What went wrong in the US then? I think the most important question is, if houses are counted as consumption or as investment. If they are investment, then there is no problem. The houses, that were bought with the borrowed money do still exist. If they are investment, they should generate enough wealth to pay for the debt, people have loaded on the houses. If houses are consumption, their prices should be in the CPI and Greenspan should have raised rates.
If they are investment, then there is no problem. The houses, that were bought with the borrowed money do still exist. If they are investment, they should generate enough wealth to pay for the debt, people have loaded on the houses.
If houses are consumption, their prices should be in the CPI and Greenspan should have raised rates.
I focus on this statement, because land is the basis of over 70% of "Anglo" money in circulation.
Land is a productive asset, as is the house built on it: the difference is that land does not depreciate, and it is also a Commons, but that is another story.
Now, if investment is about anything it is about acquiring ownership of a productive asset through a Property relationship.
The reason land is not consumption is that it has a "use value" that actually could be characterised as consumption. The purchase price of land is the net present value of future land rentals.
Yes, by all means include land/property rentals in an inflation index, but not the sale price of the productive asset: it's chalk and cheese.
The houses, that were bought with the borrowed money do still exist.
But to come back to the point of the Diary, Wolf's assumption is that in some way the "Savings Glut" is pre-existing money which has been lent to unwise property purchasers/ investors.
The chain of causality is the other way around.
Secured loans were made to by credit institutions to assist in property purchases, and due to the deficit nature of the money supply these interest-bearing loans created new money which inflated the bubble still further.
The direct cause of asset price inflation is the deficit basis of money created as debt
A very large part of this new money which was instantaneously deposited back into the system was thereupon used by American consumers to buy Chinese etc goods, and this was then saved, by being deposited in the banking system somewhere in the world.
The Bubble caused the Savings Glut: the Savings Glut did not cause the Bubble.
The whole point about the system now going to Hell in a Handbasket is that if pre-existing money were (as 99.999% of the population believe) lent out by banks to whoever, then there simply could not be any new money.
End of story. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
And, indeed, as I point out in the diary,
Then, in a sleight of hand that would make The Economist proud, Wolf inserts three charts which have nothing to do with his argument. In fact, if you look at his third chart you see that there's nothing peculiar about the "emerging Asia" current account balance until after 2004, that is, after the US had been running negative real interest rates for 18 months.
But why didn't all this newly created money show up in the CPI and triggered the Fed to increase rates, or the banks to demand higher interest for mortgages? Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
