Future Changes III: New Inflation becomes New Deflation
By Restless
A Pyramid Block by Block
- You buy a house for $300,000. Several years later, it’s appreciated to $400,000.
- You take out a $100,000 2nd mortgage.
- Your lender bundles it together with other mortgages and sells the bundle to S&W Financial.
- Using your bundle for collateral, S&W gets a loan for a million that it invests in a leveraged buy-out of BD Corporation.
- BD issues $10 million in junk bonds, which are bought by BB Hedge Fund.
- BB got the money by borrowing yen from the Japanese at a low interest rate. The yield on their purchase of BD’s junk bonds is twice that of the Japanese loan.
So, who makes money while you borrow it?
- The financial intermediaries to the transactions (via commissions, spreads and fees). It’s got to be lovely working on Wall Street or in London now.
- The wealthy that have disposable income to invest.
The New Inflation Is
the name for the rapidly expanding value of assets held by the rich.
According to a new study by McKinsey & Co., assets favored by the rich have ballooned to $140 trillion, and are growing much faster than the real economy, which they are ostensibly resting upon.
The European money supply, for example, was shown to be growing at its fastest pace in 17 years. The supply of the local currency in India is growing at a 21% annual rate. In the United States, the authorities no longer report M3, the broadest measure of money supply.
But experts have clocked it growing at about 10% per year - three times faster than the goods and services it is meant to buy. It is going into financial assets, which have been going up many times faster than consumer prices.
Your wages have not increased and no new real wealth has been added to the world. No more factories, diamonds, hard products have been created.
The economy has grown via the hyperactivity of the financial sector, but all of it is notional (fanciful; dubious) money, being used to inflate equity.
Back to You
When you got that 2nd, you were betting your home would inflate, and you wouldn’t need to ever pay back the borrowed money.
Since your wages aren’t going up most likely you saw the opportunity to use an inflated asset to put your kids into college, buy things (vacations, stuff, cars, home improvements) or maybe for that operation your insurance wouldn’t cover.
It is as if the central banks had printed up huge quantities of additional dollars, and instead of distributing these to the economy at large, it gave them only to the rich.
Thus, the rich gain the benefit of the inflation; their purchasing power rises dramatically. But the rest of the population suffers because of it; their own purchasing power declines.
They have no more income, while they have higher living expenses; health care, housing, energy and education have all gone up sharply. And to make matters worse, they now have to pay off the money they borrowed when they thought they were getting rich.
The New Deflation Arrives
Every dollar created out of thin air eventually disappears back into the ether. It’s starting to happen now and as it does, the wealthy may find their investment gains evaporating, but the rest of us, those of us that have the mortgages this whole house of cards is resting upon, will owe on assets worth 40% less.
Right now there are 100-150 NODs [Notices Of Default] filed a week in Kern County; I predict that in a year we will have 200-250 NOD’s per week. Credit is tightening, inventory is increasing and foreclosures are rising…
It’s Global Now
But it could turn into something more bizarre. The instability and decline of housing assets could fuel instability and decline in the dollar. One possible result of this would be hyperinflation within the U.S., as Germany experienced during the ‘20s.
Within the next 18 months, we’ll know.
[Written with references to The Daily Reckoning Australia and Mike Whitney at The Smirking Chimp]