How US mortgage debt could cause a global financial crisis

Moneyweek.com ^ | 7-5-06 | Dan Denning

[expat_panama]

...every (and I mean EVERY) article that I have read about this that actually uses substantive data has a pretty dire warning for the future...

Those "dire warnings" themselves were all this article had in the way of "substantive data".   

The Brits are always ready to meet the demand for US disaster scenarios.  That's a good business strategy for journalists, but a good business strategy for home finances is to ignore the British press.  The reason being is that anyone who wants to worry that "US mortgage debt could cause a global financial crisis" will also have to worry about Martians invading.

US mortgage debt is about where it's been throughout the '90's --at about 40% of total value.  IMHO it's not unreasonable to own a $100k house and with a $40k mortgage.

Besides, the role that home equity plays in the average American's total assets is still less than it was in the '90's when Saint Billy was in charge-- and even then it was only about a fourth of total wealth.  Big deal.

[VOA]

bump

[D-fendr]

Id worry most about your brother's friend. His wife will be ok unless there's deflation.

[TheSpottedOwl]

Thanks for the ping, Cal.

Even though we rent, own our vehicles, and have no credit cards, I'm concerned. There is such a thing as the World Bank. Trade with other nations is one thing, entangling everyone's finances together is another thing entirely.

I will now read all the replies ridiculing this very good article.

[Iris7]

During the Katrina aftermath the federal government spent many billions of dollars more than previously planned. This can be seen in bill versus bond spread. No extra money needed to be borrowed. The excess liquidity was soaked up by raising the Fed Funds rate instead of taxing or borrowing.

The feds do not need to borrow money except to regulate the supply of money. If the money supply is increasing too slowly the government can 1. Buy back Federal obligations with newly created money, 2. Lower bank reserve requirements (doesn't work as well as it used to), 3.Reduce taxes, or, 4. send out checks. All of these things work the same way. Macroeconomically there is no difference amongst them.

The system works in reverse to lower money supply growth.

The Feds can bail out a $1.5 Trillion loss with a mere click of the fingers. Just write a check. The banks will cash it. The banks will be paid back by a big bunch of brand new Franklins (or equal). If the net effect is inflationary or deflationary see above.

Not quite as simple as I make it seem, but only in detail.

This will seem kind of strange, but money is the same thing as credit.

[RipSawyer]

This will seem kind of strange, but money is the same thing as credit.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

This may seem kind of strange, but REAL money is not quite the same as credit. A paper dollar with nothing behind it is another matter.

[expat_panama]

"I will now read all the replies ridiculing this very good article."

When I read the article, I put off deciding whether it was good ('very' or otherwise) until I had a chance to first check the facts myself.

What I found was that "US mortgage debt" was no closer to presenting "a global financial crisis" than it's been for many decades.   That's when I decided that the article was more of the same old America-bashing that UK press loves to indulge in.  The idea is to check things out before passing judgement.

Question:  how did you know the replies would be "ridiculing this very good article" before you read them?

[Iris7]

It is true that government credit relies on trust (as does credit in general) and that it is much easier to trust a government that cannot create money for any or no reason. It is quite easy for a government that creates money whenever it wants to queer the deal, that is, the promise that a dollar today has the same value a dollar will have tomorrow and that if the future dollar has a different value from the value today the changes will be predictable. That is, that a dollar is a "store of value", as they say.

Right now the dollar IS backed by gold in practice. Anyone wishing to exchange a dollar as value for gold is free to do so. Unfortunately for the private individual the value relationship between dollar and gold is not fixed. Making it fixed is, unfortunately for the individual, impossible without great effort, skill, and luck.

I would prefer an officially gold backed dollar in which a dollar can be exchanged at will for a fixed mass of gold. Gold is not perfect however. Gold production currently is at a very high rate for technical reasons.

A dollar based on a fixed quantity and quality of crude oil would work as well as one based on a fixed quantity of gold at least on a year over year time scale. Technology change is the wild card. Commodities in general will not work. John Law tried the time discounted value of real estate with disastrous results. The tremendous flow of silver through Spain from Potosi et al. in the 17th Century caused very destabilizing inflation in Europe. Destroyed Spain as a great power as well.


Commodity baskets have not been found workable either.

[Toddsterpatriot]

Gold production currently is at a very high rate for technical reasons.

How high is production? Are you worried that a gold standard would prove deflationary?

[Iris7]

I have seen figures on current and historical gold production but have not been interested enough to take notes. It would have been convenient if I had done so. I am sorry but I cannot answer your question as you have phrased it without research.

