The Credit Conundrum: The New Loan Shark is the Fed.

It is rather obvious that inflation is part of our current economy yet underreported. Multiple articles have discussed this including one we did looking at the overall budget expenses for most American households. I’m not sure why the mainstream media isn’t stating the obvious; that American families need credit to keep the economy running. We aren’t talking about modest ratios of debt to income, but a growing amount of credit is being used as a bridge between the wage stagnation we have been facing and covering monthly expenses. I was skimming over article after article and no one seems to talk about the wage and price gap. Yes, we hear about families having a hard time making their mortgage payments. But do you really need a 10 page analysis on why a person making $14,000 a year can’t afford a $720,000 loan? The true story is in the massive wage stagnation of the nation. At a time when the unemployment rate is at record lows, GDP is growing, and home prices skyrocketing why is it that Americans are having to tap into unprecedented amounts of credit? We saw how dependent the overall global economy is addicted to credit when in August the markets literally went into a screeching halt over liquidity. No credit, no money. In fact, we are witnessing an interesting shift to a credit equals money economy. Think Americans are saving?

Americans actually spend more than they earn. How can this be? For one, we rarely see cash anymore. At least on a large scale. Most people get their paycheck electronically deposited. Then they pay their mortgage with e-Bills. Then they use debit and credit cards for every purchase including items from fast food chains. As if you need to charge a 50 cent donut on your American Express. When was the last time that you cashed your check and had the entire amount in your hands? It is interesting to note that this faith in electronic money hit a few walls when people couldn’t withdraw money from the UK’s Northern Rock online and folks did a mini-bank run. We also had a taste of it here with NetBank having online difficulties. Banks are big and look stately because they are to inspire security. When you see a vault, you know something of value is kept behind there. But what if the vault opened and all you saw was a laptop showing a brief chart of credits and debits on some accounting software? I understand that electronic banking systems are here to stay and they do make life more convenient. You also need credit for daily necessities like buying a home, insurance rates, and sometimes employement. But studies also show that people spend up to 18 percent more if they use their credit cards instead of cold green cash. This leads us into the current predicament, if money is now interchangeable with credit, what happens when the credit markets stop?

You Want Money? Uncle Fed has a Loan for Ya!

Openly the Fed is beating its chest like a Neanderthal stating that it will do everything to stifle inflation. However, when we look at BLS data, inflation isn’t to be found. O where o where are you inflation in government stats? The government wants you to believe that prices are stable but debt to income ratios have never been higher for the country. Why is this? With such a massive boom in housing, you would think people would have equity and diversified wealth management strategies. This isn’t the case with most American’s since most of their wealth is stored in housing. Don’t think so? Take a look at the booming mortgage debt in the US:


Not only is the booming debt a symptom of something larger, but the mentality of the continuous upgrade and moving up places owners in this perpeptual hamster wheel of renewing debt. Case and point. A friend was nearing the end of his car payments. The car is still in excellent condition and he seemed excited. I asked him what he planned to do with the freed up monthly cash flow. “Not sure what I’ll do with the extra money. I think I’m going to trade it in and buy a convertible.” To each their own. But you see how this cycle perpetuates. With housing, if you trade one over inflated asset for another, you are only feeding into the game. And you become dependent on credit as a facilitator. So there are multiple things happening here including the bamboozling of the American pubic that they need larger and larger homes. Oh really? How odd in the face of our declining family size; and keep in mind this is occurring in light of baby boomers downsizing and many people deciding to live solo. Working professionals are holding off on having children since they realize that they probably can’t afford to have children and provide an adequate lifestyle in many expensive metro areas. Many young families are wrestling with the issue of having children. Even with two good incomes, many families run the numbers and realize that it will be a stretch if one partner decides to stay at home for a few years. And then you have future college costs. As you can see, the argument for larger homes is more psychological than economical. The need for larger homes and cars is driven by behavioral marketing and not economic utility. You notice those Hummer commercials? They have the vehicle with gas mileage ratings looking like GPA scores going over mountains and chasing hyenas in the Sahara. When was the last time you had rapid wildlife chasing you in Santa Monica?

This credit psychology is played out well in the casino environment. Why do you think they give you chips in exchange for cash? Why do they give you a credit card instead of cash? It is easier to spend when you don’t think of money as money. If someone is able to see what $500,000 looks like, do you think this would change the impact on buying a home in Southern California? Of course, the Fed is pumping up the money supply while saying they are concerned about inflation. This is absurd since inflation is an issue of too much money floating in the economy. And since credit = money flooding the market with easy credit is going to cause what? So if they are worried about inflation and the root cause of inflation is pumping more money they sure aren’t acting concerned by their policies. I’m not sure the vast majority of American’s really care about inflation so maybe they figure it will just blow over. Folks accept prices going up as a fact of life and as long as they can make the monthly minimum payments to service their revolving debt, they are okay.

