America's Two Roads to Recession By William CateMachiavellians believe that governments manipulate their national economies to create
illusion of economic well-being. The governments' goal is to ensure political stability. As with any set of perceptions, reality changes public illusion. Unfortunately, Americans have hit two reality bumps on their yellow brick road to illusion of global well-being.
The Home Real Estate Perception is Changing
For middle class Americans, residential real estate has proven to be only effective conservation hedge against inflation. Mortgage rates are at or below U.S. inflation rate. Mortgage interest payments are tax deductible. American homebuyers can avoid paying taxes on their profits from sale of private homes. In past year, U.S. Residential Real Estate prices have risen an average of 15%. Everyone feels secure and content under this hard asset security blanket.
In short run, debt is good for economy, It creates buying which in turn creates jobs. Because interest payments on personal loans aren't tax deductible, American homeowners have tended to finance their debt by taking out second and third mortgages on their homes. Because single family residences are seen as excellent investments, Americans are buying second homes and going into massive debt to do so. Everyone's betting that real estate boom will continue to appreciate and hard asset house is an effective security blanket against personal excessive debt.
In past couple of months, there has been a deluge of media articles arguing that Real Estate Bubble is about to burst. These articles are telling Emperor that he is naked. The media drumbeat is having its affect on public's real estate perception. Real estate investors are less numerous. Homeowners are more inclined to put their houses on market. The Demand/Supply equation is slowly moving toward over supply. This will force home prices down. Debt ridden homeowners will be under pressure to sell and residential market will fall faster. Once an economic move starts, it tends to gain momentum until forces that create it dissipate.
What happens when a real estate bubble bursts? The last time it happened in States was Commercial Real Estate collapse in late 1970s and early 1980s in Texas and Oklahoma. The market failed because of an over supply of office space. Investors lost fortunes. The Savings and Loan Industry went into a crisis that required a trillion-dollar taxpayer bailout. It was primary cause of 1981-82 sixteen-month severe recession. In 1990s, real estate bubble burst in Japan. The result was 1997-2001 Japanese recession.
Exploding real estate bubbles create illiquid markets. There is less money being spent on buying things. With fewer sales, businesses layoff employees. The result is a recession.
Fifty Dollar Per Barrel Oil
Since WWII, West's stated goal has been to provide a higher standard of living for rest of world. This is a goal that almost everyone can support. It's logic of foreign aid programs. Unfortunately, there aren't enough resources to ensure a Western Standard of Living for everyone, or even for majority of people living on our little rock in space.