In my post I am referring to the post WWII shift in gold mining technology. Besides increasing use of heavy machinery in general extraction technology has greatly improved. You may be interested in (as I am, although I am, my wife says, a complete technology nerd):

http://www.e-goldprospecting.com/html/factors_in_a_gold_process_sele.html

A broad overview of modern gold mining, in this case in South Africa:

http://www.mining-technology.com/projects/driefontaine/

A UN puff piece on UN help for the downtrodden small gold miner that is useful as a look at current small scale gold mining and extraction:

http://www.unido.org/doc/4571

A brief and silly green rant but a useful look for a beginner at the cyanide gold extraction process. Actually cyanide is easy to use safely primarily because it rapidly degrades when exposed to biological processes and because it is not very toxic, actually. Contrary to popular belief.

http://www.enviroliteracy.org/article.php/1120.html

A more complete look at modern technique:

http://www.marthamine.co.nz/ore_process.html

This site is especially thorough but is completely non-technical. It really is a good view of what I describe:

http://www.bullion.org.za/MiningEducation/Gold.htm

This list comes from a Google search, "gold mining and extraction". Your question made me think more clearly, and I thank you for it.

It is possible that gold production would further deflation. The reverse is also possible. The combination of consumer cost inflation, commodity inflation, and decreasing consumer real wealth is more due to other factors than gold mining, I think. The current systemic and deeply rooted inflation and decreasing "middle class prosperity" can adequately be explained by the Austrian economic model in my opinion.

[The_Media_never_lie]

I'm so tired of the sky falling that I've taken to wearing a helmet.

Sounds prudent to me. I've taken steps to minimize time out of doors without my helmet, just for when it starts to fall. That, and bird droppings are two good reasons.

[nopardons]

bttt

[nopardons]

Just make certain to line it with tinfoil and you'll be fine. :-)

[RipSawyer]

Right now the dollar IS backed by gold in practice. Anyone wishing to exchange a dollar as value for gold is free to do so.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

You might as well say the dollar is backed by the services of prostitutes (anyone wishing to exchange a dollar for said services is free to do so), or peanuts or speaking appearances by Bill Clinton or other forms of torture. In other words the dollar according to your words is backed by everything and therefore backed by nothing. It is fiat money any way you cut it and its only value is what people are willing to give it. I am not allowed to print my own money but the government can print any amount they wish even though therir money has no more actual value than what I might print. Whatever trials and tribulations might have resulted from using gold and silver as money pale in comparison to the results of issuing paper backed by nothing more than the hot air of political speech.

[Toddsterpatriot]

The combination of consumer cost inflation, commodity inflation, and decreasing consumer real wealth is more due to other factors than gold mining, I think.

You misunderstand my question. If we returned to a gold backed dollar, do you think we could find enough new gold each year to expand the money supply enough to prevent deflation?

The current systemic and deeply rooted inflation and decreasing "middle class prosperity" can adequately be explained by the Austrian economic model in my opinion.

I'm almost afraid to ask, what "decreasing middle class prosperity"? And how can the Austrian economic model explain?

[Toddsterpatriot]

Whatever trials and tribulations might have resulted from using gold and silver as money pale in comparison to the results of issuing paper backed by nothing more than the hot air of political speech.

Really? Are you claiming that inflationary and deflationary swings have been more severe since we left the gold/silver standard?

[expat_panama]

"Whatever trials and tribulations might have resulted from using gold and silver as money pale in comparison to the results of issuing paper backed by nothing..."

What "trials and tribulations" are you talking about?   Since leaving the gold standard, inflation peaks are half what they used to be, and deflation has virtually stopped altogether.  We've not had a single depression. 

[expat_panama]

These guys are slick the way they hijacked a thread on mortgages and turned it into one on gold..   It seems to have all happened with post # 108 and the reasoning was that mortgages are credit, credit is trust, and only gold can be trusted.

I see an amazing career opportunities for them in areas such as sales, politics, law, and diplomacy.

[HereInTheHeartland]

"I hate, HATE these "mortgage vultures", that prey on the undisciplined."

Why is it "preying" on someone if they (the homeowner) want to do a cash out refinance on their home? Is the lender supposed to be a nanny and determine if the loan proceeds are going to a worthy end?

Are the above people extremeley stupid, yes.

[unixfox]

No pity for those who spend what they don't have on things they don't need.

Like our so-called government?