NationStates Jolt Archive

"Despite the significant decline already in the value of the dollar, we are not seeing an improvement in the current account balance," said Rick Egelton, chief economist at Bank of Montreal.

"This is basically down to the fact that the US is growing more quickly than its major industrial partners, fuelling the demand for imports."

source (http://news.bbc.co.uk/2/hi/business/4354759.stm)

I do not see how growth being faster in the USA than in its trading partners increases the demand for imports.
If the consumer demand was growing faster than the industrial output, then this would increase the demand for imports, but the US growing faster as a whole causing this simply does not make sense.

Can anyone explain Rick Egelton's comment?

source (http://news.bbc.co.uk/2/hi/business/4354759.stm)

I do not see how growth being faster in the USA than in its trading partners increases the demand for imports.
If the consumer demand was growing faster than the industrial output, then this would increase the demand for imports, but the US growing faster as a whole causing this simply does not make sense.

Can anyone explain Rick Egelton's comment?

Maybe he is referring to raw materials.

Maybe he is referring to raw materials.

I am fairly sure, from the context of the whole piece, that he was referring to consumer products. The only other thing mentioned was the price of oil, and this he would surely have referred to as being a price increase factor, not a demand factor.

source (http://news.bbc.co.uk/2/hi/business/4354759.stm)

I do not see how growth being faster in the USA than in its trading partners increases the demand for imports.
If the consumer demand was growing faster than the industrial output, then this would increase the demand for imports, but the US growing faster as a whole causing this simply does not make sense.

Can anyone explain Rick Egelton's comment?

Nah. I'm a bit puzzled by it myself. It doesn't seem to make sense at all. :confused:

The growth is mostly fueled by the military spending, hence no real change with import/export balance.

There has been a change. The balance of trade deficit has gone from 4.8% to 5.7% of the total economy. (An increase of 15%+). The question is how is this explained by the US economy growing faster than its industrial partner's?

I'm not an economist and this is not definitive, but some factors that might go some way to explaining the comment:

The fall in the value of the dollar will push up the prices of imports and this would normally reduce the demand for imports. However if the growth in the US GDP is relatively strong, this will act to maintain the demand for imports. Hence (I think) the the comment: the weakening of the dollar is not having the expected mitigation effect on the trade deficit. The increased price of imports could itself explain the growth in the deficit, which is the difference between two large numbers and so will be sensitive to relatively small changes in the one of them, viz:

Previous imports: 105
Exports: 100
Deficit: 5
Assume 1% relative price increase in imports:
New imports: 106 (approx)
Exports: 100
Deficit: 6
Thus a 1% increase in price of imports leads to 20% increase in the trade deficit.

Another way to look at it is that GDP is commonly measured by expenditure - here you can see the growth is going to be at least partly due to the deficit in the Federal budget (and fuck me, that's one hell of a deficit those boys are running up there: $500bn, 25% of Federal spending. A UK government would be skinned alive if they tried to pull those numbers.) This is effectively pulling expenditure forward, it's not being generated by increased production. The tax cuts are allowing increased private consumption, the government is maintaining it's own spending - hence the increased trade deficit. There may also be increasing personal debt in the USA, as in the UK, which will drive up both GDP (for similar reasons) and, potentially, imports.

This isn't a complete explanation, but does it help?

I'm not an economist and this is not definitive, but some factors that might go some way to explaining the comment:

The fall in the value of the dollar will push up the prices of imports and this would normally reduce the demand for imports. However if the growth in the US GDP is relatively strong, this will act to maintain the demand for imports. Hence (I think) the the comment: the weakening of the dollar is not having the expected mitigation effect on the trade deficit. The increased price of imports could itself explain the growth in the deficit, which is the difference between two large numbers and so will be sensitive to relatively small changes in the one of them, viz:

Previous imports: 105
Exports: 100
Deficit: 5
Assume 1% relative price increase in imports:
New imports: 106 (approx)
Exports: 100
Deficit: 6
Thus a 1% increase in price of imports leads to 20% increase in the trade deficit.