Why go to a pay day lender when you have the Fed? Financial institutions don’t need to go to loan sharks when they have the biggest one sitting at the right hand of our government. When things got tough, they speed dialed the Fed and all is okay. But like any payday lender, the interest is what will bring you down. For a short-term fix you harm the stability over the long run. The world markets are reacting and that is why the dollar is at all time lows. Commodities are hitting records and the stock market is also up for the year. Everything is up! Including the debt load on our country. Debt load is increasing:


We’ve read the bills that currently passed. They offer short-term relief to the symptoms of the current housing market but don’t address the root cause. The root cause is we are running the risk of devaluing our currency and possibly creating a hyper-inflationary environment that isn’t reflected in our government numbers except in real world numbers. We are living in a parallel universe apparently. Yet I think the Fed is afraid of deflation and their actions point toward this. When prices start correcting downward, the tools they have will be largely impotent. Some sellers wouldn’t be able to sell even if prices went down 5 or 10 percent. If they have no access to credit or funds, then they are stuck. That is the reason many went with these exotic loans in the first place. They didn’t have the funds to begin with! And buyers are being more cautious by force and their own merit. The force part comes from the fact that there is very little exotic mortgages fueling the current market. The velocity of selling slows down when you have to check documents and verify that prospective buyers’ stated income reflects reality. Things move much quicker when you can mold numbers via stuntman loans. For all other things, you have the Fed.


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35 Responses to “The Credit Conundrum: The New Loan Shark is the Fed.”

  • Dr. HB,

    Great new look on the website redesign! Our fractional banking syndicate (known as the Fed) and their printing of “money” via fiat is highly inflationary for the things we need (fuel,food, shelter, health care) and highly disinflationary for things we want (plasma teevees, etc.) Yet, these government statistics have been a laughingstock amongst investors for years now. Helicopter Bernanke just forestalled the inevitable with that latest rate cut and it looks like the policy will continue. If the Dow is up 36% in the past 5 years but the dollar is down 36%, is it still a bull market?

    • William J Sturm

      DOW up 36% and USD down 36% is it still a bull market?

      No. And it gets worse too. Do you know how many weak stocks have been tossed out of the DOW only to be replaced by stronger stocks????

      Do you know the multipliers used to give different weights to different DOW Components? If anyone does please list them.

      There is simply no way to compare the DOW of old with the one today. Suffice it to say the performance is enhanced to some rather significant degree by the manipulators.

      Did you notice that the Plunge Protection Team has been criticized for not doing enough and have been replaced by the Committee to Save the World?

      • We haven’t seen anything yet. We are now getting “bipartisan” support for a housing czar to take care of this mess. Bwahaha! What episode of the Twilight Zone are we in?

    • “If the Dow is up 36% in the past 5 years but the dollar is down 36%, is it still a bull market?”

      Is that true? Where did you find that statistic?

      I am just wondering if it is wise to continue contributing to my 401k or if I should take the same amount each paycheck and sock it away elsewhere for a better return. Any info would be greatly appreciated.

      • It depends on several things: (1) If your employer is matching some of your contribution, you are getting “free” money, so contribute at least enough to get the maximum match. (2) If you are not properly diversified across many different asset classes, get some good professional investment advice from someone whom your employer recommends. (3) If you already have sufficient liquid or other income producing assets to fund your retirement, plus inflation for your life expectancy and you are completely debt free, you might not need to contribute to your 401k. But you should do something with the extra money, so consider a Roth IRA for the tax benefits. You will still need to consider where to invest both the IRA, the 401k and any other cash you have.

      • Went to my local credit union two days ago, hoping to open a checking account there (thought it was better than Bank of America). Out of curiosity, I look at the yields on the saving account. The best I saw was 4.15%, and my immediately thought was the “real” inflation rate which is approximately 6%.

    • Thanks covered. To answer your question regarding a bull market. It depends in what sectors you invested in. If you put your money in foreign currencies, commodities, and pharmaceuticals then yes, it was a massive bull market. If you have your money in the dollar (aka savings accounts) and housing related stocks, then this past year you’ve been hammered. They are doing everything they can to stave off deflation. In fact, deep down they are hoping for inflation.

