Re: Housing Market i inne cuda amerykanskiej ekonomii
- From: herrman321@xxxxxxx
- Date: Sat, 29 Sep 2007 23:04:01 -0700
On Sep 29, 10:24 pm, Andrew Karts <andrewka...@xxxxxxxxx> wrote:
Little House on the Red Prairie
by John Cassidy September 2007 Issue
How China is keeping U.S. housing prices booming-for now.
Not long ago, a hand-addressed letter arrived at my home in Brooklyn.
"Dear Mr. Cassidy," it began. "I represent a buyer who is very keen to
purchase a house in your neighborhood. This buyer is willing to pay
cash. If you are interested in selling, please contact . . . " I
allowed myself a rueful smile. Almost five years ago, after driving
out to Levittown, New York, and discovering that small ranch houses in
that quintessentially middle-class town were selling for more than
$300,000, I wrote an article predicting a real estate downturn. As
prices continued to soar in Levittown and elsewhere, my friends and
colleagues didn't hesitate to tease me about the headline of my piece:
"The Next Crash."
At the beginning of 2004, at the instigation of my wife, I swallowed
my reservations and bought a decaying Brooklyn brownstone, with the
intention of doing it up and renting out part of it to help pay the
mortgage. The purchase price, of just over $1 million, seemed
astronomical, but from today's perspective, it was a bargain. Houses
on my block are now fetching more than $2 million and, as evidenced by
the real estate agent's missive, demand for them is brisk. I dropped
the letter in the trash, turned to my wife, and said, "Thank God for
the Chinese government. It's made us a million dollars."
The link between Brooklyn real estate and policy decisions made in
Beijing isn't immediately obvious, but bear with me. As you may well
know, the U.S. is now the world's largest debtor. According to the
Treasury Department, at the beginning of 2007, Americans-that includes
you, me, Citigroup, hundreds of thousands of other businesses, and the
federal government-owed foreigners roughly $10.7 trillion. (In case
you've forgotten what 14-figure numbers look like, that's
$10,700,000,000,000.) Now, the U.S. has the biggest economy in the
world. The gross domestic product-the value of all goods and services
that we as a nation produce each year-is about $13.6 trillion, so we
can shoulder more debt than other countries. But still, in just three
years, the external debt has shot up by about 55 percent.
The culprit is the chronic trade deficit, which has been running at
almost 6 percent of G.D.P., a level unprecedented in our history. To
pay for the difference between our import bill and our export revenue,
we have to borrow from abroad. Most countries with comparable trade
deficits meet a predictable fate: Investor confidence ebbs, capital
flees, the currency crumbles, the central bank is forced to raise
interest rates, firms and consumers retrench, and the economy goes
into a recession.
Nothing like this has happened in the U.S.-at least not yet-largely
because we have been able to withdraw cash from what is effectively a
giant A.T.M. stocked by the Chinese government, the Japanese
government, and other generous lenders. In return, we have been
handing out IOUs, mostly in the form of Treasury bonds. On June 30,
2006, China owned about $680 billion worth of bonds issued or backed
by the U.S., and Japan owned about $800 billion. (These are
conservative figures from the Treasury Department. Many analysts
believe the real numbers are much higher.) Other big holders of U.S.
debt include Russia and Saudi Arabia, which are both flush with oil
revenue. But even countries such as Brazil, India, and Thailand have
been lending us substantial amounts of money. It is impossible to
say precisely what would happen to the U.S. economy if it weren't
benefiting from the largesse of central bankers bearing yen, renminbi,
won, rubles, and riyal. It is pretty certain, though, that mortgage
rates would be appreciably higher.
Back in 2002, I assumed that the Federal Reserve would raise
interest rates, and that once cheap money was no longer readily
available, housing prices would fall. The first part of this
prediction proved accurate. Since the middle of 2004, the Fed has
taken the federal funds rate-what it charges banks on overnight lending
-from 1 percent to 5.25 percent. Normally, such a dramatic shift
would prompt a sell-off in long-dated Treasury bonds and a rise in
long-term interest rates. This time, that didn't happen. Thanks to all
those central banks stocking up on paper issued by Uncle Sam, the
interest rate on 10-year and 30-year Treasurys, rather than jumping to
7 percent-which might have been predicted based on past experience-
stayed closer to 5 percent.