OK. I understand that a weakening currency pushes up the relative price of imports. (Brazil has had a roller coaster ride since 1998 on the exchange markets, it has been fun) It also pushes up though, the competitiveness of the countries exports.

If the GDP is growing, then there is increased production of goods or services somewhere. Now these have to be doing one of the following, substituting imports, increasing exports, or expanding the overall market. With a devalued dollar, the exports will surely increase, and substitution on price criteria will occur of imports for national products.

The presumption then of flat exports has to be changed.
Previous imports: 105
Previous exports: 100
Deficit: 5
Assume 1% relative price increase in imports and in value of exports:
New imports: 106 (approx)
New exports: 101
Deficit: 5
Thus a 1% increase in price of imports due to currency fluctuation leads to no increase in the trade deficit.



Another way to look at it is that GDP is commonly measured by expenditure - here you can see the growth is going to be at least partly due to the deficit in the Federal budget (and fuck me, that's one hell of a deficit those boys are running up there: $500bn, 25% of Federal spending. A UK government would be skinned alive if they tried to pull those numbers.) This is effectively pulling expenditure forward, it's not being generated by increased production. The tax cuts are allowing increased private consumption, the government is maintaining it's own spending - hence the increased trade deficit. There may also be increasing personal debt in the USA, as in the UK, which will drive up both GDP (for similar reasons) and, potentially, imports.

This isn't a complete explanation, but does it help?

This makes sense, if you take the strange view that GDP should be measured by expenditure (That explains however, how the USA GDP keeps on growing).
I had thought that GDP should be measured by revenues, not by expenditure. Countries with positive balance of trade and no defecit, have their GDPs artificially deflated, whilst those that have economic problems have their GDPs overstated. Sounds like some accounting practices I heard of a while ago. It would also explain why the statement made no sense, as it really does not make any sense.

I believe that the personal debt level in the USA is now higher than the total disposable personal income. Credit rollover is the only way the domestic economy is surviving. I do not have any figures though, so I'll have to go alooking.

Thanks for the suggestion on what this Canadian was talking about.

Found this (http://www.federalreserve.gov/boarddocs/speeches/2004/20041019/default.htm) about personal debt in the USA.
A speech by Greenspan saying in October last year that debt was 1.2 times disposable income, a record high.

What I find a little silly about economics is that it tries to fit everything into formulas. It works for most things, but not all.
Americans are spending more for two reasons. One can be fitted into a formula: asset prices are rising astronomically. The value of a home has increased on the average by 60% since 1997. It's not really making more money, but it looks that way on paper.
The second reason is simple: the American consumer has a growing apetite for foreign goods. The only things made in the US in large quantities are big ticket items, like cars or machinery. Several smaller items, like toys, furniture, and everything else, are made in Asia. The second thing is that Americans tend to associate foreign goods with high quality, and that has become more important over the past few years.

So there is a property value bubble growing. When it collapses the USA homeowners will find themselves in the kind of equity traps that the UK suffered in the 1990s. (Particularly if they remortgage to take advantage of the artificially increased equity.)

A weakened dollar has not had any effect on the desire to own digital cameras or imported chinaware? Where is the extra money coming from?

OK so consumer confidence is high. that is normal when people believe a war is nearly over. But how does the growth of the GDP in the USA stimulate demand for imports?

OK. I understand that a weakening currency pushes up the relative price of imports. (Brazil has had a roller coaster ride since 1998 on the exchange markets, it has been fun) It also pushes up though, the competitiveness of the countries exports.

If the GDP is growing, then there is increased production of goods or services somewhere. Now these have to be doing one of the following, substituting imports, increasing exports, or expanding the overall market. With a devalued dollar, the exports will surely increase, and substitution on price criteria will occur of imports for national products.

The presumption then of flat exports has to be changed.
Previous imports: 105
Previous exports: 100
Deficit: 5
Assume 1% relative price increase in imports and in value of exports:
New imports: 106 (approx)
New exports: 101
Deficit: 5
Thus a 1% increase in price of imports due to currency fluctuation leads to no increase in the trade deficit.
(Note: I warned that my answer wasn't complete and you have indeed spotted some gaps. Also, I've only ever worked in micro-, not macro-economics, so I'm trying to remember back (a long way) to my studies. Hence, my answers are not definitive.)

