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JCK
Joined: 15 Feb 2007
Posts: 559
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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 Posted: Thu May 20, 2010 1:21 pm GMT Post subject: |
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Aren't 90+% or mortgages government backed/subsidized now? Low rates may be more a function of government backing than falling inflation expectations. I wasn't arguing for hyperinflation with my previous post, just that the combination of increasing government spending and negligible inflation has a good chance of not lasting - that could be resolved through ways other than higher inflation (e.g., decreased monetary expansion).
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GenXer
Joined: 20 Feb 2009
Posts: 703
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| Posted: Thu May 20, 2010 1:44 pm GMT Post subject: |
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| admin wrote: | | balor123 wrote: | | Report today... mortgage apps at 13 year low. CPI negative again. Rents don't appear to be dropping much on a month to month basis but in my complex they are charging winter prices in the summer, though occupancy seems to be pretty high. These are good signs for those that want deflation. I'm still hopeful that like the laws of physics, the laws of economics will eventually win. |
Here's an interesting article on why government spending hasn't led to high inflation (yet):
http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2010/03/13/the-implications-of-velocity.aspx
Basically, the velocity of money has been declining enough to offset the growth of the money supply. Take a look at the second chart. Velocity was unusually high for awhile, peaking in 1997, and declining since then. It looks like velocity has just about completed a reversion to the mean now, which isn't to say that it can't overshoot and fall further, just that one of the unusual conditions that allowed monetary expansion with low inflation is possibly waning.
- admin |
This is just a model. Reality is a lot more complicated than that. We don't have hyperinflation YET because we haven't hit a crisis that can trigger it YET, and we haven't had our debtors call in their deposits YET. We are in a very unstable equilibrium right now, and anything at all can set off off a cascade that can lead to hyperinflation. Very few things in economics are deterministic, despite the human desire to make it so. The more our government uses debt (and subsidies) to prop up the housing market, the more likely we are to be vulnerable to future crashes and instability. I bet on prices to fall a lot more. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Thu May 20, 2010 1:46 pm GMT Post subject: |
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| Question is - what happens when velocity starts to increase? Ben's plan is to start paying interest on reserves to force velocity down. But that increases the money supply even further and at some point the government will start having to worry about debt payments, preventing solutions like this one. The one theme in common with all the strategies the Fed has tried for fixing the economy is enriching banks. Only now is Obama's economic advisor saying that it turns out just giving free money to banks with no strings attached wasn't helping the economy. Well duh! |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Thu May 20, 2010 1:49 pm GMT Post subject: |
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Well, the rates are tied (mostly) to the 10-year treasury, which it set by the market. The spread between mortgage rates and the treasury prices does vary, but generally within a relatively narrow range.
To my understanding, virtually all prime conforming mortgages (less than $417k) are either government-backed or might as well be, whereas the jumbo and subprime loans are not (other than FHA loans, which are new subprime). And I don't think this has changed appreciably over the last few years, at least with respect to the prime conforming mortgages.
My understanding is that, if the investment community expects inflation, the value of treasuries drops, thus raising their yield. Given that rates are low, this seems to predict low inflation.
In my mind, this is like looking at housing or oil futures to predict future prices (not a great predictor, but better than most others). |
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GenXer
Joined: 20 Feb 2009
Posts: 703
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| Posted: Thu May 20, 2010 2:16 pm GMT Post subject: |
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| There is no economic index that's a good predictor of anything. Its not the 'normal' markets that drive prices - its the instability. Until we hit it, we would not have seen it coming. Speculating about how 'normal' economics works is useless, when the unforeseen events are the ones which can make us or break us. If we are susceptible to crashes (i.e. we are fragile enough), its only a matter of time before we get hurt. |
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CL
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| Posted: Thu May 20, 2010 2:16 pm GMT Post subject: |
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10 Year Treasury yield is dropping because of the unstability in Eurozone area and investor is switching back to risk aversion mode.
As a side note - the relationship between long rate, mortgage rate, inflation and home price is very noisy, and often works in varying lag. So adjust your expectation accordingly. |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Thu May 20, 2010 2:21 pm GMT Post subject: |
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| CL wrote: | 10 Year Treasury yield is dropping because of the unstability in Eurozone area and investor is switching back to risk aversion mode.
As a side note - the relationship between long rate, mortgage rate, inflation and home price is very noisy, and often works in varying lag. So adjust your expectation accordingly. |
Well, it does go to show that we can't predict anything. Most voices on this board were calling (hoping?) for mortgage rate increases once the government buying up the mortgages ended.
