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Friday, May 27, 2005

It's only a matter of Wen

I've been reading with great interest about how reliant the U.S. economy is on China nowadays. Specifically, how China continues to lend us billions of dollars every month. You wonder how we're financing the federal deficit? The money's coming from China. And when the Chinese, led by Premier Wen Jiabao, decide to stop lending so much money into this country, there's going to be hell to pay.

Interest rates are sure to rise, and housing prices are likely to fall.

Which gets me thinking about our own overheated little housing market here in the Rose City. We're slapping up luxury condo tower after luxury condo tower, with price tags for the units that are utterly ridiculous. $800,000 to live in an apartment at NE 16th and Weidler? Are you kidding? Three-million-dollar units in South Waterfront? Lunacy.

If Wen pulls the plug on his dollar-lending machine soon, there are going to be some empty condo towers. And if he waits a year or two, the folks who run up here from Cali and pay those prices are going to wish they hadn't. Their precious units will be worth a fraction of what they paid for them.

Thery'll get no sympathy from me. Although they'll probably get some kind of handout from the Portland City Council.

Will the housing crash happen? It very well might. Indeed, U.S. manufacturers are screaming that China's monetary policy unfairly subsidizes Chinese exports by keeping the value of the Chinese yuan low against the U.S. dollar. The U.S. companies want the yuan to rise and the dollar to fall against it, and they've got friends in Congress pushing hard to have that come to pass.

But if it does, China's likely to lower drastically the credit card limit that it's been granting to the United States. And that does not bode well at all for ludicrously overpriced housing. Enjoy, neighbors.

Comments (14)

The ones who are really screwed in this scenario are the young homeowners who have gotten themselves locked into "interest only" mortgages. I know a good number of otherwise intelligent people who have these loans, and they are ALL banking on their house's value continuing to rise at 10-15% per year. And when I ask them about their plans if housing prices don't rise so fast (or, god forbid, fall), they just look at me like I'm insane.

The high home prices and the sustained extraction of income to cover interest on loans are one big cause of our lack of competitiveness. Labor costs are, after all, tied to the cost to live. This is so basic a concept in developmental economics that I just don't see why it slipped by the radar of the big economists. It is a mutually reinforcing dynamic for which increasing the money supply (via boosting home prices to release money via home equity loans, among other means) seems to be our only tool.

The lending (by either China or the Federal Reserve), and the resulting decrease in competitiveness just get worse. If you think of lending in the same light as selling opium, expect no mercy.

I though China already froze our credit limit.

I think you're overreacting.

China won't stop buying our dollars, because their economy is just as reliant on our dollar as we are on theirs.

The Housing bubble may burst, and it may burst Homer's Waterfront dream, but the price of affordable housing will most likely stay the same.

I think it's good to be concerned about our deficit. And I'm very pleased to watch Jack tie in the South Waterfront proposal with our fear of the Chinese... but I think the US is gonna be alright.

The last line should read:

"I thought China had already frozen our credit limit."

Someday I'll learn to write. You should have seen what I culled to get down to that last line . .

Dave . . . don't underestimate the power of optimism, individually or in aggregate. Think Gold Rush mentality, where the first ones in get the money then the late comers fight over nothing while they still insist there is pot of gold to be had.

Justin . . . the dollar and lending is a weapon, but the underlying economy is what wields it, and on that level we are losing momentum to China. But I agree we have a big bag of tricks in the economics war. I have read that we might even have a Cayman Island substitute for China for making dollars out of thin air (hedge fund type stuff) in a figurative secret bunker.

This looks similar to other overheated markets like tulips and tech stocks, with three big differences that I see.

First, people must live somewhere, so the market is "sticky" - people won't just dump their houses because they become relatively worthless.

Second, it's not like people are actually forking over $800K for their condo - they are paying whatever $4K per month, which is theoretically the same payment they would make if the value of their condo dropped 50%, and interest rates doubled.

Third, our dollar policy is transparent - deflate the value of the dollar to reduce the cost to repay foreign investments. So our biggest investors buy dollars not because of the investment, but the control over us. In other words, while we focus on the money, China focuses on reunification with Taiwan, S. Korea and Japan don't want us to start a nuclear war with N. Korea, etc. ALl our biggest investors have done this same investment control thing with their neighbors for centuries. (We should take a hint and invest in N. Korea).

First, people must live somewhere, so the market is "sticky" - people won't just dump their houses because they become relatively worthless.