I think the argument was that strong GDP growth is compensating for the devaluation of the dollar in terms of imports. The weakened dollar should also drive up exports, but that may not be by enough to compensate for the increased imports. It will depend on the relative elasticities of demand. This may be where the growth of the US economy relative to the rest of the world becomes relevant - all else being equal, the increased demand from the rest of the world for US goods will not be matching increased US demand for imported goods. Also, if the increase in production is predominantly on domestically consumed goods, eg via military spending, that would not increase exports.
This makes sense, if you take the strange view that GDP should be measured by expenditure (That explains however, how the USA GDP keeps on growing).
I had thought that GDP should be measured by revenues, not by expenditure. Countries with positive balance of trade and no defecit, have their GDPs artificially deflated, whilst those that have economic problems have their GDPs overstated. Sounds like some accounting practices I heard of a while ago. It would also explain why the statement made no sense, as it really does not make any sense.

I believe that the personal debt level in the USA is now higher than the total disposable personal income. Credit rollover is the only way the domestic economy is surviving. I do not have any figures though, so I'll have to go alooking.

Thanks for the suggestion on what this Canadian was talking about.

Found this (http://www.federalreserve.gov/boarddocs/speeches/2004/20041019/default.htm) about personal debt in the USA.
A speech by Greenspan saying in October last year that debt was 1.2 times disposable income, a record high.
GDP is a measure of production, but is derived from monetary measurements - income, expenditure or value-added. I believe value-added is conceptually best, but expenditure is the easiest to measure, so that's what tends to be used. (Which is not quite a cheat - analysts are mostly interested in trends, so consistency of measurement is very important.) In principle, all three measures should give the same result.

On an expenditure basis, GDP = household consumption + private investment + Government spending + net exports (alternatively, - net imports). The last term addresses your point about the balance of trade. I can't remember how this measure deals with debt - it will inflate spending, though it should balance out over time.
Consumer debt might be netted off against investment, but that wouldn't take into account Government deficits. I suspect the answer to the latter may lie in financial flows not taken into account in GDP - foreign lending on Government bonds (I think), income from foreign investments &c. In principle, these aren't supposed to make a huge difference to the measurement, but then traditionally, Governments aren't supposed to run up the sort of Budget deficits that the USA are going in for at the moment.

So there is a property value bubble growing. When it collapses the USA homeowners will find themselves in the kind of equity traps that the UK suffered in the 1990s. (Particularly if they remortgage to take advantage of the artificially increased equity.)
It may not be artificial. After all, more people are buying houses and investing in them. It also seems like rents will also increase dramatically, as low rents may mean a collapse.
A weakened dollar has not had any effect on the desire to own digital cameras or imported chinaware? Where is the extra money coming from?
Many sources. The US still attracts a very high amount of FDI, and is a net recipient of investments. Besides, Asian banks love buying dollars to keep their exporters happy, proping the US dollar up in return.
OK so consumer confidence is high. that is normal when people believe a war is nearly over. But how does the growth of the GDP in the USA stimulate demand for imports?
A.) What war?
B.) Affluenza left over from the nineties? The rise of the entitlement society? I don't know, but savings rates are only 1.5% of GDP, the lowst in years. It's not as low as, say, Australia, but it is quite low by world standards.

Because the foundation of the US (and to some extend the entire western) economy is nothing but hot air, or to be more precise it is paper. The “growth” of the US economy is measured by production (GDP), and this “growth” have for many years been driven by mainly internal demand. All of this “growth” therefore leads to a ever-growing US trade and payment deficit, but it is continued due to investments/loans going into the US from foreign countries (who got their money from their trade surplus with the US).

I am still waiting for some little kid to shout “the emperor have no clothes on”, it is bound to happen sooner or later.

