Has the US housing bubble popped?
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It was this week, exactly 35 years ago, that the world’s big monetary experiment began. Before then, the world had a gold-backed monetary system. After that date, all its currencies were made from trees and nothing more. On 15 August 1971, the administration of Richard Milhouse Nixon decided that it needed to protect the nation’s gold. To do so, it had to renounce the solemn promises made by generations of Treasury secretaries; henceforth, dollars would be worth whatever people would pay for them. In effect, the US defaulted.
But who cared? By then America was calling the shots. If it chose to debase its own currency, who could do anything about it? And now, three and a half decades later, we raise our heads and look about us. What hath this new monetary system wrought?
In the 1970s, it wrought the worst recession in 40 years. Then, big Paul Volcker finally got control of inflation. The stage was set for a big boom – one that took the Dow from under 1,000 to over 11,000. But while stocks stretched to new heights, so did the currency in which they were measured.
The era saw a huge expansion of money and credit – made possible by dollars that really did seem to grow on trees. By the end of the boom, stocks were priced 11 times higher, but what were they really worth? No one really knew.
The stockmarket decline began in January 2000. What would have happened next, if things had been allowed to progress in a normal way, we shall never know.
Because – after the attack on the World Trade Center towers – the Feds panicked. Again, with the help of a flexible and accommodating currency, they pushed even more money and credit into the world financial system. This created a series of new booms – and bubbles – in residential real estate… emerging markets… gold and commodities… and debt itself.
Now, it appears that the US housing bubble has popped. “Home sales decline in 28 states,” announces the Associated Press. Loan applications are down 20% from last year. The US homebuilder’s confidence index is at its lowest level in 15 years. And the National Association of Realtors thinks sales of existing houses will be about 6.5% lower this year than last.
What will the end of the housing bubble mean?
“Wal-Mart posts first profit fall in decades,” adds another headline from yesterday’s news. What this headline heralds is what happens when consumers can no longer rely on house-price increases to support their spending habits. They have to cut back.
And a cutback in consumer spending in America almost certainly means a recession. Maybe worse; maybe the beginning of the end of the dollar-based monetary system.
For a fuller discussion of the US economic picture, and what it means for Britain, see: Why Ben Bernanke's balancing act will fail
Merryn Somerset Webb is on maternity leave
Recommended further reading:
If you'd like to read more about the UK property bubble, read: when will the housing bubble burst? For more from MoneyWeek publisher Bill Bonner, see: The five 'E's investors need to know about. And read Morgan Stanley economists thoughts on the US economy here: After the wealth binge - what next for the US?
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