The Empire 7

Axel Merk is Manager of the Merk Hard Currency Fund.

The Economy in Denial: Fallout From the Bursting Housing Bubble


PALO ALTO, Calif. -- Every day, another economist claims that the impact of the slowdown in housing on the economy is overrated; a few months ago, many still disputed there even was a housing bubble. There has been a housing bubble, the bubble has only started to deflate, and it may have very negative long-term implications for the U.S. economy as well as the U.S. dollar.
Almost every day, a high profile company directly or indirectly targeting the U.S. consumer warns that its outlook is bleak. Let it be Yahoo warning about advertising revenues; let it be Kellogg’s warning about its high costs; let it be Dell’s warning that its eternal rebate programs cannot push sales anymore; let it be the automakers that sell many of their brands at prices below last year’s level, yet are still unable to boost volume. All these incidents are linked to the U.S. consumer; and U.S. consumer spending, in turn is very closely linked to the health in the housing market. It also comes as no surprise that so far this year, the U.S. dollar has fallen significantly versus a basket of currencies.
Home building activity has collapsed with some builders reporting as many as half their orders cancelled. The volume of homes sold has declined and inventories are up. Home prices have – so far - held up reasonably well mostly because the cost of long term mortgages has been very well behaved; while short-term interest rates have risen, interest rates on longer term loans have in some instances even come down. As a result, the squeeze on consumer spending has been relatively mild and limited to a squeeze on home owners who have been dependent on adjustable rate mortgages who have seen their rates rise; beyond that, the squeeze has been on home owners who have employed their homes as ATM machines – these owners are dependent on eternally rising home values to finance their spending.'

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