Sunday, December 20, 2009

Future Watch: The return of outrageous mortgage interest rates.

It's hard for many people to grasp this, but one penny in 1906 would have bought a sack of goodies that would cost nearly $5 today - candies, pencils, that sort of thing. A small child given a penny to take to the dry goods store was ecstatic.

Here is a chart showing what the value of your dollar has suffered since 1983.

I recall 1983 quite well. I was in high school, and that summer I had been selected to attend a summer program in debate at a local college. I can't recall if my parents paid the tuition or if it was covered by a scholarship, but I do recall that my parents said I could not attend if there were other expenses - such as food. I really, really, wanted to go to that camp, so, frankly, I lied and said there were no other expenses, when in fact lunch was not covered. Students had to pay for their own lunch, and I didn't have any money. So some days I skipped lunch - claiming to be on a "diet." (And some days, other students, trying to make me "break" my diet, bought me a lunch or a snack - and even back then I would roll my eyes and lecture them about wasting money...and eat it. I wasn't stupid, you know.)

But other days, I could buy lunch simply by finding loose change on the ground that "real" college students had dropped. I could buy what would now be considered a "value meal" type of thing - a plate lunch with a drink - for 50-75 cents, depending on where the class went to eat.

Now that type of "value" meal costs anywhere from $3 to $6 dollars, depending on what fast food place you choose - and a real plate lunch with a drink costs about $10 at most "sit-down" type cafes and restaurants. There is no way most kids nowadays could ever just find enough change to eat a light lunch. That's because of inflation.

Inflation erodes the value of your money - the money buys less. Conversely, it takes more money to buy things than it used to. That's why even though we have rampant unemployment and falling wages - 1970s wages, to be exact - our expenses are not at 1970s levels. They are at 2009 levels, because monetary inflation has marched on even as falling wages and "improvements" in productivity lowered the cost of everyday items in absolute terms. It's not that the "stuff" is more expensive, it's that the money is more worthless. That's inflation.

One such type of "stuff" is gold. Prior to the US retiring the gold standard for our currency, inflation has bobbed it's way in an upward trendline. Some world events made it spike, and then later fall when the crisis was past - but the overall trend is still upward - that's inflation.

The writers at Dr. Housing Bubble asks this question, in the post from which the above charts and graphs were taken:

...In the 1970s gold went from $35 an ounce in 1970 to nearly $850 in 1980. This was a reflection of the U.S. coming off the gold standard but also rampant inflation. So if we had little to no inflation this decade, why is gold now up over $1,100? Because the U.S. dollar is tanking, that is why. And why wouldn’t it be? The U.S. Treasury and Federal Reserve, unlike Paul Volcker, only care about Wall Street and the banks since they are governed by crony politics. They are more worried about people buying homes with no jobs than getting people to have jobs with good wages so they can buy homes. It really is backwards.

And what will be the result?

A few things are certain:

-Mortgage rates can only go up. We are at the lower bound. It is a matter of when they go up.

-We will never ever pay off our debt. Anyone who believes otherwise does not understand arithmetic. We are spending more than what we are bringing in? Paying it off? Hah! To the contrary, we are spending even more. I doubt Keynes envisioned fiscal stimulus in the form of trillions to a select group of crony bankers.

-U.S. households are being crushed by enormous amounts of debt. The Fed hopes to generate massive inflation so we can pay off current debts with cheaper dollars. In their mind, big deal to have a $500,000 mortgage if the median income is $200,000. Clearly they are not following the employment market.

As we look at the 1970s and 1980s we can learn many things. First, massive inflation is no party and this is what the Fed is trying to induce. Second, many financial “experts” have no clue where things will be heading. Yet spending more than you earn never ends well. The signs are all there. We just need to be open to history and listen to what it is telling us.

The National Inflation Association concurs:

...The most important area of employment to look at is manufacturing jobs. Increasing manufacturing is the only way for our country to truly recover and build real wealth, because it will allow us to cut down on inflation by exporting real products instead of the money we print. Unfortunately, the U.S. lost 41,000 manufacturing jobs in November and has lost 2.1 million manufacturing jobs over the last two years.

The main areas of increasing employment in November were health care and government jobs, which are non-productive jobs that are increasing global imbalances. These jobs are not being created due to a strengthening economy, they are being created due to our artificial, temporary and destructive stimulus. They are forcing our country to get deeper into debt and create massive inflation.

Those who receive a paycheck for a non-productive health care or government job, compete against all Americans for the purchasing of consumer goods, without an increase in the supply of goods. This means after excess inventories of goods are done being worked off, prices of all the goods we consume will increase at an astronomical rate that is unimaginable to most Americans today.

Many Americans with jobs are not concerned about inflation because they believe if the prices of goods go up, so will their wages and everything will balance out. They don't understand our standard of living in America has already been declining for over a decade. Sure, we have plasma TV's, cell phones and the Internet today, but our lives are becoming harder to live and it is becoming more difficult for the middle class to survive.

Twenty years ago, a father with an average job was able to support an entire family of four or five on one income. Today, both parents need to work, and they are still unable to support their family without getting deeply into debt with credit cards, mortgages, auto loans, and college loans. Less families today have health insurance. Wages have not kept pace with inflation, all we have seen is an increase in debt to meet some of the demand from inflation...

What does this mean for the average family? Multi-generational housing, for starters. Parents are going to have to understand that their married children and elderly parents will likely end up having to live with them for years to come when this all shakes out. When young people do move out, they will likely have to live in communal housing - sharing a home with good friends, cousins, or fellow co-religionists - to make ends meet. Housing is going to become incredibly expensive.

Also, getting out of debt and staying out of it is the absolute most important thing any household can be doing right now. Those who can buy a home MUST do so with the intention of being able to afford it with only ONE income, because unemployment and underemployment is NOT going away anytime soon.

Along with multi-generational or communal housing, there will need to be a return to a more old-fashioned household econonmy - one that doesn't pay money for childcare, cooking, help with chores, etc. and puts time into self-sufficiency, such as gardening and sewing and crafts involving hand tools.

If the government will not relocalize our economy to provide jobs (especially living wage jobs) then each community is going to have to take matters into their own hands - making sure young people and the unemployed learn skills that are immediately useful for meeting the immediate needs of the community, not relying on government or large corporations out there somewhere to provide goods, services, food or transportation. They simply aren't going to.

Let your new year's resolution this year be one of looking for every way for your community to become self-sufficient and not to rely on outside sources of income, goods or services. We are entering an extended period of retraction and we need to prepare. Don't send your money away to fat-cat ceo's of transnational corporations who think of you as prey - spend your money supporting local farmers, local family owned and operated businesses and services, and getting the things YOU need to practice a craft or trade, to garden, and to educate your children and grandchildren. This year work on setting up cooperatives and community solutions instead of waiting on somebody else to solve your community's problems. This year, stop being pushed along with the current and take some (more) concrete steps to anchor your family.

That is a new year's resolution worth taking.

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