Monday, August 4, 2008

Good Quote

From Yves Smith:
Too many developed economies got addicted to asset inflation - the increasing valuations were the only source of yield to service the debt incurred in their purchase - a Ponzi scheme in the Minsky sense. Now that bubble has burst. Houses are a non-productive asset, a consumption good. Values have to fall to where they can be serviced from current incomes - whether via a mortgage payment or rent - or incomes have got to rise via wage inflation. I still don't see any other way out. The first decimates (many) banks, the second decimates the dollar.
This seems to me the crux of the inflation-deflation debate. The question is whether the Fed will backstop the fake money creation of the last ten years and bail out the banks and the housing market by inflating away the purchasing power of the dollar, or whether that invented money will be disavowed and we will end up with a deflation that begins with asset values and spread backwards to goods and services (imagine if your favorite cafe sits on real estate worth only half as much and so pays only half the rent).

No comments: