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What so many people get wrong about US deflation threat
- Thread starter brettman9
- Start date
Quote from brettman9:
In this case, deflation means rising real interest rates. Deflation of 5% means it feels like your mortgage is now at 10%. That massively increases defaults...which drives the banks to tighten lending to 0...which increases real rates...It's vicious spiral.
Please explain the mechanics of a homeowner w/mortgage more at risk of default due to deflation.
Quote from atticus:
Please explain the mechanics of a homeowner w/mortgage more at risk of default due to deflation.
Homeowner owes $200,000 on his house. That house is now worth $100,000.
Homeowner used to make $60,000/yr to pay for that house. Homeowner now makes $30,000/yr.
Make sense? The numbers are obviously exaggerated, but it helps demonstrate the point.
Quote from Kassz007:
Homeowner owes $200,000 on his house. That house is now worth $100,000.
Homeowner used to make $60,000/yr to pay for that house. Homeowner now makes $30,000/yr.
Make sense? The numbers are obviously exaggerated, but it helps demonstrate the point.
I don't dispute the underwater aspect, but the employed rarely receive salary cuts. If you're maintaining your income you can continue to pay your mort. There is no increase in real rates in any significant sense to those who are maintaining their income as deflation hits most consumables as well.
Middle manager loses his job a few years from retirement. MM is forced to live on 4% bond yields. Mort was refinanced at 4.6%, so he's underwater by 60bps right there, but the spread/var is what's significant. Say it's a 10% STIR environment of the 70's with 14% morts and said borrower is 400bps underwater with consumables exceeding 10% rate.
Quote from atticus:
I don't dispute the underwater aspect, but the employed rarely receive salary cuts. If you're maintaining your income you can continue to pay your mort. There is no increase in real rates in any significant sense to those who are maintaining their income as deflation hits most consumables as well.
Middle manager loses his job a few years from retirement. MM is forced to live on 4% bond yields. Mort was refinanced at 4.6%, so he's underwater by 60bps right there, but the spread/var is what's significant. Say it's a 10% STIR environment of the 70's with 14% morts and said borrower is 400bps underwater with consumables exceeding 10% rate.
I think you are wrong regarding wage cuts. Wage cuts are unlikely during a short period of deflation, but any protracted period will certainly bring the pain. Corporations have no other option. Either you get canned or take a wage cut, that simple. Look at Japan.
Quote from Kassz007:
Homeowner owes $200,000 on his house. That house is now worth $100,000.
Homeowner used to make $60,000/yr to pay for that house. Homeowner now makes $30,000/yr.
Make sense? The numbers are obviously exaggerated, but it helps demonstrate the point.
The inflate at all costs mentality is flawed to begin with. You simply assume that if the Fed fights inflation with all its weaponry that the above homeowner will actually see his wages keep pace with general inflation, and that's an academic argument, not a real world argument. In the current environment, whereby investors/speculators move into "hard assets" and inflate commodity prices, companies are more prone to reduce employment as their margins are squeezed.
Moreover, your argument only focusses on current asset holders, not future demand. Why should the current generation of asset holders be bailed out at the expense of the upcoming generations and their demand for housing. Should they pay 5x the cost of what that house was going for 20 years ago? In particular, when the true supply and demand is obfuscated by criminally fraudulent and negligent actions that continue to distort the real market price for real estate.