Thursday, April 12, 2012

2008 Again?

Here's a great article from Chris Martenson's site. Particularly the section on the global housing bubble. Here is an excerpt:

"If $1 of collateral is supporting an inverted pyramid of $33 of leveraged debt, which is then the collateral supporting an even larger pyramid of derivatives, then when that $1 of collateral vanishes, the entire edifice has lost its base.

And that's at the heart of current central bank policy: “Extend and pretend” is all about keeping the market value of various assets high enough that there appears to be some collateral present.

In our example, the mortgage is still valued on the books at $450,000, but the actual collateral — the house — is only worth $250,000. The idea being pursued by central banks around the world is that if they pump enough free money and liquidity into the system, and buy up impaired debt (i.e., debt in which the collateral has vanished), then the illusion that there is still some actual collateral holding up the market can be maintained."

Understanding the nature of collateral and its real value is imperative to understanding the housing market. Just a reminder, that house prices in New Zealand, for example, are priced exactly the same now as in 1992 in gold ounce terms. Yet house prices always go up? Yes, but  in value?


Gold in New Zealand dollars: $2029.23 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $38.64 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)
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