It may not be artificial. After all, more people are buying houses and investing in them. It also seems like rents will also increase dramatically, as low rents may mean a collapse.
Personal lending in the USA has already reached the level where repayments are 1.2 times the disposable income. (See post above for link to Greenspan saying this.) This means that the people, the buyers of property and the payers of rent, can not afford to pay more. Not without triggering a massive round of inflation through excessive pay rises. The value of a property, in the long term, is determined by what the buyers are willing and able to pay, the same goes for rent. At the moment properties are overvalued as their prices are higher than people can actually afford. The realty market is still strong on the back of speculation it seems. However that has a limited life span. Eventually the property speculators cut their losses when property values get to high, and this initiates a price collapse. Rent being too high results in empty proiperties which are loss making. Rents can not go above what the people can pay. If this results in a collapse, so be it.

Many sources. The US still attracts a very high amount of FDI, and is a net recipient of investments. Besides, Asian banks love buying dollars to keep their exporters happy, proping the US dollar up in return.
Foreign Direct Investment does not result in money in the consumer's pocket. It results in profits flowing out of the country and less money in the US consumer's purse in the long run. You acknowledge that the US still attracts this, so it has been happening for a while. The effects should be showing, and they are in that personal credit is at an all time high, even though consumer spending is not.
The US dollar is not being propped up.
But the dollar has been declining since February 2002 - it's down by 55 percent against the euro and 22 percent against the yen - and the trade deficit has stubbornly refused to shrink along with it.
(You should have to pay to get it, but I found this link (http://www.nytimes.com/2004/12/15/opinion/15wed1.html?ex=1260853200&en=c19926d82d86a26b&ei=5088&partner=rssnyt))


A.) What war? Ever heard of a place called Iraq?
B.) Affluenza left over from the nineties? The rise of the entitlement society? I don't know, but savings rates are only 1.5% of GDP, the lowst in years. It's not as low as, say, Australia, but it is quite low by world standards. No planning in other words. A belief that the future will be as rosy as the past. I hope, for the sake of the people that they are right.

Personal lending in the USA has already reached the level where repayments are 1.2 times the disposable income. (See post above for link to Greenspan saying this.) This means that the people, the buyers of property and the payers of rent, can not afford to pay more. Not without triggering a massive round of inflation through excessive pay rises. The value of a property, in the long term, is determined by what the buyers are willing and able to pay, the same goes for rent. At the moment properties are overvalued as their prices are higher than people can actually afford. The realty market is still strong on the back of speculation it seems. However that has a limited life span. Eventually the property speculators cut their losses when property values get to high, and this initiates a price collapse. Rent being too high results in empty proiperties which are loss making. Rents can not go above what the people can pay. If this results in a collapse, so be it.
Of course. But this is natural market forces at work. At least you now understand part of the reason for the US's spending habits, though I am far more sanguine than you are. Home building activity is incredilbally resilient, and sooner or later, the CAB will correct itself.

Foreign Direct Investment does not result in money in the consumer's pocket. It results in profits flowing out of the country and less money in the US consumer's purse in the long run. You acknowledge that the US still attracts this, so it has been happening for a while. The effects should be showing, and they are in that personal credit is at an all time high, even though consumer spending is not.
It has always attracted investment, and foreigners have an insatiable apetite for US assets. Living in Brazil, which sees itself as an overly important economy, it iis a bit hard to understand this. But it is happening.
The US dollar is not being propped up.

Yes, it is. The dollar is declining, but if Asian banks stoopped buying dollars, or worse, decided to dump their dollar assets all at once, the US dollar would be much, much lower. In the worse case scenario, the euro woould be worth $2.50.

Ever heard of a place called Iraq?
Ah, you mean that place thousands of miles away, with a lesser impact of most wars the US has been in?
No planning in other words. A belief that the future will be as rosy as the past. I hope, for the sake of the people that they are right.[/QUOTE]

One important consideration is the hurricanes - Four parts of Florida are spending huge sums rebuilding. Much of the materials has to be imported because there just isn't enough in the states.

Of course. But this is natural market forces at work. At least you now understand part of the reason for the US's spending habits, though I am far more sanguine than you are. Home building activity is incredilbally resilient, and sooner or later, the CAB will correct itself.

