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April 19, 2005


Erik Schmidt

Careful, Dan. You may be once again cast as The Dark Crusader for continuing to talk about the housing bubble. I find reactions to somber predictions about this bubble to be very much like those we encountered back in 2000, when the Dot Com bubble was preparing to deflate in spectacular fashion. While I don't think that the housing bubble will necessarily cause the same degree of carnage, I do find the insane rise in housing prices very troubling. Yet it seems that in general Americans have become consumers of news, in the sense that we don't really like to hear things that make us feel unhappy about ourselves and our situation, or cause us to look critically at the events around us. Just give me my McHappy NewsTicker and leave me alone!

John Hunter

I doubt we are at the end of the bubble. However, financial bubbles are very difficult to time. My guess is the bubble will continue for over a year for most, if not all locations in the USA. And unless the bubble continues and prices reach levels much higher than they are now, the end of the bubble will not be dramatic decline of prices (say an drop in prices of over 25%) in most locations. Manhattan (with historically very volatile prices) and certain other locations will likely have dramatic declines. But overall the real estate market will slow down (fewer sales) greatly and may experience say a 5 year period where prices decline slightly (or increase slightly). Real Estate normally does not behave the same way the stock market does when a bubble breaks, but we will see what actually happens.

The risk of stagflation, while real, is small, I believe. The huge trade deficit, large unfunded liabilities (Social Security) and huge federal budget deficients are likely to cause problems. However I believe these problems will more likely result in long term slow degradation of the standard of living in the USA instead of a dramatic break of the sort that could result in stagflation.

The decrease in the standard of living due to these forces could well be masked by other forces that increase the standard of living. So the inevitable cost of us now living beyond our means (passing the bills on to our children and grandchildren) can be ignored fairly easily. It is not a good approach but it is likely the one we will continue to practice. A recession is much more likely than stagflation.


I agree "the larger economic forces are lining up in alarming ways" and I'd worry that a real burst-bubble would contribute to a negative ... I really hate to use this word ... but "spiral."

Not to say that any spiral would have to be as long or as deep as we experienced in the 70's. After all, they had an energy crisis ...

Alf Watt

The very suburban housing boom they are talking about, the "Mansions on Postage Stamps" are destroying farm land at a frightening pace. They are all going to be razed when nobody can afford to heat them anymore...

Joe I.


Well I think you are over stating things. A slow down from the torrid pace just brings things back to normal growth in housing starts. When it (if it) drops below the historical growth average then you should worry and not until then.


The US is still the driver of growth and innovation. We may have competition in many areas but this is a stable country. Today the BBC is reporting that 1-7 Indian women have HIV and there is explosive growth. This will lead to a society which will become unstable. In China when (not if) the communist government falls it will look like Russia now or more likely break into nations along provincial lines. This will again cause economic problems....The US is dynamic, diverse in all ways, and very wealthy (to be working class here is to be a king in most of the world) We owe the debt to each other whether it is a contract (credit card) with a business or a politcal promise to our old folk. The debt and Social Security issues are an IOU on paper and nothing more. The buyers of US debt bear the greater risk of default or nationalization. They would loose reserves and have economies that could not recover or invest.

I am going to Argentina next week for business, a country defaulted on all debts but is roaring back to life thanks to American, Asian and European investment returning and rich Argentinian's who moved money out into foreign accounts reinvesting in their home country. (Wealthy americans have accounts all over the world as well) In addition to all the entreprenuers starting new restaurants, eco tourism and manufacturing. This would happen if the US defaulted, which we won't, but it is not the end of the world. It would be devestating to people who have no savings though....If only temporarily. The Fed warns people to save more to weather any storms in the future.


Joe.I. -

You said "Today the BBC is reporting that 1-7 Indian women have HIV and there is explosive growth. This will lead to a society which will become unstable."

As an Indian citizen, and female, I'm impelled to bring some clarity to your interpretation of the news article. To clarify from the BBC article "Mr Feachem said that the biggest form of transmission in India is from heterosexual intercourse with prostitutes." Rest of the article here

And today's refutation by the Indian government,

The maximum figures estimated are as high as 15 million cases but these are chiefly sex workers and thence spread to the wives of those who use their services viz., truck drivers, laborers, factory workers in cities like Mumbai who are far from their families in the village.

