Defoggingthedata by Andreas

061606 June 16, 2006
Re anticipating the deflation of the housing bubble, draining liquidity;
Krugman writes in this morning’s NY Times that effectively inflation is less likely to be a problem in the immediate future because wage push pressures do not exist in sufficient magnitude to trigger wage push inflationary pressures. But, he goes on to say, what happens if the housing bubble begins to deflate, leaving this prescient question apparently for another column or perhaps peer reviewed paper. But I would like to engage the latter question. It would seem that either when the housing bubble shrinks or pops, or just before, that it would be a good idea to drain liquidity from the economic monetary system. There would seem to be two basic ways to drain liquidity. First, have the Fed Reserve (or the Treasury Dept.) sell T bills and bonds thereby reducing temporarily the money supply outside the halls of the gov’t and Fed; until such time as it became necessary to redeem same T bills and bonds. At which point liquidity would be re-extended regardless of the global demand for the dollar. The other basic way to shrink liquidity out of the system seems to be to increase taxes on the rich. Such a move has the effect of relatively increasing the private sector need to deprive banks of their deposits, thereby reducing the amount that they can lend out, and thereby reducing overall liquidity. Or you could require that banks retain a bigger basic margin from which their multiplier could be calculated; also reducing the amount of money in circulation. The basic point is that if the amount of taxed income in Treasury IRS hands increases, then the amount of money available to banks for lending out is reduced. So that the amount of money available for housing mortgages is also reduced, thereby driving the costs of mortgages up and gradually “topping off” the housing market.

Topping off to be preferred to bursting the bubble;
It is important to keep in mind that a topping off effect is vastly to be preferred to the alternative which involves the bursting of the housing bubble which is likely to leave vast numbers of new home buyers in relative economic ruin. Further it is important to note that the reason that the W. government has been able to get away with not raising taxes is not merely because they have been borrowing money from abroad, as has been noted ad nauseum, but also because they have been able to acquire liquidity by borrowing from within the government. The Bureau of the Public Debt web site states that of the total US debt of roughly 8.3+ trillion dollars, that roughly 3.5+ trillion dollars is held within the government itself. However this self generated liquidity also figures in the calculation of ongoing value of the dollar, which is determined by overall international demand. So that were or if the demand for real estate were to diminish it would likely be correlated with a drop-off of overall demand for the US dollar from sources abroad. (Note talk of immanent inceptions of both Iranian and Russian oil bourse, selling oil for euros and/or I suppose, Rubles?) Then there is the price push inflation that we apparently are experiencing as a result of relatively higher oil and gasoline prices.

Raising the minimum wage;
And if there is a national move to raise the minimum wage in order to compensate for these increases in the cost of heating and transportation without raising taxes progressively on the rich, then we may well experience a wage push inflationary trend. But the question needs to be asked, who is better able to absorb the increases in oil products prices, the working poor or the wealthy elite? The answer goes without saying. But you will not likely hear that answer from the Bush administration neither from these Republicans...

A.D.Fogg