It is resiliant, but the over pricing has limits. Lok at the history of European property prices (particularly the UK, under Thatcher) and tell me there is no parallel with the curreent US market. It is exactly the same story over again.
Not being an economist by trade I am not sure what you mean by CAB, but if it is to do with consumer borrowing, this can only correct itself if consumers top buying new products and pay off debts instead. This is what is called a recession.


It has always attracted investment, and foreigners have an insatiable apetite for US assets. Living in Brazil, which sees itself as an overly important economy, it is a bit hard to understand this. But it is happening.
It is not hard to understand, it is hard to understand why it is viewed as necessarily being good for the USA economy. Inward capital investment is useful and beneficial while a country is transforming from one society (agrarian usually) to another (industrial normaly) and this transformation requires capital expenditure. One the transformation is complete, as I believe it is in the USA, then further inward investment simply syphons profits and thereby money out of the economy. People and companies do not invest in the USA because they like the country and want to help it. They invest to obtain a return on their investment. This means that, in most cases, more money leaves the US economy than enters. (The exceptions being failed investments, and too many of these would have dissuaded investors which you rightly claim has not happened.)
How Brazil sees itself is irrelevant to this discussion, and a very poor attempt at creating a straw man :p

Yes, it is. The dollar is declining, but if Asian banks stoopped buying dollars, or worse, decided to dump their dollar assets all at once, the US dollar would be much, much lower. In the worse case scenario, the euro woould be worth $2.50.
This reflects a difference in opinion as to what "propping up" a currency means. To me it means maintaining a currency at a stable level, not allowing it to lose value against other currencies. To you, it appears, it means cushioning the fall. Not alowing it to collapse "overnight". By your meaning, I agree that the dollar is being propped up. By my meaning it is not, it is having its slide controlled.


Ah, you mean that place thousands of miles away, with a lesser impact of most wars the US has been in?
I was referring to consumer confidence, in which the "feelgood" factor applies. The war does have an effect on the economy in increased military spending, and also in boosting consumer spending. Nothing implied about it having a greater or lesser impact, just that it does have one.

I am not knocking the USA here. I was trying to understand a statement by a n economist with the a Canadian bank. This led to a discussion of the relationship between GDP, imports and economic sustainability. All I am doing is indicating a few points that I believe people should be concerned about before it is too late. I made the same type of points to colleagues concerning the UK economy, at one stage.
As I said above, I am not a trained economist, but I do work in political and economic philosophy. There is some background knowledge, just I am not accustomed to using modern economic abbreviations.

It is resiliant, but the over pricing has limits. Lok at the history of European property prices (particularly the UK, under Thatcher) and tell me there is no parallel with the curreent US market. It is exactly the same story over again.

<snip>
The argument that's being run in the UK, and very probably in the USA, on house prices is that current prices are sustainable, because of historically low interest rates. House purchases are largely debt financed, so the cost of ownership is more a function of the interest chargeed on the debt than the price itself, particularly in the early years following purchase. Ie, who cares what the price tag says, so long as you can afford the repayments?

A similar argument is being run on consumer debt. So long as lenders don't want their money back (and why should they?), the repayments on higher debts are affordable due to lower interest rates.

Thus, the argument is that household debt has just gone through a step increase into a new, sustainable paradigm. Sooooo, the $640bn question becomes, can we keep the interest rates low? Maybe so, but at the cost of one of arguably Governments' most effective weapon against inflation and an over-heating economy. Sounds like funny money to me, but finer minds than mine think everything is cool, so what do I know?

source (http://news.bbc.co.uk/2/hi/business/4354759.stm)

I do not see how growth being faster in the USA than in its trading partners increases the demand for imports.
If the consumer demand was growing faster than the industrial output, then this would increase the demand for imports, but the US growing faster as a whole causing this simply does not make sense.

Can anyone explain Rick Egelton's comment?

