I'll throw you a bone. Education 50 years ago discretionary for the most part. I think fewer then 15% went to college and those that did, could afford to and pay cash for the most part. When our veterans came from WWII we created the GI Bill which was a small stipend at the time that more then payed for any soldier who wanted to go to school. Today the GI bill barely covers one year of college expenses. Education today is an asset. It's correlated to stock prices and housing prices. Like all assets, they go up with inflation. Why? Because demand in one causes demand in the other. So if the Fed's policies are indeed inflationary for asset prices, and that is their goal is it not Martin, then the problem they have is they don't get to choose "which" assets get inflated. That has been the conundrum from the beginning. In a perfect world, the Fed could isolate individual variables and leave all others constant. We don't live in that world. We live in a world where if the Fed inflates risk assets, then ALL assets that are CORRELATED to risk, go up lockstep. And since education has become a risk asset, the sharp jump in the cost of education is closely tied to the sharp jump in risk asset prices. See the problem is the Fed can't have it's cake and eat it too. So they are choosing to inflate everything. The consequences of this policy will be dire. Make no mistake about it. We will have a society of wealthy investors who will own everything. The cost of education will be so high that America will fall into the very cast system that has plagued your dead United Kingdom for centuries. The poor, who will be a majority of the country will cry for a dictator. For only under a dictator can wealth be forcibly stolen and can society be brought back to parity. Socialism won't work as it only strengthens the existing cast system to keep the rich rich and the poor poor. You don't live here Martin, I do. I see this more and more every day. The kids I grew up. Middle class kids. Families are drowning in debt, none of my friends kids can go to college, at best community college. Wages are worthless in this country as they can only be used to buy junk. Meanwhile housing prices in the top 5% are setting records. The Hamptons and NY both set records recently for largest sales ever on record. The American Dream is gone. We sold it to the bankers. Their kids will inherit the trust from daddy which will be a tax free off shore trust of course which will include 100's or properties, billions in stock that keeps going up, countless art and jewelry and a cast system that will guarantee their wealth for generations to come.
I could talk about these individual points, but, really, I don't have to. Even if I were to agree with your overall message that the US has been experiencing inflation which hasn't been measured properly all this time, I just don't understand what this has to do with Rick's point about QE3, the Fed and the eventual massive inflation looming on the horizon. I mean if you think that inflation is not being measured properly, your beef is with the BLS, which is part of the Dept of Labor. If you think that farmers should be growing different things, your beef is with the Dept of Agriculture. I am not even going to talk about healthcare, 'cause that's a little too politically sensitive. At any rate, all these changes in American society have occurred over many decades. What's the connection to the "firehose and the geranium plant"?
Nope, can't change it. Come on Martin, I suspect you have yourself a fine British education and most certainly took some stats course in your younger years. You know when you analyze data that it's very sensitive to variables specific to each region. So yes my dear friend in the UK, when you avg into the sample set housing prices in Detroit that which are as low as 10k for a home, yes 10k! It skews the overall data. In the hardest hit areas of the US where the people are practically living in a depression, housing prices have crashed and look affordable on paper. But how many of us are moving to Detroit to capture this value and more importantly how many could ever be employed there? No my friend, in the areas of this country where there IS a high concentration of wealth and opportunity, housing prices are NOT affordable outside of the rich or those willing to drown in debt. Again as someone who has lived in NY and Chicago I can speak about this first hand. Also, something to look at before I post another article for you that answers your question, is that housing prices are affordable in these bad areas because the equity that existed at the highs when poor people bought those homes has now been converted into debt. Now these homeowners are left holding the bag. So yeah, mom and pop can go across the street and buy a cheap home but the home they already own that was 500k is now worth 300k. So on paper, whether the home across the street is affordable or not is irrelevant since it's affordability is predicated on the owners in the area now drowning in their own debt from the bubble burst. OK, here's your article: http://www.forbes.com/sites/zillow/...come-ratios-hiding-behind-low-mortgage-rates/ And it highlights how manipulated these "affordability" ratios are in light of the manipulated interest rate market.
Listen, Maverick, I don't disagree with your points above. I don't live in the US, so I can't exactly say that I feel your pain. Still, I visit and I know that American society has issues. Some of these issues are big. I don't want to live in America and I don't want my kids to live in America, because of these issues (and yes, I did have a choice at one point in the past). I think, in fact, American society is pretty f*cked up in many ways. I don't know what the future holds for the country and I hope it can overcome the various challenges it faces, but I can't be sure it will. So I am in agreement with your sentiment and I can see your point. If this was Rick Santelli's message, I would have a very different response. However, Rick Santelli was talking about very specific current issues and my disagreement was with the particular things he said, rather than anything you say above.
