Krugman Vs. Ferguson

Looks like I'm not the only person crazy enough to take on Nobel Prize winning Krugman. Nial Ferguson writing for the Financial Times takes a swipe as well.

Ferguson argues that Monetary policy is what has helped the recovery, but fiscal policy is hurting us as the Fed and Treasury begin to engage in a boxing match of their own. Does the Fed stay independent and refuse to monetize the debt or do they dance and lead us down a path of inflation and deficits not imaginable just a few years ago.

This may only be interesting to me, but the ramifications for you and your retirement are extraordinary.

Scott Dauenhauer CFP, MSFP, AIF
www.meridianwealth.com

Krugman: The Big Inflation Scare

Krugman doesn't think Inflation is something to be worried about, at least in the short term. He doesn't believe we are facing hyperinflation and I tend to side with him on that. I do sometimes wonder if the hyperinflation bit is more of a political scare than an economic one (as does Krugman). But where I part company is that the inflation scare economists have history on their side.

Krugman points out that we didn't have inflation during the great depression - there was a tremendous amount of inflation from 1941 through 1951

Krugman points out that we had government debt over 100% of GDP after world war II and we didn't inflate it away.......this is nonsense. Inflation since 1945 has averaged nearly 4%, it would take nearly $12 today to buy what $1 purchased in 1945. Inflation was and should have been a worry.

Our deficits will force interest rates up (and hopefully inforce some discipline) and if the economy recovers inflation is sure to rear its ugly head. It may not be hyper inflation, but just 3 - 4% inflation will have a huge affect on everyone. If it hits the 5 - 6% range we are in for real trouble.

The concerns economists have over debt and inflation are real and should not be ignored as Krugman basically states when he says "The only thing we have to fear is inflation fear itself."

Fear inflation, it is the silent tax that ruins retirement.


Scott Dauenhauer CFP, MSFP, AIF
www.meridianwealth.com

Treasury Blow Out Blows Up Mortgage Recovery

From a mortgage blog:

"With respect to yesterday’s in the mortgage market — yes, it is as bad as you can imagine. No call can be made on the near-term, however, until we see where this settles out over the next week of so. If rates do stay in the mid 5%’s, the mortgage and housing market will encounter a sizable stumble. The following is not speculation. This is what happens when rates surge up in a short period of time - I lived this nightmare many times.

Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day. Jumbo GSE money — $417k - $729,750 — has been blown out completely with some lender’s at 8%. I have seen it all in the mortgage world — well, I thought I had."

The link above takes you to the blog which is a day by day account of the turmoil the mortgage market is experiencing. I'd check on the May 29th post as well.

This is a problem.

Scott Dauenhauer CFP, MSFP, AIF

The Atlantic: $8 Trillion and Counting

The Atlantic:

Here's a pie chart that puts into perspective the size of the Fed's involvement in the financial crisis. The entire circle represents approximately 8 trillion dollars. Yes, $8,000,000,000,000. The blue quadrant represents federal lending including expansion of swap lines to the tune of about $2 trillion. The purple quadrant comprises housing related purchases ($1.45 trillion) and buying $1.8 trillion of commercial paper. You can see a more itemized breakdown here.





The graph was put together by the Atlantic's Timothy Lavin and Anup Kaphle.

Mortgage Delinquencies, Foreclosures, Rates Increase

Here's the scary part:

"Prime fixed-rate home loans to the most creditworthy borrowers accounted for the biggest share of new foreclosures at 29 percent, MBA said, a sign job losses are hurting homeowners."

Its not just job losses, people are simply walking away because the banks won't negotiate. A bank would rather take a huge loss on a home than negotiate with a creditworthy borrower who has lost in some cases 70% of their homes value. The bank will however negotiate with people who have no history of paying their bills....this kind of behavior can only be rewarded for so long without consequences, we are starting to see those consequences.

This is where Mark-to-Market rules actually hurt as the homeowner is ignored while their loan is carried at something close to 100% of the value on the banks books.

Get used to these headlines.

Scott Dauenhauer CFP, MSFP, AIF
www.meridianwealth.com