Consumer demand maybe increasing, but you have to take into account something: since 1972, the U.S. government has been providing both carrot, and stick, to drive manufacturing and production overseas. Carrot through GATT agreements, letting big contracts to foreign producers, etc. and Stick in the form higher taxes, restrictive environmental and labour laws, (not mirrored anywhere but northern europe), and transfer payments to corporations that place factories in "Third World Countries". Since GDP is gross Domestic product, changes to how it is calculated to include non-productive activities (Stock trading, futures markets, etc. which are just capital Manipulation and generate no real wealth), and government transfer-payments (that also generate no real wealth, but do keep the poor from rioting) keep the real numbers skewed. (This has been going on since the 1970's.)
Since this process started under Nixon, the value of the dollar in real-purchasing power has dropped repeatedly, including the double-digit stagnant-inflation of the Carter Years. (High interest rates, High inflation, no economic growth, "Stagflation")

The baby-boom generation is in powr, and seems quite content to live off the Capital of the country while disposing of the ability to generate the wealth to sustain them. This is why Social Securiity is going to collapse-there aren't enough of the right kind of jobs left, (and fewer every day) for the big socialist ponzi-scheme to actually work. Eventually, the money runs out on any situation where you spend more than is made.

source (http://news.bbc.co.uk/2/hi/business/4354759.stm)

I do not see how growth being faster in the USA than in its trading partners increases the demand for imports.
If the consumer demand was growing faster than the industrial output, then this would increase the demand for imports, but the US growing faster as a whole causing this simply does not make sense.

Can anyone explain Rick Egelton's comment?

Although the dollar has fallen in value, there is a delay in consumers' purchasing behavior. In fact, this causes the current account deficit to actually increase in the short term, as the amount of goods exchanged remains the same (the j-curve). For example, if I like Swiss chocolate, I'm not going to immediately stop buying it when it gets a bit more expensive.



The delay has been longer in recent years as companies engage in long-term commitments with overseas partners and/or practice extensive hedging. Like the way I buy CHF futures so my chocolate bars don't go up too much in price.


Also, the current account includes investment income. If the US is growing faster, foreigners will be more likely to make investments. The US must pay dividends and/or interest...which is counted against the current account.

The argument that's being run in the UK, and very probably in the USA, on house prices is that current prices are sustainable, because of historically low interest rates. House purchases are largely debt financed, so the cost of ownership is more a function of the interest chargeed on the debt than the price itself, particularly in the early years following purchase. Ie, who cares what the price tag says, so long as you can afford the repayments?

A similar argument is being run on consumer debt. So long as lenders don't want their money back (and why should they?), the repayments on higher debts are affordable due to lower interest rates.

Thus, the argument is that household debt has just gone through a step increase into a new, sustainable paradigm. Sooooo, the $640bn question becomes, can we keep the interest rates low? Maybe so, but at the cost of one of arguably Governments' most effective weapon against inflation and an over-heating economy. Sounds like funny money to me, but finer minds than mine think everything is cool, so what do I know?


You are a fraction older than me. You must remember the house price boom and bust and the equity trap nightmare of the 1990s. Interest rates may be lower now, but if servicing existing lending already accounts for morew than the disposable income, there is no space in the economy for further price rises for property. However, individuals do not necessarily see this.

In the eighties, interest rates were low in the UK. This led, as expected to increased consumer spending. Exactly what is happening in the USA now. However increased consumer spending puts inflationary pressure on the economy. Higher demand means higher prices or increased productivity. Higher prices is directly inflationary. Increased productivity leads to demands for higher wages, also inflationary. To control this the theory is that you take some heat out of the economy by raising interest rates.

Now if property prices are being supported by their being low interest rates (a dubious proposal to start with), then this increased spending, driven by these same low interest rates, will eventually force either inflation, or an interest rate rise. Either will provoke recession.

That, as I understand it, is the classical argument concerning spiralling house prices. If something has changed, can someone please correct this argument.

Housing will continue to increase in price as long as demand is greater than supply. The current government policy is to zone more commerical than residential space (because commerical taxes are higher). If this trend continues, the price of houses will keep appreciating.

Of course, housing markets vary throughout the US, but that is the situation where I live.

Also, a 60% increase in eight years is not "astronomical." On average, equity investments double every seven years.

You are a fraction older than me. You must remember the house price boom and bust and the equity trap nightmare of the 1990s. Interest rates may be lower now, but if servicing existing lending already accounts for morew than the disposable income, there is no space in the economy for further price rises for property. However, individuals do not necessarily see this.