Because the firehouse is spraying EVERYTHING! That is his point. The Fed absolutely cannot control a single variable. They are not a surgeon that can operate with precise accuracy. They have to drop an atom bomb on a house to kill a few termites. So while the Fed thinks they are simply providing liquidity to only credit markets or only MBS's, they are actually adding liquidity everywhere. And yes Martin, you are correct, this has been ongoing for a long time, but the slope in the last decade is getting steeper and is on the verge of going parabolic. And by the way, the massive inflation will come the same way it always has, through massive deflation first. And where will the deflation come from? From all these bubbles popping. When they pop, and make no mistake about it Martin they will, you will see a massive deflationary spiral. And when that happens, the flood gates will really open. What we are seeing now, is not massive inflation or anything near it. We are seeing a society that is being gamed by the rich because the Fed is telling them what cards they are holding and allowing the rich to bet accordingly. This is why I made my argument that all things of value, education, health care, houses, stocks will continues to go parabolic. The inflation is concentrated. When you have massive hyperinflation, it will no longer be concentrated. That is when you lose your currency. This is why Gold is not holding a bid and why the Dollar has been firm the last year. We are not in a massive inflationary cycle yet. We are trying to PREVENT that Martin. Now do I think it's inevitable? No. We could just have this bifurcated society of ultra rich and ultra poor where the bubbles stay in place and we simply come to accept it. QE and infinity. It's possible. Honestly Martin, we are in uncharted waters. Nobody knows what is beyond this horizon as we are dealing with experimental economics to the highest degree.
Well, Maverick, to address your concerns about the methodology of these indices, I put my fine education to work (and no, it ain't British) and looked at the details, using the regional breakdown of the NAHB/Wells Fargo HOI. The raw data is available here, should you decide to check my calculations: http://www.nahb.org/fileUpload_details.aspx?contentID=534 So I attach a different graph with a few data series plotted. Firstly, I include the aggregate NAHB/Wells Fargo index in its original, unmodified state. Secondly, I include the version of the index which is weighted by the ratio of median price of a home in a particular region to the median price of a home across the US. This is designed to specifically eliminate the "Detroit" skewedness (as an illustration, while the original index for Detroit is 87.5, the weighted one comes out as only 35.7; conversely, while the original index for the NYC area is 29.7, the weighted one is 72.55). Now, since you also don't like mtges, what with all of them manipulated rates, I have added the raw measure of affordability that doesn't take the mtge rates into account and is calculated as simply a ratio of median income to median home price. This is computed for every region and then I plot both the mean and the median of these ratios across regions (to address concerns similar to those you expressed). Finally, let's take a look at the negative equity issue. I am aware of this being a problem for existing homeowners, but, obviously, this is a completely independent concern. On this issue, I also think a picture is worth a thousand words, so I offer you these here charts: This is based on the data from LPS, by way of the excellent CalculatedRisk blog (http://www.calculatedriskblog.com/2013/07/lps-large-decline-in-mortgage.html).
So you raise a few legitimate concerns here, Maverick... I agree that we are dealing with a system here that has a much larger number of degrees of freedom than the Fed has "control levers". But that's life, with all its complexities and imperfections. Unfortunately, as citizens of our respective democracies, we always run the risk that the people who make decisions that affect us have no idea what they're doing. This isn't something that's confined to monetary policy and the Fed, but rather is a generic feature of the sorts of societies that we consider optimal at the moment. As to your vision of the future, you could very well be right. I have no idea what the future holds and I, personally, don't see the scenario that you describe as a very probable one (and I don't see any signs of the mkt pricing it as such). However, assigning probabilities to different future scenarios is a very subjective business, so I don't expect us to agree on it. At any rate, let me approach things from a different angle. In light of everything you have mentioned, what would you have the Fed do differently? How would you define the Fed mandate in way that prevents the particular excesses and scenarios you mention?
And, returning to the original subject of this discussion, i.e. Rick Santelli. How can I have any respect for him when he doesn't even have the courage to stick to his guns? I am sure you have seen the exchange he's had w/Hilsenrath. Why is it that he suddenly has to say something like "I never said it was about inflation" and start talking about "velocity", "volatility" and all that other stuff? Why does he have to dilute his thesis with all this other crap (to be fair, he does mention his original inflation premise in passing, but moves quickly on)? I listened to the whole clip and, honestly, I find it a bit embarrassing.
I don't think Hilsenrath really gets to talk a lot in this one, tbh. http://video.cnbc.com/gallery/?video=3000176036 They have a handy transcript, too.