I Know You Are but What Am I?

Sheesh! The Chinese have a better understanding about why the prices of our houses have gone through the roof than Boobus Americanus does. The United States has positioned itself between Scylla and Charybdis: what's more important, a strong dollar or keeping people's house prices artificially inflated? Naturally, our spineless politicians and the Fed are looking for a third way out -- saying it's all China's fault and that they should change. Good luck with that. China is just doing what's in their best interest and there is no reason why they shouldn't.

Hey America, it's pretty simple: if you mess up you room, clean it up yourself; if you live in a glass house, don't throw stones.

Update: Apparently, Asians are preparing for a dollar collapse. We already have good reason to believe that the Fed won't protect house prices and instead will come to the dollar's rescue.

Anyway, there is a great discussion (as always) about this over at The Mess Greenspan Made blog.

Some choice quotes:

The solution is with the United States and not, as pointed out by Governor Ben Bernanke in March 2005, with global savers. The problem is not the global savings glut, it is the lack of savings in the United States on the part of the government no doubt, but also on the part of the individual households.

Believe it or not, the extremely low household savings in the United States can be partly attributed to the rising housing price. Think about it: Who needs to save if his house is gaining value astronomically? By the time of retirement, all he needs to do is to cash in on the house or get an annuity through reverse mortgage to pay for all the bills for the rest of his life (increase in rental cost consistently falls short of the increases in housing price).

Saving little is indeed rational if the housing price continues to rise at its current pace indefinitely, if down payment and mortgage cost remains low, and if the dollar does not collapse in the foreign exchange market. Unfortunately, these are big "ifs."

We need the Fed doves to help remove the lid on the long rates and break the wishful thinking that cheap financing is always around for property purchase, for fiscal budget deficit, and for current account deficit. The property market will cool off. With well-targeted CPI inflation rate eating into the value of the house and with dollar depreciating against all major currencies, the property market bubble will shrink over time.

The US households will finally begin to realize that they need to save for their retirement nest egg, or else, be prepared to face the reality that the equity they build into and the capital gains on their house won't be enough to keep them happy for the rest of their retirement life.