That would be more true if everyone was simply living in their house. But evidence suggests more and more people are turning to houses as a better investment than stocks, and many people own 2 or 3 houses. This causes the market to rise dramatically higher than it would if people were only buying houses to inhabit them, and will make any popping of the bubble harder for those who DO want to live in the house.

Second, it's not like people are actually forking over $800K for their condo - they are paying whatever $4K per month, which is theoretically the same payment they would make if the value of their condo dropped 50%, and interest rates doubled.

Yeah, but those people are only doing so because they are assuming the market will increase at 10-15% per year. So they may in fact not be able to afford that $4k/month payment over the long term, but they are jumping into it because they assume a certain payoff when they sell. But if the market crashes and they can't sell at a profit, then they are forced to choose between losing money on their investment or living with a mortgage they can't support.

This is a pretty frightening scenario . . .just as it was when economists told the same story in the 1980s about the Japanese. In fact, almost all of the doomsday scenarios about the U.S. economy today parallel the things people warned about in the 1980s--massive deficits, a failing social security system, an insufficient savings rate, a disappearing middle class, a dollar that was too strong and then too weak, and foreign countries poised to destroy our economy by refusing to loan us any more money.

In fact the 1980s paved the way for the economic boom of the 1990s. Let's hope Santayana was right, and that those who fail to learn from history are condemned (or perhaps blessed) to repeat it.

Er, Jack, that was just before this little thing called the personal computer took over the world. You got a line on what the next one of those might be? Anyway, I've got a hot little $3 million condo you might be interested in...

Jack said "I've got a hot little $3 million condo you might be interested in...""""

.....and the property taxes are only $126.52 for ten years.

Besides we shouldn't worry. Urban renewal willtake over the world and bail us out when it all gells.

Come on Randy, tell us a little story or something to make us feel good.

The demand is there for these condos. Housing market is freaking hot, Portland is again exploding in growth. I disagree with why the costs are expanding, I think it has to do with the true weakening of the dollar, inflation unreported but exploding in growth (look at prices over just the past year, they are at 10-20% more in many cases where I buy.)

The true "killer" for both CHina and the U.S. will be skyrocketing energy costs, particularly crude, but you'll see electricity skyrocket also. This will crush both economies, as both are completely reliant on affordable energy-- without it their economies stall and inflation jumps.


Limited resources, including oil, is just a fact thing. If oil were to double, can the economy simply adapt to a new equilibrium? That is, use less oil and just move on.

I would hope that the design of the economic system is not itself dependent on cheap abundant oil. My outerlimits illustration of adaptation is the ease with which able-bodied adults can easily get 50cc scooters to accommodate much of their in town travel needs. This is simple enough that I would not need to express too much blind faith in theoretical technological solutions.

There are examples of super energy efficient building designs; actual, working, full size models. Could I think of the present home building frenzy as inefficient to the extent that they do not incorporate the concepts of efficiency that are known and affordable today? Is the easy money funding of energy waster homes much like the 0 percent financing for SUVs (and tax deductions) post 9/11?

Only AFTER the energy price moves will people adjust either their choice for efficiency in transportation or inclusion of efficient design into buildings. Price must move first. We only have a government aided and extended lag time in energy costs reaching its truer and higher equilibrium price. This government interference is itself the cause of delayed progress toward greater efficiency.

What you call "stall" I just call progress, in a temporal and objective sense. It applies to both transportation and housing. When money is again treated more like a mere substitute for barter (rather then instruments of debt) then housing prices will return to normalcy too, in the long run. Jack's point, perhaps, is that lag time is not infinite.

Is the housing market headed for bubble territory, if not already there?

Of course.

Will the bubble burst?

Of course, they always do.

When will this happen?

Heck if I know. I bought my first house at the tail end of one California housing depression, and sold my last (California house) during the middle of another. If I could predict when the bubble would burst, I would be writing this from my Costa Rican hideaway.

Jack, tell me if we're wrong here: China *is* the dealer, holding the cards (some $225 billion in US treasuries). They are resistant to float the Yuan because if the dollar weakens against the Yuan, they lose a % of their *investment* in treasuries...which they've been happy to buy because it's a good place to stash the trade-surplus cash. Right now, they are artificially keeping the Yuan comparable to the US $ to preserve their investment. The *trick* will be to figure out how to let the dollar slide slowly, which would avoid a free-fall scenario in which a bubble might burst. Will China play along? And how does the latest news from the EU and its recent trials play into all this? Will this be China's cue to begin the scenario? Jack? Anybody?

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