Friday, November 03, 2006

Japan's housing market and Gold

The Japanese stock and real estate market topped out at the end of 1989. Japan's real estate declined for over ten years after that and wiped out $12 trillion in values. Japan fought the deflationary situation year after year. Japan brought their interest rates down to zero, and that still didn't halt their massive deflationary real estate decline.

Will our real estate picture be different? Richard Koo in his great book, "The Balance Sheet Recession," stated that to avoid the Japanese experience, the US must run massive and continuous government deficits and at the same time allow the dollar to decline in a major way.

Big deficits, a declining currency -- both of these are highly inflationary. And that was Japan's problem -- it couldn't produce inflation. Japan was in the grip of deflation year after year.

What about the US? Well, we certainly have the deficits. But the dollar continues to hold up. The fact is that to offset a deflationary housing situation, the US is going to need INFLATION. The Fed governors can warn and threaten and complain in public about inflation -- but the name of the game is going to be inflation -- or I should say, it better be inflation!

Is gold "just another commodity" as so many analysts claim?
Since September 2005 gold has outpaced the CRB Commodity Index. If gold was "just another commodity," why this superior action on the part of gold? The answer, of course, is that gold is unlike any other item -- gold is eternal wealth. There seems to be no way of getting that thesis into the heads of the anti-gold crowd. Maybe I should stop trying.

The Fed must inflate to ward off the deflationary effects of the housing slide. Gold is discounting the Fed's actions.

-- Stock Market down six days in a row -- most unusual. No huge decline on any one day, just deterioration. You'd think the market would be ready to put on some kind of a rally next week.

But we may not see a lot of anything until after the election. It seems to me that the declining market is discounting a Democrat victory, perhaps winning one or both houses. Of course, that would produce a stalemate, which the market would like. The less the pols can do, the better the stock market likes it.


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