  • William J Sturm

    Dr. HB,

    DOW drops from 14,000 to 13,000. USD index drops 6% and thus the bounce back up is 13,200 (not 14,000).

    I was shocked to learn that 31% of CPI is based on Rental Equivalent Cost or some such animal. The real reason some believed we got into this easy money mess was because it came with a perceived modest level of inflation! The cost of shelter was going up like gangbusters but the CPI was not affected.

    The real reason they redefined the CPI was to steal cost of living adjustments on pensions. And, like compound interest this effect compounds over time. The cost of living increase withheld 5 years ago is not there to be guarded against the loss of buying power! Negative compounding and those on pension are taking a pounding. Well, the checks are still being honored. I guess there is something to cheer about.

    • They officially call it Owner’s Equivalent Rent. Which of course makes no sense since 70 percent of the country owns their home. Plus, they use hedonics in other areas which make absolutely no sense as well. They apparently think that if you don’t have Kobe steak, you’ll be happy to substitute tofu and Ramen.

  • William J Sturm

    What must I do to review the other 7 comments?

  • Solution –

    Commodity Standard Monetary Policy (ie – Gold or Silver Standard)

  • hi Doc

    Did you see this testimony before Frank’s Congressional committee? he presents a lucid comparison of present conditions to 1929.

    Congrats on the new site, too.

    Some questions for those advocating a return to a commodity standard, a la Ron Paul, Mike Mish Shedlock, and many posters on this board – how do you account for an increase in human population, labor, and production that outstrips the base level of the underlying commodity? That is, what does a fixed amount of, say, gold, as the basis for money do to the possibility of business expansion? Wage increases? How is “value” created for new inventions (technical, medical, energy, etc.) if the supply of money is fixed?

    • “The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.”

      Amen to that. This isn’t new. Those who don’t know history, think that the current golden era of housing is something novel but in fact, we had a massive bubble in Florida real estate in the 1920s that looked very much like our current bubble on a more micro scale. Flippers, pretentious housing developments with bourgeois names, and massive over building. It ended in spectacular fashion as well.

      If you haven’t read this article, you should:

      More bail out talk. Take a look at some suggestions:

      “NTIC has called on lenders to impose a two-year moratorium on resetting adjustable rate mortgages (ARMs). It also has called on lawmakers to more stringently regulate brokers and lenders to prevent abusive lending.”

      Why don’t we just tell lenders to stop receiving payments and except tomatoes as a form of payment? If you read the article, you would think that no one in this world is accountable for this mess.

      • In fact I had seen that article and nearly linked to it in my original post. Can we use little ketchup packets instead of tomatoes, though? I can get them by the box at the local fast-food joint, free. Make ketchup equal to a benjamin, mustard a jackson, and relish is maybe just a hamilton.

    • Good point. I always wonder why people in favor of “commodities” always pick the ones that are most disconnected from the real necessities of life. What would happen if we started denominating everything in joules?

      If we are really going to get back to basics, that would be “If you can’t eat it, drink it, wear it, build shelter with it, or burn it to keep warm, then to hell with it.”

  • Hey,

    Great writings as usual. Perhaps I’m young (at 32) and naive but when did massive debt no longer be a 4-letter word? All around we see people willing put themselves into more and more debt and not have a problem with it. I had a neighbor 6 mo ago who was talking to me how he took out *another* home equity loan and seemed to be boasting about the rate. As if I should be impressed that he has 120k in his pocket and forget that what he really has is a massive loan. I was nodding along while thinking I must be in bizarro world because it didn’t seem to dawn on him that all he really had was more debt…Keep in mind this was after he showed my his new ganite countertops and joke!

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    • Barclays UK. Right-o, chap. You risk getting your website overloaded with happy glampers looking for just the kind of help you’re offering.

  • Think about the term, “homeowner”, for a second. If you have a massive mortgage with a bank or several banks, you do not own a home at all. You are leasing a home from bank with the option to sell or buy it in the future. You own nothing.

    Getting the masses to confuse debt with equity is the key to economic and political control. Debt makes the masses passive. And with a passive electorate, you can have illegal aliens take away jobs and kill wages. You can have outsourcing overseas without consequences. You can import H1B visas, etc.

    • Well, you’re risking a philophical debate on the concept of “ownership”. Technically one could argue you own the bundle of rights that accompany the option. The very concept of credit – that is, payments over time rather than a lump sum at the exchange of the original ‘goods’ – is at the heart of the modern concept of ownership, via the daily vehicles of mortgages, car loans, credit cards, not to mention the economically complex vehicles like LBO, CDO, buying on margin. Stocks, bonds, any type of non-monetary exchange over time, comprise “ownership” beyond the original model of immediate cash exchange for goods.