My understanding is that the government buys have ended, but rates are now as low as I've ever seen them. |
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GenXer
Joined: 20 Feb 2009
Posts: 703
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| Posted: Thu May 20, 2010 2:24 pm GMT Post subject: |
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| JCK wrote: | | CL wrote: | 10 Year Treasury yield is dropping because of the unstability in Eurozone area and investor is switching back to risk aversion mode.
As a side note - the relationship between long rate, mortgage rate, inflation and home price is very noisy, and often works in varying lag. So adjust your expectation accordingly. |
Well, it does go to show that we can't predict anything. Most voices on this board were calling (hoping?) for mortgage rate increases once the government buying up the mortgages ended.
My understanding is that the government buys have ended, but rates are now as low as I've ever seen them. |
\
When the noise is bigger than the supposed measurement, we have a problem. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu May 20, 2010 3:45 pm GMT Post subject: |
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[quote="GenXer"] | admin wrote: |
This is just a model. Reality is a lot more complicated than that. We don't have hyperinflation YET because we haven't hit a crisis that can trigger it YET, and we haven't had our debtors call in their deposits YET. We are in a very unstable equilibrium right now, and anything at all can set off off a cascade that can lead to hyperinflation. |
I doubt this is right. For this to happen the velocity of money would have
to increase very quickly. I suspect that this doesn't happen in practice.
Given that the Fed is not continuing to substantially increase the money
supply (i.e they seem to have more or less stopped), a "cascade" would
mean some sort of uncontrolled increase in velocity, which is not really
possible.
Of course some increase in velocity is possible, and it will be tricky for
the Fed to time things so that this doesn't cause some inflation. So some
inflation is certainly possible, but not hyperinflation. Historically that has
only ever happened when there has been unrestrained prinnting of
money by the govt. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu May 20, 2010 3:51 pm GMT Post subject: |
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| Sorry, the quote in the above post is from GenXer not admin. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu May 20, 2010 3:57 pm GMT Post subject: |
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| balor123 wrote: | | Question is - what happens when velocity starts to increase? Ben's plan is to start paying interest on reserves to force velocity down. But that increases the money supply even further and at some point the government will start having to worry about debt payments, preventing solutions like this one. |
The Fed's paying interest wouldn't cost the govt. anything, would it ?
They just create the money.
BTW, the point of paying interest on reserves is not to force velocity down,
its to prevent the excess money supply (much of which is currently
deposited with the Fed as excess bank reserves) from entering the real
economy too quickly. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Thu May 20, 2010 4:41 pm GMT Post subject: |
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| JCK wrote: |
To my understanding, virtually all prime conforming mortgages (less than $417k) are either government-backed or might as well be, whereas the jumbo and subprime loans are not (other than FHA loans, which are new subprime). And I don't think this has changed appreciably over the last few years, at least with respect to the prime conforming mortgages.
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The recent, large increase in FHA lending is actually what I had in mind earlier when I wrote that the mortgage rates aren't a particularly good indication of inflation expectations. I suppose you are right that this wouldn't be relevant for prime conforming mortgages. I wonder what percent of the market that is, though. I also think CL made a good point about the Eurozone instability driving rates down too.
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GenXer
Joined: 20 Feb 2009
Posts: 703
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| Posted: Thu May 20, 2010 4:52 pm GMT Post subject: |
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[quote="mpr"] | GenXer wrote: | | admin wrote: |
This is just a model. Reality is a lot more complicated than that. We don't have hyperinflation YET because we haven't hit a crisis that can trigger it YET, and we haven't had our debtors call in their deposits YET. We are in a very unstable equilibrium right now, and anything at all can set off off a cascade that can lead to hyperinflation. |
I doubt this is right. For this to happen the velocity of money would have
to increase very quickly. I suspect that this doesn't happen in practice.
Given that the Fed is not continuing to substantially increase the money
supply (i.e they seem to have more or less stopped), a "cascade" would
mean some sort of uncontrolled increase in velocity, which is not really
possible.
Of course some increase in velocity is possible, and it will be tricky for
the Fed to time things so that this doesn't cause some inflation. So some
inflation is certainly possible, but not hyperinflation. Historically that has
only ever happened when there has been unrestrained prinnting of
money by the govt. |
Yes, like the recall of the debt. When enough people lose their homes and the house prices fall even more, and then more people lose their homes, and then more people lose their jobs, then the 'impossible' will all of a sudden become possible. How naive people are thinking that the government can control ANYTHING at all about the economy. How well did the bailout work?
If this is not unrestricted printing of money (what's going on right now), I don't know what is. We'll be taxed into the ground, businesses will lay people off, and the only way to keep the government in power would be to print more money. Eventually people will get tired of it, and throw the spenders out of office, but we never know - we may yet end up like Greece. |
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