Thursday, November 1, 2007

US Gets Cheaper as Falling House Prices Lead to Lower GDP

America is probably getting cheaper. And Americans are probably getting poorer. That’s how the global accounts get settled. Americans owe a fortune to foreigners. As their paper money is marked down so is the fortune they owe. They will owe less. But they will own less too – because the value of their own dollar holdings…and dollar incomes…will go down. Foreigners will take advantage of the situation in two ways. They will buy US assets at low prices. And they will take advantage of low US wages by outsourcing some of their low-wage business to America.

America is a cheap country already; our guess is that it will get cheaper.

Back in the beginning of September, Frederic Mishkin, a Fed governor, estimated that housing prices might fall 20% by the end of 2008, and that it would reduce GDP by as much as 1.5% within three years.

That didn’t seem like much to us…certainly not enough to worry about. But Mishkin felt like a passenger on the Titanic; he wanted to find the lifeboats.

“Monetary authorities have the tools to limit the negative effects on the economy from a house-price decline,” Mr. Mishkin told his colleagues.

Then, in a speech October 19 on ‘monetary policy under uncertainty’, Mr Bernanke argued for acting sooner rather than later when risks become apparent.

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