In the eighties, interest rates were low in the UK. This led, as expected to increased consumer spending. Exactly what is happening in the USA now. However increased consumer spending puts inflationary pressure on the economy. Higher demand means higher prices or increased productivity. Higher prices is directly inflationary. Increased productivity leads to demands for higher wages, also inflationary. To control this the theory is that you take some heat out of the economy by raising interest rates.

Now if property prices are being supported by their being low interest rates (a dubious proposal to start with), then this increased spending, driven by these same low interest rates, will eventually force either inflation, or an interest rate rise. Either will provoke recession.

That, as I understand it, is the classical argument concerning spiralling house prices. If something has changed, can someone please correct this argument.


Actually, that's the Keynesian model, and it had to be modified after what happened in the late 1970's in the U.S.- you had high interest-rates (Double digits), Double-digit inflation, and economic stagnation at the same time-a situation that the Keynesian model pretty much claimed was impossible, and a situation they still are reluctant to discuss in Econ 101 classes today. (Just took 101 and 102 not very long ago.)
The big threat isn't growth, it's uncontrolled growth, leading to hitting the overproduction "Wall" as happened in 1929-more product than you had market for it.

The U.S. is far from that-at present. The greater threat is spiralling energy costs due to a couple of factors that weren't and aren't looked at widely.

1. Since 1980, most of the oil-refinery facilities in the United STates have either lowered their capacity due to lack of equipment, or shut down entirely-the sites becoming "Superfund" lawsuit generators.

2. Reductions in electrical generation capacity for "Environmental reasons" (Breaching dams on the Snake river, the stalling of new 'safer' n-plant construction) did not account for increases in demand due to population expansion. Energy is a big cost in production, transport, in fact, in every area that impacts an industrialized economy.

Gasoline has doubled in price in the last ten years, and looks like it's going to go up-not down, but most of the domestic production capacity in the United States was "capped" with cement in the late 1970's and early 1980's. There were ten refineries on the west coast not ten years ago, there are two now, and neither refinery has the capacity it did ten years ago.
Building NEW refinery facilities isn't possible with the current environmental laws.

How does this impact the cost of your house?

Well... people will always need to live somewhere. Shelter is one of the big three (along with food and water) that is necessary for survival.

Houses require raw materials that are transported from often long distances. The workers have to get there, there has to be power for the tools they use to build it (*and all of this costs money).

Costs of Electricity, Oil, and Natural Gas are higher, and going nowhere but up. Consequently, prices will do the same-even if the availability of people who can PAY those prices declines.

In SW Colorado, around 1985, I had friends whose parents lived in 100,000 dollar houses that the bank wouldn't foreclose on-not because they were successfully making the payments on $5.00 an hour service jobs, but because there was close to zero chance that the Bank could find a buyer for the property, who could make the payments!

Similar problems seem likely here in Washington State, with the massive layoffs has come a massive foreclosure notice in the papers-each week, it's five times what it was two years ago, and growing.

Things are NOT just fine. People are often upside-down on their mortgages here (My sister and her husband owe $25,000 more on their house, than they can get for it.)

The big threat isn't growth, it's uncontrolled growth, leading to hitting the overproduction "Wall" as happened in 1929-more product than you had market for it.


Unless, like me, you blame the clowns at the Fed...

Havent read the rest of the thread but am wondering if anyone has mentioned the chinese yuan being pegged to the dollar and the effect that has on the trade balance, mainly that the US gains no relative price advantage over chinese imports.

Havent read the rest of the thread but am wondering if anyone has mentioned the chinese yuan being pegged to the dollar and the effect that has on the trade balance, mainly that the US gains no relative price advantage over chinese imports.

Yeah, it'll be pretty interesting to see what happens over the coming years. Governments cannot maintain artificial exchange rates forever.

