From MoneyWeek:
After the wealth binge – what next for the US?
By Stephen Roach
The modern-day US economy has just gone through its most extraordinary period of wealth creation on record. First equities, then housing – over the past decade American households have added to net worth as never before. That binge is over. With the property market now cooling and equities settling in for an era of single-digit returns, wealth creation is likely to be subdued, for the foreseeable future. There can be no mistaking the profound implications of this development for the American consumer, the global economy, and world financial markets.
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So much for what has happened. It is the prognosis that now matters most. I do not think there is any doubt that the US housing cycle is now turning. The questions pertain more to scope, speed, duration, and depth of the coming adjustments. In an era of financial-market deregulation -especially since deposit ceilings in mortgage lending institutions were eliminated by the early 1980s – residential property cycles have taken on a life of their own. As a result, both the uplegs and the downlegs have lasted far longer than standard business cycles. The data flow has certainly shifted to the downside – namely, mounting inventories of unsold homes, declining mortgage loan applications, rising financing costs, and anecdotal reports from builders and realtors.A housing downturn will have obvious and important implications for US GDP growth. The direct effects are straightforward: Over the past three years, 2003-05, residential construction activity has boosted real GDP growth by about 0.5 percentage point per year. In data just released for 2Q06, the sector was estimated to have reduced annualized GDP growth by 0.4 percentage point. To the extent the decline in new building activity remains orderly, reductions could continue at the second quarter pace. Relative to the heady gains during the final stages of the boom, that means the contribution of residential construction activity could swing from +0.5% to -0.5% – imparting about a one percentage point drag on overall real GDP growth for at least the next couple of years.
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The trick will be to pull this off without a hard landing. Here’s where my newfound optimism comes into play. As long as G-7 finance ministers, the IMF, and the world’s major central banks remain committed to a rebalancing policy agenda, the odds favor more orderly adjustments in the US and global economy. A withdrawal of excess liquidity by bubble-prone central banks is a key element of this rebalancing agenda. The good news is that this process now appears to be getting under way. The bad news is that the authorities may have waited too long to begin the heavy lifting – leaving a still highly unbalanced world all too vulnerable to any number of exogenous shocks. Either way, there is no escaping the endgame. The wealth binge must be brought to an end if an unbalanced global economy is ever going to end up on safer footing. I think that is exactly what is now under way.
From Bloomberg:
Japan’s Producer Prices Rise at Fastest in 25 Years
Japan’s producer prices rose at the fastest pace in a quarter of a century, increasing pressure on companies to pass on surging oil and commodity costs to consumers as the economy expands.
An index of prices that companies pay for energy and raw materials such as iron ore increased 3.4 percent in both June and July from a year earlier, the Bank of Japan said in Tokyo today. The July increase beat the 3.1 percent median estimate of 33 economists surveyed by Bloomberg News.
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June’s gain was revised to 3.4 percent from 3.3 percent, the biggest increase since March 1981, the central bank said.
There has not been a real recession or downturn since 1990-1992. For most people under 30 in this region, the past 12 years have been the best ever economically. They have been taught to live in huge credit card debt and spend thousands on designer clothes & the latest electronics.
your an asshole, not all of us
run up credit cards and buy designer clothes we can’t afford.
My father taught me well.
I manage my money very well thank
you.
and I am shocked by the way
many of you older people
drive cars you can’t afford,
live in homes you can’t afford.
Most of the older people I speak
to , friends of my parents, don’t
have a clue of whats going on.
And Electronics I could care less.
except for the laptop.
Suggest you get a life.
I also think a lot of older people are completely clueless about the market. They think their houses are worth obscene amounts.
I have a neighbor who put her home for sale on the street that I am renting. She listed it at $719k. Her house is an outdated piece of crap and she told me she was seeing what she could get…then she had the nerve to tell me to make her an offer! Old fart – no thanks, I’m not financing your retirement. I’ll give her 100k!
“and I am shocked by the way
many of you older people
drive cars you can’t afford,
live in homes you can’t afford.”
baby boomers have helped cause the bubbles we’ve seen by out bidding each other for houses. the second home binge what was it 40% in 04 and 05. and tons of bad advice to their children as in real estate only goes up. hope they eat cat food in their retirement. id like to see their pension, social security and medical taken away which is whats going to happen to me. they screwed their own children and grandkids
thanks
Bottom line:
Both young & old people can be equally as stupid.
Lets not be so yellow.
SAS
A few of the homeowners I know have been pouring all thier new equity gains into home improvements. This seems about as sensible as putting it into Hummers and BMWs. A new kitchen or flooring is another depriciating asset.
I wonder how many people who got the equity benefits from the last few years will have anything to show for it when prices normalize?