The Great Inflation Cover Up...

[kach22i]

Getting up early or going to bed late?

The government pulled a fast one, why am I not shocked?

[turbo6bar]

Inflation ex-inflation is quite manageable now. My bet is a crumbling consumer takes us into a deeper recession and inflation will moderate substantially. Worst case, we see recession and strong inflation.

[Porsche-O-Phile]

I think that's actually the likely scenario.

I'm sure inflating the currency is being seriously discussed behind closed doors as a "solution" to the housing problem. It's probably the only way that some of the raw # values for price could ever be upheld.

Think about it:

For example, in 2002, John & Mary buy a bungalow in Wilmington for $300k. In 2005, they sell it to Bob & Suzy for $600k. Bob & Suzy are "typical" bubble buyers - zero down, I/O, ARM. Today let's say their house is worth $450k (and falling) fair market value. The bank is perilously at risk of default here. If Bob and Suzy (wisely) say "this is insane" and turn the keys back in and walk away, guess who gets stuck holding the empty bag? The bank eats at LEAST $150k on that deal, probably more.

The only way the banks can get back into a situation where the value of the collateral (houses) covers the cost of the notes and therefore create disincentives for default would be for prices to rise again (LOL!) One way to do this, since it ain't gonna' happen anytime soon on its own, is to inflate the heck out of the dollar to the point where the "fair value" of that home (for sake of argument let's say it's $350k real, uninflated dollars) exceeds $600k.

Based on the OFHEO graphs that have been posted here numerous times, the currency would need to be inflated about 40%-60% more than today in order for this to happen. And I don't doubt for one second that our government isn't considering doing it to "save" the stupid backers that wrote & sold these loans and profiteered off of them in the first place.

If supply/demand froze today that would mean:

$6.00 gallon of gas
$32k for a base-model Honda Civic
$6.00 for a latte at Starbucks

etc.

The more worrisome prospect is that if government/FED try to do this by manipulating rates/markets, that they'll do a few things (perhaps unintentionally):

1. Interest rates will rise substantially, so even though the "raw dollars" are out there in circulation, nobody will want to borrow them because it's too expensive. This would certainly exacerbate the "credit crisis" and wouldn't to a heck of a lot to help housing either if mortgages are running 15% or 18% like they were in the 70s/80s. . .

2. They'll (predictably) screw it up by not having an effective "exit strategy" (sound familiar? from government? perish the thought!) in being able to put the brakes on the inflationary run-up when they've gotten it to a point where it can "fix" the banks'/underwriters' problems. This means inflation could spike up way past the desired point and continue to climb to very high levels, with dangerous consequences.

3. The plummeting value of the dollar would deter foreign investors from continuing to buoy up the U.S. economy through the purchase of T-bonds and other vehicles. This would tend to further depress the dollar and spike inflation. . .

I don't doubt for one second that these "solutions" aren't being seriously considered in government/regulatory circles though. Not for a second.

My advice - buy foreign currencies and securities. That's what I'm doing. I don't see good times ahead for the U.S. economy/dollar. We're only seeing the tip of the iceberg. Google "nuevo peso". I think that's where we're going - maybe not quite to that extreme, but possibly. We're definitely heading for high interest rates, higher unemployment, lower dollar value and much higher prices.

It's 1973 all over again people. . . (well, the P-cars aren't quite as cool and the clothing hasn't improved much, but at least the music is marginally better, unless you consider rap).

[RoninLB]

[hardflex]

POPhile, agree with what you said except I can't agree with what you said about the Music.....


As I see the way they figure inflation, they are now EXCLUDING the things I buy all the time and Including the stuff I don't (HD TV's, Computers, etc)