      That really has nothing to do with legal or illegal immigrants, however.

  • Someone mentioned new plasma tvs above. That’s what this is all about. I watched a news story this morning about an older woman who was losing her house after 17 years. We are supposed to feel sorry for her. If logic serves me, she must have refinanced her house against the paper value and then done what most people have done, buy a bunch of “status symbol” crap. When I bought my condo in 2003 in North Jersey, I made what I considered to be a major purchase of a $1500 television. I paid cash for it (not borrowed cash) and was the only person I knew who had a TV larger than 40″. Today? Everyone I know has a widescreen, big screen, flat screen LCD/Plasma/DLP television. People have stopped considering the actual cost of things and are truly just trying to keep up with the Jones’s. I watched Bill Maher this week and he had Ken Burns (the documentarian) on. I couldn’t agree more when he talked about 9/11 and how the biggest request our gov’t made of us afterward was to go out and buy stuff. Unbelievable. I didn’t feel bad for that woman on the news and I really don’t feel bad for anyone being foreclosed on. Sometimes you bet and you lose. Pardon me for not shedding tears as I watch someone pack up their belonging into a new Escalade.

  • Sorry for the spam. No harm intended.

  • There have been times that I have asked friends that weren’t from L.A. what the most taboo conversation topic to bring up with someone. Most of them would make guesses such as STD’s, Family issues, Mental Health issues (depression, etc)…I would always reply to them that I’d bet it would asking them what their Debt to Equity ratio would be.

  • The housing bubble will indeed become, during the ensuing years, an all consuming nightmare for millions of the middle class of the Western hemisphere. The typical sneering media canard on the Left habitually blames the wicked purveyors of easy money. That the overfed, under read, ill informed, gullible, downright ignorant masses are solely to blame for their plight is strictly un-Politically Correct – and yet an unutterable – reality. The Consumer is often of the ilk mentioned in the posts above… a granite counter top and plasma TV worshipping fool. He will spit in your eye if you try to inform him of his error… of the terrible burdens he has bought upon himself and his family by taking on debt during these troubled time etc., That mocking, all knowing, pseudo sophisticated attitude of the typical boastful buffoon who tries to impress you with his new toys. A sinister approach to adopt may well be to encourage it!
    The consumer is about to get a good hard spanking. A spanking his parents probably never gave him. All told The United Consumer’s of the Western World are about to receive their first royal spanking in many a generation. It will get ugly. Dr. HosuingBubble’s articles offer good insight on what we can expect ahead.

  • Oh, there’s plenty of blame to go around. Did people with Negative Amortization Loans REALLY think about what they were getting into? Sure, most of them planned to sell, and that what was EVERYONE was telling them-the market can only go up-it’s a new paradigm.
    Well, here’s the thing. If lenders actually had to face the consequences of their marginal dealings, they wouldn’t be shoveling that crap so much.

  • Comment by gael
    “Is that true? Where did you find that statistic?”

    Well, it’s sorta true. I posed it as a hypothetical question because the real stat is the S&P is up 36% and the US Dollar is down exactly the same percentage amount. I asked in Dow terms simply because that index is the one the MSM reports on all the time and most people who don’t watch the markets closely judge what they hear the stock market is doing by. The Dow is very misleading as to the health of the overall market, but that’s a whole different thread. I have a 5 year chart of it but I’ve never been able to successfully post a link here so you can go to yahoo finance and make a comparison chart of the S+P vrs the USD for the past 5 years to get confirmation.

    The reason for the question was whether or not Joe and Jane 6 pak
    “think” everything is just hunky dory when they get their brokerage statements every month and see that their mutual funds have gone up. There’s nothing on the statement that says the amount of NAV they have has devalued enormously during the last 5 years, even though it shows the account up 8% this year. For example, if you’re a Canadian national investing in the US S+P index via Vanguard or some other big mutual fund, you’ve actually LOST 1% this year (due to the loonie’s rise above par with the buck) even as the cheerleaders on cnbc celebrate new highs every day. Then, think of the Chinese government that holds an estimated 300 Billion worth of US Treasuries and you can see where they might be getting a bit not too happy about losing money on our debt (they sold 48 Billion worth of Treasury bonds and notes in the last month.) A lot of this discussion can be found at (which Dr. HB cites occasionally.)

