I enjoy reading your essays about the real-estate market. Today I read one about Privatizing profits and Socializing risks. I am trying to get people to use the catch phrase

Privatizing profits and socializing loses (the new corporate America).

I think this plays better with the public. Risk is to nebulous a word for the average person. The slight modification I propose, I believe, has more chance sticking in a persons memory.

After reading your articles, I have a question: Could the Fed's drop in interest rates be in preparation for an attack on Iran?

We've already seen that the drop has driven oil prices higher and decimated the dollar. Everyone knew that would happen, so why would the Fed do that when the economic numbers did not justify it? Perhaps it was not in response to the ongoing credit crunch, but in p reparation for global economic shocks that are forthcoming due to a future escalation of war in the Mideast.

The article today on inflation is great. I read about this subject often: this expose was cogent. The following is a question I have had for sometime.

Given that the bond market is sophisticated and ever vigilant, why or how could it miss the phony inflation index all these years.

A wise friend (a friend made through mutual enjoyment of discussing finances) helped me devise my own "Personal Rate of Inflation". I'm in my late 20's with a wife and 2 kids living in a small apartment with somewhat above average US income. My mid-fifties friend is divorced and has two college graduated kids and his residence is owned.

My Personal Inflation Rate (PIR) is proportionately different than my friends. Unfortunately for me, my PIR is skewed higher. Housing (per home ownership) is my largest future expense, but I'm betting on a modest home ownership deflation over the next couple years (before I buy). I believe college costs will have the highest proportion of inflationary cost for me (and a large percentage factor in my calculation). We drive older -more fuel efficient than average- cars and live close to work, so our transportation inflationary costs are minimal. Healthcare is provided through my employer and the average cost has gone up close to 8% a year. Even though we are all healthy, family coverage costs us more than the US Gov'ts use of 6%.

I could explain more, but I'm sure you understand by now how I calculate mine.

My friends biggest expenses are taxes, healthcare, entertainment, other insurance, grocery, etc... Notice, housing is not a major expense. Inflationary forces of housing (a 40% factor) are of little direct importance to him. Transportation hits him mostly during his travels, but that is very discretionary spending. So a 17% factor is very high for him as well. I'm sure you get the picture

Anyway, hope the perspective is a little different way to look at it.

Oil prices Decline The above article touts "reasons" for the decline in oil prices. In actuality the October contract expired and the November contract was never above the October because of market inversion (front month being at a premium to the deferred month). Inverted markets are usually due to tight supplies in the cash market. As you can see the December contract is at a discount to the new front month (November) indicating a tight cash market supply situation still exists. Regardless of what happened in the Gulf once the front month expired the new front month becomes the quoted price. This decline is not due to market “action”. I wonder if the reporters who follow futures markets understand how they work?

Again, just an excellent series. I know that you must feel like Cassandra from time to time, but keep up the good fight.

This note is not a comment on anything that you have written, but a national example of the statistical principal that correlation does not equal causation. Let me explain.

Owning a home is typically now referred to as “the American Dream”. As an aside, I was taught (or learned by osmosis) that the “American Dream” was to live in a land of opportunity, with certain freedoms guaranteed in writing, to be allowed to keep the fruits of my labor, to speak, believe, and worship as I saw fit, and to be generally left alone – particularly from the heavy hand of a centralized government. But I'm getting old; I guess that now it's renting a styrofoam and stucco shed in the desert from a Cayman Island hedge fund. Back to correlation and causation.

Home ownership is strongly and positively correlated with numerous positive societal attributes: safe neighborhoods, stable workforce, successful marriages, healthy children, etc. etc. But correlation isn’t causation: all of these positive societal attributes are the result of the actions traditionally necessary to purchase a home. These included saving some money for a down payment (in other words, demonstrating the ability to defer immediate gratification for a longer term and richer reward), demonstrating a history of paying back money borrowed (in other words, demonstrating responsibility and commitment), and demonstrating the ability to pay the loan back (in other words, not just a willingness but an ability to pay).

So are the positive societal results derived from “owning” a home or from the ability to defer immediate gratification, demonstrating responsibility and commitment, and demonstrating capability and maturity to carry through on commitments? I bring this up because one of the “goals” of the current administration is to increase home ownership with the expectation that society would benefit. In the end, however, it is comparable to a national weight loss regime that would round up 2 million overweight people, put them in camps, and starve them.

Most of the talk (and as far as I’m concerned, it’s only talk, but that’s a different rant) about “helping/bailing out” individual homeowners misses the entire point: many, if not most, are not sufficiently responsible and mature to own a home. So if these individuals (generally

– I am sure there are some cases of out and out fraud and deception) have to return their home to the bank, well too bad. Unfortunately (last analogy), the situation is akin to a parent (the bank/mortgage broker) letting a child (the borrower) eat 2 gallons of ice cream. The child feels horrible and has thrown up on the carpet. The parent is angry about the mess. The solution? Call grandma to clean up and sue the ice cream manufacturer. Sadly, a typical American response today.

I continue enjoying your blog. Not with an air of arrogance and a grin as someone sitting far away and for whom American problems merely open new investment opportunities, but rather one who knows that history always repeats itself and whatever happens in the US now is likely to be repeated somewhere else somewhere down the line. It's good stuff to know - almost like watching the future unfold before my eyes.

You mention often the true fact that it is American children who will be saddled with the debt. You could perhaps qualify this further by mentioning *whose* children more precisely. It certainly won't be the children of the upper class. They will be able to say "Screw this" and move to Canada, or Mexico or even Europe or China, knowing that their fathers' carefully balanced investment portfolios will keep them safe no matter what happens to the US. As long as someone has options, they cannot be forced to do anything.

