Friday, December 28, 2007

Here we go!

Enough of scribbling on others' blogs, I have enough on my mind to have my own.

This is primarily a housing crash blog, but we will also deal with the broader issues of the credit bubble and collapse, and the severe deflation that is to come.  I am a fervent admirer of Ludwig von Mises and the Austrian School of economics, so I will inject salient quotes from that tradition and commentary as well.

I will do my best to document the crash with text and photos from my perch here in smug Seattle.  I'm a long-distance hiker and I walk just about everywhere.  I used to like Seattle a lot more.  I still like it, but I can't wait for RE prices to return to their proper place and teach a lot of the idiots here a lesson they deserve.

Yes, the author of this blog believes that foreclosure is a Good Thing, the one true solution to the housing mess.  May we have more foreclosures!

Thank you, kind readers, for visiting Deflation Land.


Steve said...

Deflationary spirals are predicted, and then fail to come to pass, about as often as predictions we will run out of oil.

Are you willing to put up a substantial amount of your own money, name specific deflationary conditions that must come to pass in a specific time period, and give the money away to charity should you be wrong?

christiangustafson said...
This comment has been removed by the author.
christiangustafson said...

My money is in the market where it matters. Got puts? Get some!

Deflation is the destruction of money and credit. Every foreclosure is a whiff of deflation, as is every welshed credit card bill, and every failed MBS or CDO. In the aggregate, we're looking at systemic threats to our banking system. This is not a drill.

Deflation is all around us. House prices are headed south.

(reposted, had to fix a typo)

Steve said...

I think I see - you take deflation to mean "bad stuff happening in the world of finance".

As opposed to saying, inflation rates will fall (fall below zero), and therefore we will have deflation, like what happened in Japan in the 90's.

That definition of deflation (contraction of the money supply) would mean you could make targetted bets about the future - not about bad stuff happening generally, but specifically about the level of CPI.

christiangustafson said...

No, Steve, I mean deflation, which gives us plenty of bad stuff in the financial world. I'm talking about debt defaults, counterparty derivative defaults, and the collapse of structured finance as we know it. Debt is money, and the destruction and contraction of it is deflation.

Yes, this is the Japan 1990, with the contrast that Americans don't have 2 cents in the bank, unlike the prudent Japanese. Bernanke sees deflation and is terrified of it, so he has been trying to stave it off by front-running it with sweet Fed liquidity. But the Fed is powerless to stop this chain of events.

Gold and other commodity prices will fall in this. I'm not betting directly against them because I prefer standardized options of bubble companies on the CBOE.

Housing bubble collapse. Equity market collapse. Destitute Baby Boomers living in their SUVs. It's coming, Steve, get ready!

Steve said...

"Debt is money, and the destruction and contraction of it is deflation."

Whoa there Chris, you may want to go look that up. The US government sells debt in order to contract the money supply, and buys debt in order to expand it.

Debt is money just as much as an avocado is.

Your blog is about recession, or something, not deflation. If it were about deflation, you'd be talking about the CPI, what direction it's headed in, and when you expect it to cross zero, and why you think the Fed will let that happen.

It's true that people horde money in a recession, and if the Fed mismanages things, in extreme circumstances that can lead to deflation. But deflation does not equate to "bad stuff happening", broadly stated. It actually has a meaning that is very specific and isn't just "everyone's defaulting and getting laid off".

Wikipedia gives an ok introduction:

christiangustafson said...

In our system of fractional-reserve banking, banks create money when they issue credit and create debt. This has gotten completely out of hand and has caused the bubble asset inflation of real estate.

When some zero-down IO-ARM mortgage idiot bids up a moldy Ballard house to $500K, the lending bank creates $500K out of thin air, in exchange for the long-term promise to pay. Debt gives birth to new money. They securitize this debt and it becomes an asset. Wash, rinse, repeat, until you wind up where we are today.

The foreclosure of these houses, the collapse of the obligations to the banks, the destruction of the securitized bonds, the crashing of speculative asset values, and, finally, the rapid tightening of future credit, that is very much deflation. Great horrors await.

Seattle is very much a part of Deflation Land! My blog will discuss and document these horrors from a Seattle perspective, especially with respect to real estate. The debtors who bought into this bubble are going to be skewered.