    They point of all this? The Fed has decided to sacrifice the dollar in favor of cutting interest rates. So what? Well, we get
    massive real inflation. We’re already suffering from it, but it will get worse. Much worse. The dollar is under severe pressure already and there are many economists and market technicians who expect it to fall all the way to FORTY over the next few years. This is a raw cutting in half of the dollar! What does that mean? It means that everything we buy that is imported will double in price. DOUBLE! The start of this is already evident as we have debased our currency by four percent in less than one month!
    Wages will not keep up. The middle class in this country will be hurt badly. Their real purchasing power will decline by fifty percent or more as debt service overwhelms them.
    Approximately half of all our Treasury Debt is held by foreigners. As they take haircuts on the principal value of those investments of up to 50% from today’s levels – remember, they’ve already lost 20% in the last three years – they will demand much higher interest rates to buy any MORE debt or roll over what they have now. Since our government continues to insist on raising the debt ceiling and spending more and more money, the real cost of money in the form of interest rates will rise precipitously, no matter what the Fed does. This is already happening in the bond market and it will get much worse. Since the Fed cut rates the 10 year interest rate has actually RISEN. Foreign holdings of our debt have decreased. That is the real cost of money and its going the wrong way. All of this is due to the intentional act of Ben Bernanke in bailing out the Investment Banks who had made bad bets – acts which he “protected” when he cut Fed Funds and issued the 23A “exemption” letters to SIX large banks. For more on this, I’ll try to post a link:

    So to sum up, we have a problem so big that predictably (and ironically, since they were the proximate cause of the mess) the government is trying to get involved. They have given us a mass tax hike disguised as inflation as oil producing countries are now demanding payment in Euros and foreign central banks are fleeing from the dollar for the first time in modern history. As for the housing bubble market? It must be allowed to correct…hard if our economy and our currency is to regain it’s strength by tossing the smoke and mirrors act.

  • The Third Fractal’s Day 36 – The Federal Reserve Boosted Euphoric Minutely Gap to a New High for the Great Wilshire – at Day 36 of a possible 14-15/36/36 day Terminal Growth Fractal Series

    There have been only 2 days of easily discernible transient fractal perturbations caused by external world events in the last 5 years. One occurred on 7 July 2005 with the London bombings and the second occurred with the 0.5 vice expected 0.25 Fed Funds rate cut on 18 September 2007. The extra 0.25 percent rate cut likely distorted the underlying slope lines defining a 3-4/10/9 of 9-10 day final fractal progression for the Wilshire. Unlike the Japanese, German, French, British, Canadian, Mexican, Swiss,and Taiwanese equity markets, the Federal Reserve induced malinvestment took the US ‘s homegrown Wilshire above its previous July highs and dropped the US dollar perhaps little lower than its necessary nadir point in a declining 3/7/7 day fractal. Cutting Federal lending interest rates do matter with savers usually punished and speculators rewarded. The Wilshire gapped above its closing high of 19 July 2007 on day 36 of the third 36 day 2.5x fractal of a 14-15/36/36 day series. Bank of America BAC completed day 20 or 2x of the third fractal of a x/2.5x/2x Lammert fractal series of 10/25/20 days. The 10/25/20 day BAC fractal can be traced against a caricatured Wilshire similar 10/25/20 pattern with day 9 of the second fractal, the 16 August low. Last week GM completed week 29 of a 15/36/29 of 29-30 fractal with an evolving series of two fractals from the 16 August Wilshire low:a classic 3/7/6/4 day fractal, x/2-2.5x/2x/1.5x pattern, which the Wilshire likewise shared, followed by a 3-4/10/9 of 8-10 day pattern. This latter fractal series can be more easily discerned by reviewing the fractal pattern of its sister company, Ford. Will the 8 trading day valuation (price x volume) integrative top for the great Wilshire from 12-23 July 07 best an integrative top of the highest 8 trading days containing Friday 5 October 07’s remarkable gapped new record high day? With a background of contracting US housing and financial industries, the last investment dollars are now clearly focused on the commodity and equity markets. Conditions of terminal malinvestment euphoria, characteristic of the housing bubble at its peak in 2005 have shifted to the equity and commodity markets. Could the composite equities progress to 11/27/27 months? Gold, the Swiss Franc, and Euro share the Wilshire’s 14(-15)/36/36 day pattern with gold gapping to a high on day 21 and 22 of a 11/26 of 28 day second fractal. The US dollar after making a 3/7/7 fractal low has the possibility of a positive growth first fractal of 6 to 8 days. The Euro/Swiss Franc, and British Pound all appear to be following a 19/47/37 of 37 to 38 week terminal growth pattern.

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