Neither of these facts point to any future instability for the country with respect to the literate middle class, technological and economic growth. Statistically, 15 million is 1.5% of India's population.

Furthermore, a society is more apt to be unstable when there are weak family ties, lack of community support and extended networks, not to mention an overall sense of isolation.

Ran Talbott

"We owe the debt to each other whether it is a contract (credit card) with a business or a politcal promise to our old folk."

That hasn't been true for many years: foreigners currently hold almost 40% of the Treasury debt, and a fourth of our corporate bonds. Our net foreign debt is about to cross 25% of GDP, and will almost certainly exceed half of GDP by the end of the decade. Even if we magically got our fiscal house in order tomorrow, the costs of servicing our existing debt will take a big bite out of domestic investment for a long time to come.

John F

You state "It's too early to predict that the housing mania is about to subside, but the larger economic forces are lining up in alarming ways". That's pretty vague, and leaves with quite a bit of wiggle room.
Does the drop in housing starts portend something to be worried about? Before you try to scare us, why don't you tell us what the volatility in housing start data is, so we can see if this is truly an outlier, or merely part of the statistical noise (and "largest drop in 14 years sounds exciting from a journalist's point of view, but is basically useless for analysis). The end of a bubble is notoriously hard to predict. Predicting the future is tough, because it ain't what it used to be. One event that everyone is associating with a bursting of the real estate bubble is a rise in mortgage rates. It's been predicted for years... but it just refuses to happen!

"...but the larger economic forces are lining up in alarming ways". Do you care to elaborate on which "economic forces" you are so glibly referring to?
Stag-flation... a word we are hearing a lot in the media these days. Has anyone ever satisfactorily explained how stag-flation comes about? I mean a real, logical, self-consistent economical model? I am not an economist, so maybe someone can explain it, or point to a reference that does.

Ran Talbott

You can see a chart for the last 5 years here:

The latest drop is somewhat outside the usual range of volatility, but so was the jump that preceded it a few months ago. Overall, it looks like the trend has ben flattening out. Was that increase in 4Q04 the result of a bunch of people foolishly jumping on a bandwagon that's about to start rolling downhill? Beats me. We should know in a few months. Which is, of course, way too late for the news organizations desperate to be the first to break The Big Story on the Economy (tm).

There's a wikipedia article on stagflation here:

In a normal business cycle, inflation is a sign that consumer demand is picking up, so all the producers who've been holding back will start ramping up production, hiring lots of workers, and make everybody happy and properous through The Wonders of Economic Growth. More or less ;-)

However, if the inflation is caused by, say, resource depletion, artificial constraint by a monopoly or cartel, currency devaluation, or some other factor that doesn't result in increased production, there's little or no real growth. Hence "stagnation + inflation".

John F

Just noticed your comment on my comment on Dan's housing bubble story. Thanks for the info. Very informative. Next time I'll have to try to dig a little better!
I also happen to believe we are in a housing bubble, but I also want to be able to think about it from a rational point of view (i.e. show me hard data), rather from a gut feel point of view (oh my god, did you see, housing prices are up, again!).

The mad doctor

I agree with the bubble theory. It's been tough for me to watch this spectacle of an economy propped up on bullshit. The excesses of speculation over two decades and clever financial tricks were a big part of the growth period. Since they have been trying to prevent decline via a very low fed rate and tax cuts along with runaway federal spending. The real estate industry has come to the "rescue" creating paper wealth for homeowners and income for all the many folks in the home industry from the guys building them to all the parasites surrounding buying a home.

Now the easy money is gone and all sorts of unethical behavior and people who should not get loans are in the game. Speculators are buying up to one-third of homes now. ARMs and no-interest loans are very popular.

At some point the affordability, decline in interested buyers and higher interest rates will take the air out of this thing. Resulting in at best a recession and worst a huge collapse of the US and world economy.


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