Just A Blip Or Enduring Trend?

   

You're overpayed anyway.

   

I got a $6/hr raise in March this year by changing employers.

I also got a better job title and I don't work nearly as hard as I did at the previous employer...

You gotta know when to hold'em, know when to fold'em, know when to walk away, know when to run....

   

Real wages will rise above 0 again in the near future but wage gains will lag economic growth for some time to come. However, total compensation will rise faster than wage growth.

   

Mortgage rates hit 18-month high

California mortgage defaults rise for first time in 3 years

KING OF REAL ESTATE: I'm Tom Barrack and I'm Getting Out

Rising prices put brakes on U.S. manufacturing

GM may be forced into Bankruptcy

Toro I know you position on the housing market and I know you see the tech sector as the new engine so I have to ask as to where you see the growth in the economy when that bubble pops. I would never have thought to see Boston as a buyers market so when the shoe falls there has got to be more than ipods to keep the economy running.

   

The economy has self-correcting mechanisms. Interest rates are rising, which is slowing demand. When demand slows enough, interest rates will start falling again, which spurs demand.

Also, businesses have spent below trend for the past 5 years. This is an offshoot of the Bubble, but capacity utilization has been creeping up from a low of 73% a few years ago to over 79% today. Generally, capacity is considered tight at 83%. Businesses are also sitting on over $600 billion in cash, highest ever, which they've been reluctant to spend. So there is a lot of current and potential firepower within corporations.

Again, I'm expecting a slowdown, but have for some time now, so maybe I'm wrong. Recessions have been fairly rare events the past 25 years.

Economy Grows 3.8% in 3rd Quarter

Unemployment at 5% in October.

Productivity rises 4.1%

Personal Income up 5.8% annually in the third quarter.

   

I agree with the principal of what goes up must come down. The lack of recession in the last 25 years has been on the back of unprecedented deficit spending. That camel back is getting knocked kneed and it needs a forward moving economy or the whole thing collapses. This is what has created the bubble in the 1st place.

If that bubble bursts not only has a major engine of the economy thrown a rod but there is no replacement to pick up the slack and give to forward momentum necessary to keep the economy running. This is why the corporations have built up their war chest to such unprecedented levels for they see this coming. We are not looking at a slowdown, it's a crash.

Here is the new engine of growth, interest rates. The is a noose that will choke, not stall, the economy. Rising interest rates will claim the housing bubble. That's because the precarious state of the U.S. housing market is not simply a result of leveraged speculation; it is a result of naive leveraged speculation. Very few homebuyers seem to appreciate the risks they are assuming. Because prices have been rising for so long, many home-buyers believe prices will continue to rise. And because they believe prices will continue to rise, they devise ever-more-creative ways to control as much real estate as possible with as little starting equity as possible. And even after buying, they continue to suck equity out of their homes. Homeowners borrowed a staggering $600 billion against their houses last year – a sum equal to 7% of disposable personal income. Real housing prices have peaked on average four to six quarters after the central bank first raises interest rates and following what appears to be 200 basis points of short-term rate hikes. The tightening then continues another two quarters thereafter for what looks like a total cyclical increase of 300 basis points or so.

In such an environment prudence seems idiotic, while idiocy masquerades as prudence. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable.

   

First, the United States ran budget surpluses during the latter half of the 1990s, during its strongest growth. It should also be pointed out, as I've posted here before, real per capita economic growth has increased at a fairly constant rate for about a century. The 1980s and 1990s were no different.

Also, government spending has grown at a slower rate than in the past. I've posted it elsewhere but will do so again here

Government spending

1930-39 5.0% (War, New Deal)
1940-49 7.5% (War)
1950-59 5.8% (GOP President)
1960-69 3.8% (Democrat)
1970-79 0.5% (Nixon/Carter, decleration from Vietnam war spending)
1980-89 3.1% (Reagan/Bush)
1990-99 1.3% (Slick Willie, Dem)
2000-04 3.0% (W, GOP)

Or

1946-74 3.4%
1975-04 2.3%

http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid

I worry greatly about the housing market. However, most housing markets do not crash. Most flatten. That doesn't mean this one won't come down, but nationally, housing prices have every year since 1932. In real terms, they have fallen, but since nominal housing values are underwritten with nominal debt, when real values of housing falls, so does the real value of debt. I don't want to minimize the risk, but I don't think we should crawl into caves either. Also, I live near extremely over-inflated property markets and the transactions have completely stopped.

There will always be people preaching the end of the world Scape. Perhaps one day they'll be right. But up until now, they haven't been.

   

Avro

The United States started to militarize in the mid to late 1930s.

And absolutely the GOP has been a big spender, but its primarily been on the military.

Despite all this talk about W being a conservative, he is hardly one. Non-defence, discretionary spending under W has risen faster than it ever did under Slick Willie. He has never vetoed a single spending bill. And I find the GOP very disappointing in that they are almost single-mindedly focussed on tax cuts and only tax cuts. There are two sides to the balance sheet but the Republicans only want to deal with one. Its ridiculous! Now I'm all for tax cuts, and I wasn't against tax cuts at the beginning of the decade (though I would have cut taxes more for the poor and middle class and less for the rich). But if you're going to run deficits when the economy is weak (which is fine) you should run surpluses when the economy is expanding, which is now. IMHO the Democrats under Clinton were much better stewards of the economy than W has been. That's not entirely fair because Bush was faced with an imploding bubble that was not of his making. But on the other hand, it seems like his only response seems to be "cut taxes."