America’s middle class is getting squeezed.
“Homeowners Feeling Pinch of Lost Equity,” says the New York Times .
Diesel fuel and heating fuel are both selling for more than US$3 a gallon.
And the Boston Herald reports that appraisers are now killing housing sales. They give their opinions just as they did before. But now, their appraisals are not high enough to get mortgage financing.
And now Ben Bernanke is warning of inflation. Hmmm... He told Congress yesterday that higher energy and higher import prices “put renewed upward pressure on inflation.”
What he meant to say was that he and his colleagues were destroying the value of the dollar...and people were beginning to notice.
Then, he went on with the remarkable line:
“We are going to make sure that the inflationary impact that may come from a weakening dollar is not passed into broader prices.”
How is he going to do that? If the dollar goes down, it will take more dollars to buy things. That’s what inflation is . Can you have inflation without rising prices; can you have a falling dollar in which the dollar doesn’t fall? Mr. Bernanke did not venture into the metaphysics of it. Instead, he left the false impression that he and his sidekicks at the Fed were going to catch the buck in mid-air. Ha! They’re not going to catch it at all.
They’re going to let it fall. We remember Paul Volcker; and Ben Bernanke is no Paul Volcker.
And so, dear reader...the story is getting more and more interesting.
The financial industry is sitting on something between US$100 billion and US$500 billion of as-yet-undisclosed losses. The Financial Times says the “crisis will get worse before it gets better”.
About 2 million American homeowners are set to lose their homes.
The dollar has already lost 10% of its value against other major currencies so far this year.
Americans’ most important asset – residential property – is going down at nearly 5% per year. Since property prices are in dollars, in world terms, the householder is losing about 15% per year. And yes, dear reader, housing will keep going down. There’s another thing you can count on. The typical family doesn’t earn enough money to buy the typical house. Either family incomes must rise, or housing prices will fall. Which will it be?
Which is more likely? Here, we’ll take a wild guess – uh...housing prices will fall.
And now, dear reader, here comes the other shoe – the drop in stock prices. Yesterday, the Dow was off a few points. It was down 360 points the day before. If this presages a general collapse in share prices, it means that ALL major forms of wealth and savings are in decline for Americans. Housing, stocks, even money in the bank.
The only things that are not going down are the cost of living...and gold.
Ben Bernanke implied that the Fed would not be lowering rates again...not any time soon. He’s not going to allow the cost of living to get out of control, he says. But if stocks slide, what else can he do?
One way or t’other, stocks are going down. Because real estate is going down. And because profits are going down. Profit margins are high now, for reasons we’ve explained in these Daily Reckonings . But profits never stay this high for long. They always regress to the mean. Besides, the growth in profits has come from financial activities, not manufacturing. Finance is peaking out. Wall Street itself is selling off. Goldman Sachs (NYSE:GS), Merrill Lynch (NYSE:MER), Morgan Stanley... these dogs have had their day. Now, they’re on their way down, and so are business profits, generally...and so are stocks.
Want some other sure things?
The middle class is sinking. Houses are going down. Stocks are going down. Isn’t that enough?
Okay, how about this: inflation, worldwide, is picking up . There are many more people with much more money in their pockets than there were a few years ago. Wages are rising in the East. Prices for basic materials and food are soaring. Soon, the asset inflation we’ve seen over the past few years will give way to consumer price inflation. Not just in the United States, but worldwide.
Bill Bonner
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- None Found
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Dayahka on 12 November 2007:
Did you see Bernanke dribble over himself when Ron Paul asked him how you can fight inflation with inflation, and Bernanke replied: Well, stuff from here won't have a higher price, as if there's any stuff from here anymore.
Anyway, why gold, gold, gold? May not the government confiscate it or set a fixed price? And what about other tangible assets like land or platinum or copper or even fresh artesian water? Even one of the gold-buying places you mentioned only gives you paper gold--and that sort of business, too, may go the way that Citi and most banks are headed now, so you could just as easily end up with worthless paper (or just photons on a computer screen).
Comment by bzn on 12 November 2007:
What do you guys think of Ron Paul's idea of allowing a competing legal currency in gold and silver?
Comment by Man in a Shed on 13 November 2007:
There are shades of Harold Wilson's "It does not mean that the pound here in Britain, in your pocket, in your purse of bank has been devalued" speech in the Feds denial of the impact of the dollar slide.
The BBC are commemorating the 40th anniversary of this major economic humiliation of the UK under its then Labour government here.