Market and Economic Outlook Part II

This is a second excerpt from the October issue of “Moving Markets”, for a full complimentary copy visit www.usawealthmanagement.com.

If the government keeps its word with no more bailouts (which would be a long odds bet in Vegas; probably a better chance of the Detroit Lions winning the Super Bowl), we could be in for some tough economic times. The reality is though, this may be the medicine we need as full economic recovery cannot occur until excess debt is properly dealt with. Yet, Washington politicians continue to insist that solving our massive debt problem requires the accumulation of more debt. Are politicians attempting to put off the “day of debt reckoning” until they are safely out of office or dead? Bottom line is politicians are trying to have government create consumer demand that is no longer there. (More on retail momentarily)

Let me give you an example. Chris Martenson, a blog writer on economic matters, made a very interesting point on September 28, 2009, citing information obtained on the Federal Reserve Bank of Cleveland’s website.

(Source: http://www.clevelandfed.org/research/data/credit_easing/index.cfm )

When a prospective homeowner wants to purchase a home, he/she typically needs to go out and locate a mortgage lender. That lender, after loaning the new homeowner the money needed to buy the home, sells the mortgage to another institution. That institution either holds the mortgage or sells the mortgage to another institution. This process continues until, at some point there is an ‘end holder’ of the mortgage. The lending bank rarely holds the mortgage. Instead, the modern banking model is far more profitable making loans and selling them, freeing capital to make additional loans.

Martenson points out that through the month of August, 2009, 3.2 million existing homes were sold at an average sale price of $217,000 and 263,000 new homes were sold at an average price of $264,000. Assuming all of these properties were purchased with a 20% down payment, there was new mortgage volume through the first 8 months of the year of about $611,066,000,000, or $611 billion.

According to the Federal Reserve’s website, the central bank purchased $624 billion of mortgage backed securities so far in 2009 (in other words became the end holder of the mortgage) and invested another $98 billion in agency debt for a total of $722 billion. The Federal Reserve isn’t just playing a role in the housing market – it HAS BECOME the housing market. It appears the government is spending more money than it’s taking in.

Where does the Federal Reserve get its money? It holds a portfolio of US Treasuries. As the government prints money to pay its obligations, the excess spending is funded by the issuance of US Treasuries, IOU’s from the US Government purchased by investors and the Federal Reserve. So essentially, the US Government IS the housing market this year, or, taxpayers are the housing market this year. You decide.

Now how do you feel about the ‘recovery’ in the housing market?

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