You are a fraction older than me. You must remember the house price boom and bust and the equity trap nightmare of the 1990s. Interest rates may be lower now, but if servicing existing lending already accounts for morew than the disposable income, there is no space in the economy for further price rises for property. However, individuals do not necessarily see this.
I do indeed remember it, in fact I came within a whisker of being caught myself. However, the eighties boom in the UK was highly artificial, fueled by Lawson's sudden relaxation of credit controls; and, specifically in housing, the long trailed withdrawal of MIRAS, which fed buying fever. IMO, normal supply considerations should have led to falling housing prices given the massive release of (heavily discounted) council stocks onto the market. All in all, both an indictment of classical economics in this particular market and an illustration of why economic shocks are bad things.

I do agree with the point you're making here. However, the conventional wisdom amongst housing analysts in the UK is that the low interest rates mean that there is still sufficient headroom in disposable income to service current debt levels. The consensus seems to be that the limit is being reached, hence the tailing off of price rises, but not about to be badly breached, so no significant fall in prices is expected. I've seen some of the calculations and they seem sound enough, but they do of course assume no imminent rise in interest rates. Big assumption (see below).

There is another general point to be made here. The UK housing market is famously a bugger to model using conventional economics. I had to do it once as an econometric study, and by far the best the best explanatory variable we could find for current price was lagged price - in fact it was about the only consistent factor. In other words, not only is housing a neccessity, but there is something about it that makes people prepared to pay the percieved market price no matter what. My personal opinion here is that housing is a very aspirational thing and people will pay the most they think they can afford. Construction costs don't really come into it for established housing - if costs fall, purchasers compensate by going up-market or buying improvements. This undermines conventional economic considerations of utility and factor costs.
In the eighties, interest rates were low in the UK. This led, as expected to increased consumer spending. Exactly what is happening in the USA now. However increased consumer spending puts inflationary pressure on the economy. Higher demand means higher prices or increased productivity. Higher prices is directly inflationary. Increased productivity leads to demands for higher wages, also inflationary. To control this the theory is that you take some heat out of the economy by raising interest rates.
I'm pretty sure that eighties interest rates were lower than seventies equivalents, but higher than current rates in the UK. However, I agree with your main argument.
Now if property prices are being supported by their being low interest rates (a dubious proposal to start with), then this increased spending, driven by these same low interest rates, will eventually force either inflation, or an interest rate rise. Either will provoke recession.
I think it's pretty clear in the UK that property prices have been inflated by low interest rates. Mainstream lenders used to lend no more than 2½ times joint income to purchasers - I believe the limit now is closer to 4 times. The early years of a mortgage tend to be the most difficult, and the repayments in the early years of a mortgage are largely comprised of interest payments, so higher mortgages become much more affordable with lower rates.

However, I agree with your analysis. And that is the problem I alluded to in my previous post (possibly too eliptically - my apologies). To my naive view, we have, certainly in the UK and from the sound of things in the USA, economies held up by low interest rates, either directly in consumer debt or indirectly by house prices. That leaves them vulnerable to inflationary pressures or shocks, because using interest rates to control inflation would risk recession as disposable incomes fall below that required to service debts. I also see the current low interest rates as being potentially inflationary, compounding the effect. Of course, the whole argument against this last issue is that low interest rates are now the norm, and so not inflationary in a stable system.

In theory, the UK economy is better placed than the USA economy to get round all this, because we're managing to avoid major Budget deficits, so in principle we have more scope to borrow to get out of recession. The amount of paper the USA is having to sell to fund their Budget deficit sounds phenomenal, and could well come back to bite them in the ass. But of course if the USA economy nosedives, the UK is screwed along with the rest of the world, so that's pretty scant comfort.

New Grenada also makes a good point about the Chinese exchange rate - I don't know enough about the American economy to know how big a factor that could be. However, artificial exchange rates are famously a bad idea on both sides - at some point they require resolution, and that could be traumatic. Also, though the Yuan is pegged, the dollar is still falling overall, so the general principle mentioned in the origonal article about the fall mitigating trade imbalances should still stand.
That, as I understand it, is the classical argument concerning spiralling house prices. If something has changed, can someone please correct this argument.
Likewise. As I said previously, the only counter-argument I've heard is that prices are levelling out at a sustainable level. Plus, as above, conventional economics tend not to apply to housing.

(Statutory health warning on the above: I normally work in micro-economics, not macro. I may well have missed something vital.)