The Great Reflation

In his latest commentary, Peter Schiff explains why the supposed recovery of the real estate market is just another bubble caused by the Fed’s interest rate manipulation and buying of mortgage-backed securities. In fact, the true fundamentals of the housing market are much worse than reported. Smart investors should learn from the mistakes of the last housing crash and invest in something that doesn’t depend on government stimulus this time around.

“The ‘wealth effect’ from rising home prices combined with the similar influence of rising stock prices creates an aura of recovery. In fact, this week’s revisions to first quarter GDP revealed that consumer confidence and spending are up despite real discretionary per capita incomes plunging at a 9.03% annualized rate. That is worse than the largest plunge during the 2008-2009 crisis (7.52%). Additionally, the household savings rate fell to an abysmal 2.3%, the lowest since the 3rd quarter 2007. Debt-financed consumption supported by inflated asset prices is what led to the financial crisis of 2008. It’s amazing how willing we are to travel down that road again.

Of course rising asset prices are completely dependent on continued Fed support. As we have seen time and again, whenever the Fed even hints at tapering its massive QE programs the stock market sells off. The housing market is even more dependent on that support. Given the risks, it is arguable that no private market for home loans would even exist without government intervention. The bubble that popped in 2008 consisted mainly of government-guaranteed mortgages. This time, the mortgages are not merely government-guaranteed, but government owned.”

Read the Full Commentary Here

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One Response to The Great Reflation

  1. Fred Murray says:

    Reinflating housing prices also will reinflate government revenue via higher property taxes. then governments won’t cut back their spending and govt employee unions will have more money to donate to those in govt who support govt spending.