The fixed rate on 30-year mortgages (closely tied to Treasurys) barely
crept above 6.5 percent, creating a floor for real estate prices.
Despite all the talk of a housing slump, there is still no sign of a
nationwide crash. In parts of South Florida, there have been
significant price reductions, but Oklahoma City and Albuquerque are
still enjoying increases. In my neighborhood, housing prices seem to
go up every week.
If the sight of the world's richest nation borrowing heavily from much
poorer countries strikes you as strange, award yourself a jelly bean.
Traditionally, the relationship has been the other way around. In the
19th century, when England was the workshop of the world, British
lenders paid for the railways and other capital projects throughout
North and South America. After World War II, U.S. taxpayers financed
the reconstruction of Western Europe and Japan.
Economic theory says wealthier countries should provide capital to
poorer ones, because that's where the highest potential returns are.
Today, however, the U.S. doesn't have much savings to lend anybody.
The personal-savings rate is negative (people spend more than they
earn), the federal government runs a big deficit, and American firms
are using much of their surplus cash to finance buybacks of their
stock.
There is a neat phrase to describe the relationship between the U.S.
and its Asian creditors: vendor financing. The governments in Tokyo,
Seoul, and Beijing lend us money; we use it to buy Lexus cars, Samsung
cell phones, and all manner of Chinese products. It seems obvious that
such a one-sided arrangement can't last, but predictions of its
imminent demise haven't fared any better than my real estate call in
2002. In February 2005, Nouriel Roubini, an economist at New York
University, and Brad Setser, a senior economist at the website RGEMoni
tor.com, predicted that within two years, America's lenders would balk
at providing additional funds and the U.S. economy would risk a
recession. Oh really? In 2006, China bought an estimated $250 billion
in dollar assets. In the first quarter of 2007, it purchased at least
$100 billion more, according to Setser.
Some analysts did recognize the potential durability of vendor
financing. In a series of articles published in 2003 and 2004, Michael
Dooley, David Folkerts-Landau, and Peter Garber, three economists
then connected to Deutsche Bank, argued that it could last a
generation, until the Chinese economy had absorbed the country's
enormous pool of rural laborers into factories.
The trio explained how China benefits from financing our profligacy.
In the past two decades, it has transformed itself from a rural
country into the world's second-largest exporter, after Germany (the
U.S. now ranks third). From the perspective of Beijing, investing
hundreds of billions of dollars in low-yielding Treasury bonds is a
modest price to pay for keeping U.S. markets open to Chinese goods and
gaining access to U.S. industrial technology.
Media accounts of Sino-U.S. dealings tend to ignore this reality.
Treasury Secretary Hank Paulson flies to Beijing to chide China for
not instituting more reforms, including currency revaluation. Chinese
vice premier Wu Yi politely tells him to shove off. (Cue headlines
about rising tension between Washington and Beijing.) But the very
idea of Paulson lecturing the Chinese is an absurdity akin to a
shopaholic lecturing his credit-card company on the need for lower
monthly interest rates. The Treasury secretary's trip was an elaborate
charade designed to discourage Congress from slapping tariffs on
China.
The U.S. and China have a symbiotic relationship that neither side can
afford to disrupt. Partly for this reason, much of Wall Street is
remarkably sanguine about the U.S.'s growing indebtedness. A while
ago, I had dinner with a big-time investor, who told me to quit
worrying: The foreigners won't stop buying Treasurys anytime soon, he
said. They need to park their money somewhere, and the U.S. still
provides the most hospitable environment for itinerant capital.
