Noticeably Poorer

Up the Down Staircase: Fakery, Inflation and the Housing Market
By ALAN FARAGO

The British sitcom, "Upstairs Downstairs" was a comedy of manners, of the rich and their servants, which is come to think of it, how the Federal Reserve and Wall Street's stylized dialogue on inflation will appear to historians, in retrospect.

Over the past decade we've had Wall Street wagging its tail to the Fed's "growth recession", "low" inflation, we've had "worries about higher inflation". Meanwhile, Americans in the vast majority are noticeably poorer.

It is not just the pocket book: it is also quality of life. The growth economy based on suburban sprawl--now flat on its face--has been a nation killer, sold like tobacco or sugar as 'what the market wants'.

But, always, the bottom line is the pocketbook. And there, the incredibly narrow bandwidth on government propaganda on inflation, and the timidity of most economists, Americans for the most part have meekly bought into the rosy scenarios.

Americans on fixed incomes, though, may wonder indeed if they have been inflicted with an unreported kind of disease--because inflation to them has been real and rampant.

"Thanks to 20 years of inflation, $1 million today has just 54% of the purchasing power of $1 million in 1987." (from The Wall Street Journal, Jonathan Clements, June 27, 2007)

Bingo.

Countless Americans responded to the pressure of inflation, emptied of meaning and relevance by government statistics, by investing far more in housing than historical precedent or reason would prudently allocate.

When a significant percentage of the nation's homeowners are investing 40 to 50 percent of disposable income on housing, and home values have fallen 30 percent off purchase prices (as they are, in the nation's most overheated areas), who needs an exogenous shock to threaten the economy?

Until 2005, real and unreported inflation was matched by consumers of mortgages in housing, matching inflation with inflation, sucking up many purchasers of subprime mortgages, but also, hard working middle and upper middle class.

As paper value of individual investments in housing went up, up, up, the real value of mortgages packaged and sliced into financial derivatives disappeared into pension funds, insurance pools, and hedge funds providing leverage for even more speculative investments.

Today there is a slow motion earthquake trembling through markets for financial derivatives, whose cumulative float is approximately ten times the value of stocks traded on public exchanges in the US.

It doesn't matter whose liquidity is keeping US stock markets uplifted or high: it is an entirely different scene down in the boiler rooms where government economists and statisticians and Fed board members are keeping the engines running: the denial is remarkable.

Read the rest here.