Monday, April 11, 2005


In the Los Angeles Times, there was a story about wages not keeping up with inflation. But then there was this line:
Despite the failure of their wages to keep pace with inflation, American consumers have kept shopping. Consumer spending has continued to rise. Analysts say that's partly because some shoppers are thinking less about their paychecks and more about their biggest asset: their homes.

Home prices rose 21.1% in Southern California and 9% nationwide from February 2004 to February 2005, sheltering consumers, and the economy, from much of the pinch of higher prices.
First of all, not everybody has a home, and those people are really losing. Second, when inflation is being "cured" with rapidly rising home prices, you've got a problem. Nothing is being produced. Nothing is being exported. Nothing of value is generated.

But the rise in home prices will work for a while, but only up to a certain point. When that's reached, there will be no way to keep the economy chugging along at a decent rate. Then comes the stall. Then comes the decline.


It's bubblicious! Housing prices will top out, and that's when the fun begins. Having maintained their lifestyles on refinancings and home-equity loans, an awful lot of the consumer base of the economy will find they can't squeeze any more blood out of the turnip in which they live. As prices for everything else keep rising, something's gotta give, and that something will be descretionary consumer spending.


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