Perhaps my dinner partner was right. He's made a lot of money betting
on his optimistic outlook. Many of the skeptics, meanwhile, have been
silenced. In April, Stephen Roach, the veteran chief economist at
Morgan Stanley-who in November 2004 predicted an "economic Armageddon"-
was "promoted" to head the firm's Asian operations, a position in
which he no longer opines on behalf of the company.
Given my sorry record as a real estate prognosticator, I should
probably leave it at that, but I can't resist adding a historical
note: During any period of intense speculation, there are signs that a
peak is approaching. These include relaxed credit standards, a glut of
inexperienced buyers, elaborate theories that justify rising prices, a
lack of dissent, and more and more media outlets focused on the
speculation.
During the bull market of the mid-1980s, stock-market newsletters
proliferated. In the late '90s, there were CNBC and financial bulletin
boards on websites like Yahoo Finance, where small investors swapped
stories about high-flying internet stocks. There are dozens of real
estate websites that critique and track the progress of new listings
in Brooklyn. My wife and many of our neighbors obsessively monitor
these sites, which have names like Brownstoner, Curbed, and Property
Shark. "Did you see the news about 152 Dean?" they whisper to each
other when they meet on the street. "It just sold for $2.45 million-
$150,000 over asking."
Suffice it to say, I do not take these communications as a bullish
signal. I would develop this argument further, but my wife just asked
me to look at a recent posting on Brownstoner. There's a three-story
fixer-upper close to the heavily polluted Gowanus Canal that's a real
steal at $1.1 million . . .
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The Mood of the Nation
9/28/2007 3:43:01 PM
Stock markets closed lower today, Friday September 28, 2007
by Alan Hall
Stock markets are the barometers of social mood. Price data shows the
collective optimism and pessimism of investors, and thereby, society.
Another reliable social mood indicator has always been presidential
approval ratings. But today, presidential approval is near a record
low while the stock market again approaches 14,000. What's going on?
If the stock market is doing so well, why do we feel so bearish?
The public attitude toward the Federal government is dismal. A new
Gallup poll published this week says Americans now "express less trust
in the federal government than at any point in the past decade, and
trust in many federal government institutions is now lower than it was
during the Watergate era, generally recognized as the low point in
American history for trust in government." [Emphasis added]
The poll shows that trust in government to handle international or
domestic issues is at its lowest level since 1976. Trust in Congress
is at its lowest point ever, and faith in the executive branch is at
43%, only 3% higher than just before President Nixon's resignation in
1974.
We are even losing faith in democracy... or at least in our ability to
make it work. The percentage of people who trust the public's ability
to perform its role in a democratic government has fallen 8 percent in
the past two years.
The Reuters/Zogby Index poll on September 19 was worse, showing only
29 percent approve of Bush's job performance. "'The public mood is not
just dark. What's darker than dark?' Zogby said. 'The mood is getting
ugly.'" (Reuters)
On the other hand, the index says 56% rate their personal financial
situation as excellent or good, and 64% feel fairly secure about their
current job. Many individuals seem to think their fortunes are
independent of the larger group. These feelings fly in the face of the
national economic situation.
This week another Reuters article said: "The Senate voted 53-42 to
raise the debt ceiling to $9.815 trillion, the fifth increase in the
U.S. credit limit since President George W. Bush took office in
January 2001." The Senate Finance Committee Chairman said: "We have no
choice but to approve it. If we fail to raise the debt ceiling soon,
the U.S. Treasury will default for the first time in its history."
The article said U.S. debt stood at $5.6 trillion when Bush was
elected, and quoted a Senator: "Increasing the debt limit is necessary
to preserve the full faith and credit of the United States of
America." [Emphasis added]
That should easily win the 2007 Most Ironic Statement Award.
The poll numbers show conflict. Confidence in jobs and financial
prospects remains high, yet confidence in government is collapsing.
Americans remain in denial even as we nervously watch our government's
cowboy dilemma -- out of options and forced to embrace even more debt
at the end of an inflationary box canyon.
.
- References:
- Housing Market i inne cuda amerykanskiej ekonomii
- From: Andrew Karts
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