Saving, Asset-Price Inflation, and Debt-Induced Deflation

[EJ]

ej, what are the missing components of total net worth? adding liquid assets, retirement plans and housing equity doesn't come near the total net worth figures. what else is included?

NOTE: This table reports the distribution of liquid net worth, IRAs and Keoghs, housing equity, and total net worth in the HRS. All values are in 1992 dollars. Liquid net worth is the sum of checking and saving accounts, bonds, stocks, and other assets, minus short-term debt. Total net worth is the sum of liquid net worth, IRAs and Keoghs, housing equity, other real estate, business equity, and vehicles. The number of observations is 5,292. Figures are weighted using survey weights.

See http://www.jcpr.org/wpfiles/lusardi.wealth.tables.PDF

[WDCRob]

To my untrained eye this critique would seem to fit together pretty well with the previous discussion on the exponential growth rate of money, The End of Money.

It might also provide the framework for an answer to the question raised there re: the constraints on such a system? A: the point at which the 'real economy' can't sustain the debt payments.

[EJ]

My thoughts, exactly. Last night sent "The End of Money" to Dr. Hudson for his consideration... curious to see what he thinks. Will let you know if he has comments.

As we discussed in the End of Money thread, MZM = GDP does not represent a breaking point in the expansion whereas debt payments (DP) > income (Idp) to pay debt service does. One can expect that as DP approaches Idp, the propensity for debt markets to crash rises; some market participants, sensing a coming wave of defaults, will demand cash payment. If an event occurs near DP = Idp that causes Idp to rapidly decline, such as a recession, a "Ka" disinflationary crash may occur suddenly.

[WDCRob]

And Poom becomes, what? The nominal increase in Idp relative to a flat or falling DP (since no one's willing/can afford to take on additional debt)?

[EJ]

And Poom becomes, what? The nominal increase in Idp relative to a flat or falling DP (since no one's willing/can afford to take on additional debt)?

You take a five year Rip Van Winkle nap. You wake up in 2012 to find that the debt pyramid has indeed collapsed. Just to get you imagining possible future worlds, which do you think is the least bizzarre?

Median Home Price: $450,000 ($225,000 today)
Median Household Income: $80,000 ($40,000 today)
30-Year FR Mortgage: 19.5% (6.14%)
Discount Rate: 18% (5.5%)
CPI: 20% (3% today)
Oil: $200/bl
Imported Car: $80,000 (One year's median income)
Domestic Car: $40,000 (One half year's median income)
Cup of Starbucks Coffee: $6 ($3.00 today)

or

Median Home Price: $100,000 ($225,000 today)
Median Household Income: $30,000 ($40,000 today)
30-Year FR Mortgage: 0.5% (6.14%)
Discount Rate: 0% (5.5%)
CPI: -4% (3% today)
Oil: $100/bl
Imported Chinese Car: $80,000 - due to 50% tarriff (One year's median income)
Domestic Car: $40,000 (One year's median income)
Cup of Starbucks Coffee: N/A - out of business ($3.00 today)

[WDCRob]

Both look well beyond what I can imagine to be honest. But if I'm already in debt up to my eyeballs and am not particularly interested in taking on more, option A looks pretty good.

How do you get housing prices to double in five years when the average annual payments on a 30-year mortgage will represent 110% of the median income? 100 year mortgages?

[jk]

CPI: 20% (3% today)

you don't mean the OFFICIAL cpi, do you?

[DemonD]

I did read that whole thing and my head was hurting (had to take breaks to get my head around it). Dr. Hudson is certainly a great analyst, but like many academians, his writing style is filled with words that are meant to purposefully confuse the reader. I did feel like I got the message though (and i thank grape jelly for the translation and the follow up chart EJ - it helped clarify a lot).

The only thing I'm wondering as was posted is what Dr. Hudson thinks will happen and when... as in are either of these scenarios possible and if so which will be the one to happen:

Median Home Price: $450,000 ($225,000 today)
Median Household Income: $80,000 ($40,000 today)
30-Year FR Mortgage: 19.5% (6.14%)
Discount Rate: 18% (5.5%)
CPI: 20% (3% today)
Oil: $200/bl
Imported Car: $80,000 (One year's median income)
Domestic Car: $40,000 (One half year's median income)
Cup of Starbucks Coffee: $6 ($3.00 today)

or

Median Home Price: $100,000 ($225,000 today)
Median Household Income: $30,000 ($40,000 today)
30-Year FR Mortgage: 0.5% (6.14%)
Discount Rate: 0% (5.5%)
CPI: -4% (3% today)
Oil: $100/bl
Imported Chinese Car: $80,000 - due to 50% tarriff (One year's median income)
Domestic Car: $40,000 (One year's median income)
Cup of Starbucks Coffee: N/A - out of business ($3.00 today)

I have to go with the first is most likely, if for no other reason than Starbucks HAVE to be around. But I can't see home prices being that much, if for no other reason than there are currently 2.1 million vacant homes with an estimated 1.2-1.6 at or nearing completion.

Both oil numbers look very achievable though. I would put the inflated oil at probably closer to 300/bl, especially if you are assuming that gold will be 2500-3000/oz.

What I'm wondering is what will trigger the Ka movement when it comes? A couple of my coworkers (who also timed the tech boom pretty well) have told me they have put their 401k's into the stable income fund and out of stocks already. The more I read I can't tell if I'm getting more paranoid, getting more bearish, or too squeamish, or if the Ka is coming very soon.

[Jim Nickerson]

You take a five year Rip Van Winkle nap. You wake up in 2012 to find that the debt pyramid has indeed collapsed. Just to get you imagining possible future worlds, which do you think is the least bizzarre?

