Stripped of all the acronyms and economist-speak, government policy of the
past few years has been simple: lower interest rates to push people out of
cash (which yields nothing) and into stocks and houses. And then, when those
assets go up enough to make their owners feel rich, hope that this paper wealth
translates into a willingness to max out credit cards and take out car loans.
This propensity to borrow and spend more when your investments are rising
is called the wealth effect, and by early 2013 it seemed to many that America's "normal" debt-driven
consumer society was reviving and that we might, after all, be able to maintain
our military empire, welfare state, big houses, SUVs, massive banker year-end
bonuses, easy incumbent reelections, etc, etc, without any prioritization or
hard choices.
Nope. It turns out that the laws of economics can be bent but not broken.
You can't have a vibrant, growing economy AND interest rates near zero AND
a stable currency at the same time. One of these has to give. And in the past
month interest rates have started moving back towards historically normal levels.
Rising interest rates are incompatible with housing and equity bubbles, and
the air is now leaking from both. As this is written on the morning of June
20, global stock markets are down big. And US housing, which in some markets
was approaching 2007-esque levels of speculation, has hit a wall, at least
based on mortgage applications:
Mortgage
applications tumble as rates rise further: MBA
(Reuters) - Interest rates on home mortgages rose last week to hit their
highest level in over a year, sapping demand from potential homeowners, data
from an industry group showed on Wednesday.
Rates climbed 2 basis points to average 4.17 in the week ended June 14,
according to the Mortgage Bankers Association. It was the highest level since
March of last year.
After hovering around record lows, rates have surged for six weeks in a
row, pushed higher by worries that the Federal Reserve could slow its stimulus
program sooner than had been expected. Rates have accelerated by 58 basis
points since the start of May.
The Fed's bond purchases have kept borrowing rates, including mortgages,
low. Though mortgage rates remain low by historical standards, the ultra-cheap
mortgages have helped lure buyers back into the market and worries have crept
in that higher rates could disrupt the still-young housing recovery.
The rise in rates appeared to hold back homebuyers as MBA's seasonally adjusted
index of loan requests for home purchases - a leading indicator of home sales
- fell 3 percent. The gauge of refinancing applications slipped 3.4 percent,
though the refinance share of total mortgage activity held steady at 69 percent
of applications. The overall index of mortgage application activity, which
includes both refinancing and home purchase demand, declined 3.3 percent.
And so the wealth effect shifts into reverse. Fewer people can afford mortgages,
so home prices stop rising, making homeowners feel less rich. Stock prices
stop rising (or, like today, start going down) and the record number of people
who have been buying on margin see their exciting gains melt away. They feel
both less rich and suddenly very stupid. Most of them will spend less, and
the recovery will stop in its tracks.
Which means it's time to think about the next big government plan to save
us. Will it be a massive public works program? Expanded QE? Maybe a major war?
Whatever, it will have to be commensurate with the size of the now-global crisis.
So, just a guess, but this time around it won't be surprising to see a coordinated
attack on deflation from Europe, the US and China. In other words, global Abenomics.