Anomalies have been with us for years like baseballs floating in the sky supported against the force of gravity by some mysterious power.   Now some of these apparently irrational phenomena are taking more familiar forms - the baseballs are falling back to earth.  For example:

1. The sustained rise in housing prices since 1986 and especially over the past 5 years brought the price of houses in many areas to heights that made us wonder how our children would ever afford to buy a house.  How could the price of a basic necessity rise beyond the grasp of the next generation?   And how could it be that home owners could essentially be paid to live in their houses every year for decades instead of housing being a cost?  How could owning a home after all the costs of maintenance, repairs, insurance, mortgage, etc turn out to be a profitable enterprise year after year - the opposite of paying rent - because of a constant appreciation in the value of houses?  

Answer: home prices are dropping and they will drop substantially further before this deflationary period is finished so that they will again be affordable for our children.  Home ownership will become a cost center again, not a profit center, just like it was for our parents.  Yes, eventually home prices will begin to increase gradually, but from a much lower level and only after people stop thinking about their housing costs as if they were an investment.  

2.  How can the price of oil be so much higher than the energy equivalent price of natural gas (a multiple of about 6)? 

Answer:  That is not a total anomaly since oil and gas are not really freely substitutable for each other.  Nonetheless, oil is coming back toward 6 times gas and it may well go there or even lower before the next bull market in oil starts.

3.  How can American political leaders starting with Johnson (and excepting only Clinton and Bush I) trash the federal budget, apparently on purpose in some cases (Reagan and Bush2), running up deficit after deficit, without it having any real world consequences for the U.S. dollar and without the American public apparently caring at all?

Answer: That whole program looks likely to change going forward and the process will not be fun as the country discovers that deficits eventually have consequences.  The next administration will need to pump up this deflating economy with more deficit spending of nearly unimaginable proportions which will come on top of the absolutely unconscionable deficits and debt run up by Bush - essentially doubling the total of all prior deficits, in other words the national debt,  in just 8 years.  At some point the markets will punish the dollar and force the U.S. to put its fiscal house back into order.  Sacrifices may be required by a disastrous runaway inflation just as has been the case with some famous South American and African countries that have tolerated profligate governments. 

This entry was posted on Thursday, October 30th, 2008 at 8:47 pm and is filed under Predictions, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.