Monday, January 10, 2005

Economic Pessimism

Since my last post, the economic pessimists have become much more shrill. The problem is, I find it hard to disagree. Even the Federal Reserve is admitting that ultra-low interest rates are creating market distortions. The situation is exacerbated by Asia's insatiable appetite for U.S. Treasury Bills. According to the articles below, these low rates have created three kinds of problems for the world economy:
-Inflation of both assets and commodities that lead to greater risk taking and higher debt loads
-Low savings rates in the U.S., and too much saving in Asia
-Huge trade imbalances that lead to overcapacity in Asia and undercapacity in the U.S.
In other words, the cheaper money is, the more people will borrow. The more money they have, the more they will "invest" in ever inflating assets because there's no interest-rate benefit to saving. Problems arise when people overborrow on inflated assets to support short-term spending, or when they carry large debt loads on inflated assets they might need to sell in the near future for whatever reason (retirement, for example.)
Right now, people in the U.S. are spending like there's no tomorrow. In fact, people are increasing their spending 50% faster than their income is growing.!!
It will be interesting to see how this all turns out. In the meantime, I don't feel a pressing need to rush into this inflated housing market. Since I can't compete with those who are willing to spend 50% or more of their monthly income on a house payment anyway, I'll continue to save and hold tight until sanity returns.
Recent Articles of Interest
The percentage of first-time buyers hits a record low in area.
Game Over
Bond bubble, American-style
China's Exports Rise 33%; Trade Gap Widens to Record
Call for Adjustable Mortgages Jumps
Foreclosures grow as refinancing increases
World On Brink Of Ruin
Sites of Interest
Professor Piggington's Econo-Almanac
The Daily Reckoning

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