Perhaps it is far fetched to claim this will happen on a large scale, but let's face it - it will be the middle and lower classes which will pay the price. They always do, be it a democracy or a communist regime. When they start being suqeezed beyond coping, will they not revolt? Perhaps not by running with guns in the streets, but a more subtle financial revolt.

The sad thing is, the American people under the right leadership could rebalance the budget and pay off the debt in no time. You have no shortage of skilled people, hard working people, and infrastructure to make it work. The problem is you're unlikely to get such leadership soon.

The only article I disagreed with you about was your report on Northern Rock. A bit of a shakeup of the financial sector happens every so often and is a fairly natural phenomenon of the financial world. The ones not ready for it, with possibly a weaker management team, will unfortunately fall off the table. You cannot blame people for cashing out. Sure, it is illogical, but hell, we're emotional creatures. Don't tell you me you would not be in the queue to get your cash if it was your bank that might fall... We all worry about our savings, official statements or not... I dunno, of course you make valid points, but was your article not overly dramatic? A bank went down. So what ;-)

P.S. Thanks for the reference to "1984" by Orwell. It inspired me to re-read the book (secretly online during a few quieter office hours). What an excellent book, and how terrifying in its realism.

Yes, let's grant Boeing, soybeans, almonds, Hollywood, Catepillar, Citicorp and Microsoft their well-earned glory: the U.S. sells $1 trillion in goods and services abroad: that's 7.5% of the GDP. But the U.S. imports $1.8 trillion. So the question becomes: can our exporting stalwarts sell $800 billion more a year? And if they can't, then what U.S. goods and services will appear that overseas buyers want?

This struck a chord with me. One frequently hears commentators (economists and the like) state that once the dollar drops then exports will become cheaper. The implied message is that things will all sort themselves out through the magic of the markets. It may not be so. You covered the idea that as the dollar declines there may not be many existing exports to increase. I would like to note that it may not be very easy even to maintain the current ones let alone for new exports to commence. It may be that many of the people who might be involved in developing the new export products just will not be there. I refer to the past "brain drain" into the US from the rest of the world. For many decades now the US has been the destination of choice for the worlds cleverest and most motivated innovative people. Just look at the number of foreign students who have stayed on after their visas expire, become citizens, and form much of the entreprenurial and technical backbone.

The thing is that these people still have dual citizenship and very transportable skills. If things get bad enough for them in the US (hyperinflation, civil unrest) they will simply pack up and leave - they don't need to apply for citizenship elsewhere. This is a recipe for a sudden and massive reversal of the brain-drain. If the scientific and highly trained join the entreprenurs in emigrating en-mass, the US will not be able to maintain the exports of existing high value added technical items let alone creating competitive new ones in difficult financial times. In that situation, the US exports could consist largely of such unprocessed raw materials the rest of the world feels cannot be obtained cheaper elsewhere.

Just my £0.02

People write that statistic "70% of the economy is consumer spending" like it was shocking, even evidence of waste and decadence. But what should the percentage be? If the purpose of the economy is to provide things for people to use, then the non-consumer portion just reflects the overhead. It's the business-to-business transfers that are required to produce the final portion that is actually consumed. We don't build car parts for fun, after all. We build them to put into cars that people buy.

In that view, a decline in the non-consumer portion reflects an improvement in productivity. If the economy becomes even more efficient at producing goods, presumably the consumer portion will just rise. That sounds like a good thing to me.

You could argue that since consumer purchases are optional, a more consumer-oriented economy would be more volatile. But that assumes there's some portion of the economy that is NOT dependent on consumption. Again, if the purpose of making car parts is to build cars, then a drop in the demand for cars drops the demand for car parts, even if 30% of the economy were dedicated to making them.

I suppose in less prosperous periods, more of the economy was dedicated to necessities, and those would not be as volatile as luxuries. But choosing poverty to avoid economic ups and downs doesn't seem like much of a solution either.

The US dollar, gold, and oil are trading at the edge of their historic limits. What would a substantial move through those limits mean?

Once school believes that these are just "lines on the charts." That's logical. On the other hand, the double yellow stripes on the highway pavement are just lines on the ground, yet drifting over them can have serious consequences.

The other theory is that this would mean "regime change." A large change in the global economic regime which has lasted, with slow evolution, since WWII. We do not and CANNOT know what that means, despite all the frenzied speculation on the web. It's all guesses, and mostly not worth reading.

The Matrix movies said it well. We cannot see beyond choices that we have not yet made and do not understand. In orhter words, there may be serious events in our future, which mean we (USA, China, Japan, OPEC, EU) face equally large decisions. We cannot predict events because none of us know how these choices will be decided.

So stay cool and watch events. Put your seatbacks and tray tables in an upright position, fasten your seatbelt, and enjoy the trip.

As you will have read, the government has now guaranteed all existing deposits at the bank. This is interesting and has implications that are still being debated, but essentially it may amount to nationalization. The same thing is happening to NR as happened to the US mortgage lenders. They have to roll over their short term debt, but the rates they are paying (in this case it will be to the Bank of England) will be so high that they cannot make money on what they are getting from the mortgages. Their derivative insurance against this may be blowing up too, though we do not know that.

In the end therefore the prospects for NR are that shareholders equity will evaporate. So the question is whether anyone will buy them. It is hard to see why they would. In the current environment, the costs of rolling over the debt are the killer, and that is not going to get any better.

So what then? We end up with a very odd situation in which those people with money in NR on Sunday, who kept it there, are safer than any other savers with any other bank in the UK. But if you deposit after Monday, you are still at risk (I don't know that people realize this, but the Chancellor was very careful to confine himself to 'existing' deposits). And we may also end up with a nationalized bank, and a very significant precedent.

The calm before the next storm has now descended.