Holman Jenkins gets it right:

The truth today is that politicians are rushing to prop up house prices not to rescue the poor from the ignominy of renting, but to get past the next election without affluent voters having to confront a realistic decline in the market value of their main assets.

Most of these homeowners are still above-water in their home equity; though job changes or the prospect of job changes may make them sensitive to current market prices, many are not in need of selling.

In the meantime, drawing out the correction prevents the market from finding a bottom. It prevents owners and shoppers alike from having confidence to judge what houses are worth. It bails out lenders and investors who incautiously or fraudulently financed home purchases for speculative buyers, which can only encourage more of the same behavior in the future.[...]

A more honest use of taxpayer money at least would be to buy up houses at foreclosure auctions and demolish them, especially in neighborhoods likely never to recover. The true fillip to “social stability” right now would be to nip in the bud the blighted, suburban slums of the future.

I am seriously pessimistic about the economy right now. The market is not being allowed to correct itself, and we are all paying for the banks mistakes via the hidden tax of inflation. Speaking of which, here’s David Ranson:

Markets look forward, while government surveys of the cost of living are a rearview mirror. A little “indicator analysis” shows that commodity prices, far from reverting quickly back to the mean, are early-warning indicators of the future CPI [Consumer Price Index]. Last year’s large increases in energy and food imply that consumer-price inflation is going to be much closer to today’s “headline” rate of 4.3% than the “core” rate of 2.5%.

Why does this matter? The accompanying graph shows how rapidly the purchasing power of income declines from an ongoing inflation of 4%. After nine years, an income of $100,000 is worth only $70,000. After 17 years its purchasing power has been cut in half, and after 30 years by about 70%.[...]

But worse may be yet to come. While commodities like energy and food are leading indicators of the CPI, precious metals like gold are, in turn, leading indicators of energy and food. It’s sobering to note that precious-metals prices this year are running more than 30% ahead of where they were a year ago.[...]

There is a remarkable parallel between annual CPI inflation and the cumulative change in the price of gold measured from eight years before. A similar graph could be plotted for silver, and the parallel can also be seen in cross-section by comparing countries over time with varying degrees of currency instability.[...]

But taken as a whole, the relationship suggests my following rule of thumb to estimate CPI inflation at any time: Divide the percentage change in the gold price from eight years in the past by 80, and add three. This rule of thumb has largely worked over the past several decades. In the last eight years the price of gold has risen 225%. The rule therefore comes out with an answer that puts inflation a lot closer to 6% than 4%.

From reading these two articles in succession, I would infer that the Federal Government’s policy (and I suppose by extension the Federal Reserve’s) is to inflate the currency to bail out banks, and preserve home prices in relative dollars, while hoping nobody notices their income dropping and their real purchasing power dropping like a stone. Real nice.

Anybody have any good ideas about where to invest?

UPDATE: More from Robert Samuelson [emphasis mine]:

The more upsetting figures are those for the last three months. In this period, the full CPI rose at a 6.8 percent annual rate. Without food and energy, the increase was still 3.1 percent. Medical services were up 5.1 percent, women’s and girls’ apparel 7.3 percent (again, at annual rates). Inflation is accelerating.

Price increases of individual items can have many immediate causes: poor harvests for food; OPEC for energy; uncompetitive markets for health care; corporate market power for drugs. But persistent inflation — the general rise of most prices — has only one cause: too much money chasing too few goods. It’s not a random accident. The Federal Reserve regulates the nation’s supply of money and credit. The Fed creates inflation and can control it.

Since August, the Fed has been under enormous pressure to ease money and credit. It has. The overnight Fed funds rate has fallen from 5.25 percent in early September to 3 percent now. Politicians are clamoring for the Fed to prevent a recession. Banks and other financial institutions want cheaper credit to enable them to offset losses on subprime mortgages. There is fear of a wider economic crisis if large losses erode confidence and, by depleting the capital of banks and other financial institutions, undermine their ability and willingness to lend and invest.

Unfortunately, the Fed shows signs of overreacting to these pressures and repeating the great blunder of the 1970s. Underestimating inflation then, the Fed repeatedly shoved out too much money and credit in a vain effort to keep the economy near “full employment.” Now, switch to the present. Again, the Fed has underestimated inflation. It expected the economic slowdown to suppress inflation spontaneously. But so far, the lower inflation hasn’t materialized in part because, outside of housing, there hasn’t been much of an economic slowdown.[...]

If most of those excesses aren’t given the time to self-correct, we may be trading modest pain today for much greater pain tomorrow. Trying to prevent a recession at all costs is a fool’s errand that could ultimately backfire on us all.

Will anybody listen???

UPDATE 2: Yet more from Larry Kudlow.

Tags: gold, Housing Bubble, Inflation, Stagflation

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