Monday, July 28, 2014

Warren Mosler — Pending home sales and why housing matters

So why does housing matter? 
Can’t spending simply go elsewhere? 
The problem is the oldest of all macro constraints- 
If any agent spends less than his income, another must spend more than his income for all of the output to get sold. 
It’s also been expressed as ‘the paradox of thrift’- decisions to not spend income and to instead ‘save’ cause sales and income to fall with no increase in net savings.… 
So housing matters a lot as it looks to be the only available avenue for the economy to spend more than its income in sufficient quantities to overcome the demand leakages [with no one else stepping up].
The elegant simplicity of the sectoral balance approach to macro.

The Center of the Universe
Warren Mosler

16 comments:

Malmo's Ghost said...

I can't stand Denninger, but he is dead nuts right on the issue: home ownership is toast (and should be), and Mosler is far behind the curve on the issue.

http://market-ticker.org/akcs-www?post=229244

Tom Hickey said...

While I haven't seen Warren write about this, Bill Black, Randy Wray and Michael Hudson have been ahead of the curve on it.

Warren's point is simply that business is not picking up the lagging investment in housing, nor is the consumer borrowing enough for other stuff to make up, nor is government offsetting with the deficit, nor is the trade balance, either. So lacking the usual contribution from housing investment in a recovery, this recovery is lagging.

y said...

"Warren's point is simply that business is not picking up the lagging investment in housing, nor is the consumer borrowing enough for other stuff to make up, nor is government offsetting with the deficit, nor is the trade balance, either."

the other option you left out is for people with savings to spend them.

Basically, if everyone with massive hoards of savings spent them, there would be no need for 'spending injections' from elsewhere.

Malmo's Ghost said...

Tom, the consumer is DOA. Housing or no housing.

Tom Hickey said...

Right, y. If those with savings not earmarked for retirement or other provision, spent down the saving through either consumption or investment, then the situation would be different. But the wealthy are wealthy because they are the savers.

Actually, the bulk of the RE sales in the recovery were actually cash buys by vulture investors. The banks sold off much of their foreclosed RE this way. But that seems to be over and many of those investors are now seeking to divest, from what I read.

Tom Hickey said...

"Tom, the consumer is DOA. Housing or no housing."

Right and this is likely to remain the case until there is a shift in capital and highly rewarded labor share toward ordinary labor share.

What seems to be happening is that many US corps are making more of their profit outside the US and some are even shifting country of domicile to avert taxation.

No sign this is going to get better for US workers, especially with new and improved trade agreements in the pipeline.

Malmo's Ghost said...

Tom, you are very astute. Labor is totally emasculated. The oligarchs won. Now what?

Tom Hickey said...

I think that Strauss & Howe and Ravi Batra are on track about another Awakening being due and a political revolution. I'm estimating around 2020, give or take a few, depending on how events unfold.

Not just the US, either. The whole world seems to be coming apart at the seams. Something is in the air.

Roger Erickson said...

"The oligarchs won. Now what?"

Now they get to consume their servants, with a consequence rather like Aesop's Fable of the Belly & The Organs.

http://etc.usf.edu/lit2go/35/aesops-fables/373/the-belly-and-the-members/

The 0.1% is claiming that the Middle Class is getting "all the food" - and so is draining off all the aggregate demand.

They won't catch on until literally everyone is starving ... including themselves.

Matt Franko said...

PCE is at ALL TIME HIGHS and SP500 earnings are also at ALL TIME HIGHS... govt spending is at/near ALL TIME HIGHS...

http://research.stlouisfed.org/fred2/series/PCE

http://chartsninja.com/charts/single/6956

People are not saving very much...

http://research.stlouisfed.org/fred2/series/PSAVERT

If nobody saves, then we dont have demand leakages...

Trade deficit is running 40b per month that is 480B annual... deficit is projected at 492B close enough..

foreigners are sending us stuff to consume and saving the balance... we are spending everything domestically...

this is a good time to be in the business of basic provisioning of goods and services... vice housing development...

rsp,

Tom Hickey said...

But still not enough to spark are good recovery, the government balance and external balances being what they are.

Neoliberal conclusion: People need to borrow more.

Malmo's Ghost said...

Anyone buying into Fed rhetoric on raising rates? I fail to see how that would help housing (price appreciation, that is). On the other hand, higher rates would mean lower prices, and then a horde of cash buyers from here and abroad could swoop in and buy hand over fist. Still, Fed jawboning aside,the only way rates go north will be if wage inflation takes hold. Not holding my breath on that score either.

Tom Hickey said...

Shows the insanity of monetary policy. It's choosing winners and losers, something that government is not supposed to be doing in a capitalist economy.

Malmo's Ghost said...

Low rates, say where they are now, portends a Japan scenario, I suppose. Raising rates would likely guarantee an implosion equal or exceeding the 08 meltdown.

We live in a credit based, consumer driven economy. I just don't see how raising rates is a possibility. And of course there's the treasury market to contend with given higher rates.

My guess is that the jawboning is hot air spewing in an attempt to sew the seeds of confidence in the consumer/s--make them think all is well, so rates must go up in a hot chugging economy since every thing is wonderful. If I were betting I'd say there's a 99% chance the Fed won't raise for another decade.

Matt Franko said...

Mal

the way I am looking at current sit is that you have the 'money manager capitalists' (PIMCO Black rock, etc) and their amen chorus dying with the ZIRP and QE as they bascally make money "managing" portfolios of govt bonds and take fees out of the interest to make money...

So the ZIRP is killing them and they want the rates up...

BUT then you have the academic monetarists (Yellen, et al) standing on monetarist principles and wont raise rates as we are not adding jobs...

So these two sides are setting up for a clash imo (moron civil war)... we know they will stop the QE in October but doesnt look like they will raise at the same time... that looks like it may come later... but at least stopping the QE is going to help a bit especially if they start to let the portfolio run off at the same time...
rsp,

The Rombach Report said...

"Anyone buying into Fed rhetoric on raising rates? I fail to see how that would help housing (price appreciation, that is)."

Shares of publicly traded home builders are looking to me like the canaries in the mine shaft. Long term charts of LEN, TOL, HOV, PHM, RYL, and others are reminiscent of late July 2005. Home builder stocks started their long decline long before the CDS market started sounding the alarm on credit risk.

I think the Fed will be unable, (unwilling?) to normalize interest rates without triggering the mother of all bond/stock market debacles. However in bond space I think the sell off will be mostly limited to corporate debt and especially high yield debt which has enjoyed a spectacular rally. Treasury yields on the other hand may very well go lower. I kind of like selling the 10yr Bund vs. buying 10yr Tsy note. The yield spread now weighs in at 1.32%