Median Home Price: $450,000 ($225,000 today)
Median Household Income: $80,000 ($40,000 today)
30-Year FR Mortgage: 19.5% (6.14%)
Discount Rate: 18% (5.5%)
CPI: 20% (3% today)
Oil: $200/bl
Imported Car: $80,000 (One year's median income)
Domestic Car: $40,000 (One half year's median income)
Cup of Starbucks Coffee: $6 ($3.00 today)

or

Median Home Price: $100,000 ($225,000 today)
Median Household Income: $30,000 ($40,000 today)
30-Year FR Mortgage: 0.5% (6.14%)
Discount Rate: 0% (5.5%)
CPI: -4% (3% today)
Oil: $100/bl
Imported Chinese Car: $80,000 - due to 50% tarriff (One year's median income)
Domestic Car: $40,000 (One year's median income)
Cup of Starbucks Coffee: N/A - out of business ($3.00 today)

EJ asked which is the least "bizarre."? I don't get bizarre. I would have liked the questions: Which is more likely? or Which would you prefer to have to live through?

The first "future world" is to me the worst, though it ain't exactly Zimbabwe. It seems, and remember I know diddle about economics, to me the first would have to continue to be associated with lots of liquidity, which seems to be the problem with where we are now-- which I perceive as a mess. Isn't it going to have to end somewhere? I think, yes. Wouldn't sooner be better? I think the sooner, the better.

The second "future world" would come closer to achieving what I think this country needs, if effect, a very hard slap of the face--for those who can go along with corporal punishment. The second seems to me to be more like Japan since 1990, and I don't see where the Japanese populace has devolved into penury or anarchy, though I haven't lived through it as a Jap. I was there for a few days in 1997, and it was a very civil place.

I think I had rather 2012 resemble the second scenario.

I have to go with the first is most likely, if for no other reason than Starbucks HAVE to be around.

Starbucks! Bah, humbug.

[Rajiv]

I agree with you on this. The second scenario would be a bitter pill to swallow, but society could be rebuilt from there. I don't see that happening in the first scenario. The first scenario is a train wreck, with the train still going at a 200 mph (the inflation/liquidity trap!)

[grapejelly]

scenario 1 bails out the debtors while scenario 2 favors creditors. I think the US government will do everything in their power to prevent scenario 2 because of what it would do to government debt.

OTOH scenario 2 would save the US$.

Are we too far along scenario 1 to even entertain scenario 2? The "Greenspan put" policy continues and it would have to stop. Is there a political will for the extremely unpleasant results?

Moreover, the US is in a perpetual state of "war" which inevitably means more inflation, not less. Congress would have to raise taxes to untenable levels or slash spending in the extreme, to replace the financing that is provided by inflation.

This guessing is what keeps the game exciting, is all I can say

[Spartacus]

Scenario 1 is actually good for the banks - their balance sheets will be showing renewed, massive amounts of new loans.

Remember that financial statements are not inflation adjusted.

Bank profits would be incredibly high.

Scenario 1 is of course very, very, very bad for people on fixed incomes.

scenario 1 bails out the debtors while scenario 2 favors creditors. I think the US government will do everything in their power to prevent scenario 2 because of what it would do to government debt.

[c1ue]

The second "future world" would come closer to achieving what I think this country needs, if effect, a very hard slap of the face--for those who can go along with corporal punishment. The second seems to me to be more like Japan since 1990, and I don't see where the Japanese populace has devolved into penury or anarchy, though I haven't lived through it as a Jap.

Couple of notes I would posit concerning Japan's 13 year downturn with what would happen were a similar scenario to occur in the US:

1) Japan was the first major economy to go into the dumps; first one in first one out? Or at the very least, Japan has clearly been able to retain more intrinsic manufacturing capability than the US and thus has some trade counterbalance.

2) Japanese on average save tons of money - they are socially very afraid of being poor and not 'pulling their own weight' in society.

3) Japanese government and Japanese companies feel a very strong force to maintain everyday employment and stability. Even after the Japanese big corporations had to lay people off, I would almost guarantee that the sum numbers of layoffs in total up to now is probably fractions of what US companies are doing every year. In my own industry - semiconductors - I can only think of less than 30000 layoffs in total, whereas Sun and IBM have had individual layoffs larger than that.

Thus in sum Japan is probably not a good example to see where US society would evolve into should scenario 2) occur.

I'd personally lean more toward the labor vs. management struggles in the IWW (worker's of the world) era.

[Spartacus]

Median Home Price: $450,000 ($225,000 today)

good so far

Median Household Income: $80,000 ($40,000 today)

This is the biggie, the thing that Greenspan and Bernanke apparently agree on - wages CANNOT be allowed to rise.
So keep all the other numbers the same, but cut this by at least 30%.


EDIT - Eric, why do feel this increased income is necessary? The current asset inflation has happened without large income gains.

[Uncle Jack]

You take a five year Rip Van Winkle nap. You wake up in 2012 to find that the debt pyramid has indeed collapsed. Just to get you imagining possible future worlds, which do you think is the least bizarre?

My guess for least bizarre is option A, inflation with tariffs. The main reason I say that is because of the political and social mood of the herd who will not mind nor notice that they are less well off as long as they can sell for higher prices. Deflation, though it may be needed to cleanse the system, so to speak, will have people rioting outside the White House regardless of who occupies it.

In either scenario it appears that you EJ are siding with Jim Rogers and the secular commodity bull. $200/bl in option A and $100/bl in option B are both higher than today's prices while everything else looks like an either/or for inflation/deflation combined with some import tariffs.