Housing seems to be reaching a tipping point in perceptions anyway; it is tough to see when it will play out. With money falling from the sky, the govt (via Fannie May) willing to take on loans up to $729,750, and the Fed on track to keep lowering interest rates, this all seems a bit familiar to some people:
One day after the Fed slashed its benchmark interest rate to head off a possible recession, a small minority of economists warned on Wednesday that the central bank was in danger of invoking the same remedies that it did after the bubble in dot-com stocks burst seven years ago.
… Beyond the danger of higher inflation, some analysts warn that the Federal Reserve and its chairman, Ben S. Bernanke, could also lose credibility by appearing to act in knee-jerk response to plunging stock prices.
“They risk being seen as bailing out equity investors,†wrote Adam S. Posen, deputy director of the Peterson Institute for International Economics in Washington. “It makes it look as though stock market fears are driving the Fed to action.â€
Then again, perhaps we are headed down Japan’s path – deflation. The Fed can lower rates, but can’t force anyone to take the loan. As housing and credit (both consumer and business) continue to shrink or stagnate, there is a good chance that people and businesses will be leery of taking on debt. Which doesn’t sound like a bad thing, until you realize that much of the current value of the US and world economy is built on the assumption of constant debt and growth. But maybe I’m giving too much credit to the average consumer and trader, which seem to be prone to veer in the instant gratification direction.
I can see arguments for both inflation and deflation. All I’m sure of is that I’m happy Anna and I are debt free.