[Money-matters] HOUSING

Sun Mar 28 19:46:00 UTC 2010

MARCS NOTES:
This article is well written and describes the bubble and aftermath very
accurately
This is a MUST READ 

Futile Attempts To Reflate The Housing Bubble & The Deadly Cost

Daniel R. Amerman, CFA, DanielAmerman.com

Overview
When a financial bubble bursts - can it be reflated? And what are the risks
for all of us the reflation attempt fails? 
In this article we will briefly review the six factors that came together to
create the real estate bubble in the United States. As we will cover, the
government has deemed a return to a normal housing market - one which is
governed by market forces - to be politically unacceptable. Instead, an
artificial mortgage market has been created with massive interventions in
three different categories as the government attempts to reflate the housing
bubble. Quite a risky undertaking, but the politicians have decided they are
willing to risk everything the taxpayers and savers have, in an attempt to
remain in office. These interventions include the Federal Reserve
effectively creating money out of thin air to fund almost the entire
mortgage market at below market rates. We will explore why the three
interventions will not succeed in replacing the six sources of the bubble,
and the severe risks for all of us when attempting the economically
impossible becomes politically mandatory. We will close with a discussion of
the likely implications for the housing market and the value of the dollar,
as well as a brief discussion of alternative solutions for protecting your
net worth. How To Create A Housing Price Bubble In Six Steps
A number of factors came together to create the housing price bubble that
was experienced in the United States during the early to mid 2000s. Perhaps
the central element was a quite deliberate Federal Reserve easy credit
policy that led to the lowest mortgage rates that had been seen since the
1970s, which made purchasing houses the most affordable that they had been
in a generation. 
Qualifying for mortgage loans is not so much dependent on home prices, but
rather the ability to afford mortgage payments. As an example, let's
consider a family with the median household income for the United States in
2009 of about $50,000 per year (Census Bureau estimates). Pre-bubble
underwriting standards were that mortgage payments should take no more than
28% of household income, which meant $1,167 a month would have been the
maximum available for mortgage principal and interest payments. According to
Freddie Mac statistics, the average 30 year fixed mortgage rate between 1972
and 2006 was 9.31%. If we take the median $50,000 per year income and an
average 9.31% mortgage rate, that means that the exactly median household in
the US qualified for a $141,000 mortgage, and assuming 20% equity, a
$176,000 house.
During the rapid growth of the housing bubble, fixed mortgage rates spent
much of their time in about the 5.50% to 6.00% range. When we change our
mortgage rate to 5.75%, then a family with that same median income of
$50,000 per year can now qualify for a $200,000 mortgage, an increase of
about $60,000, or almost half again as much mortgage (and home price).
During the peak insanity of the housing bubble - an insanity in plain view
that was enabled by the federal government as well as Wall Street and the
rating agencies - subprime mortgages were being underwritten at one year
teaser rates such as 3.5%. At such rates a family with an income of $50,000
a year could "afford" a $260,000 mortgage, or almost twice the mortgage of a
decade before, which enabled a near doubling of real estate prices. At least
until the interest rate contractually reset, at which time the family would
have no known means of making the payments, but Wall Street and the rating
agencies providing investment grade ratings were far beyond being concerned
with such trivialities by this point. 
However, the plunge in mortgage interest rates was not enough to create the
full housing bubble. Even a $260,000 mortgage wasn't sufficient to buy a new
home in many desirable markets where prices were surging; the income simply
wasn't there to sell the average home to the average worker. Many people
also lacked the large down payments, the equity component of home purchases.
So the solution was to simply allow people to borrow their down payments in
the form of 2nd and 3rd mortgages that closed simultaneously with the 1st
mortgage. 
An additional hurdle was that the historical standard of 28% or 30% of
income was insufficient to make payments on the new, larger loans. Now,
those standards were far from arbitrary - many decades of mortgage
underwriting history had shown that most people could handle housing payment
burdens of that size relative to their income, but things got "iffy" above
those levels. However, in the early years of the new millennium, accepting
those traditional limitations was unacceptable, as not enough people could
buy homes at ever rising prices. So the standards were changed. People were
now allowed to borrow a total of 35%, or 40% or even 45% of their annual
income in total required mortgage payments (including 2nd and 3rd
mortgages). 
With this combination, we were really getting somewhere in terms of
"affordability". Take a family with the median national income of $50,000 a
year, let them borrow at a one year teaser rate of 3.50% (with everyone
involved pretending that will be the rate for the entire term of the
mortgage), let them use 45% of their income to cover the package of
mortgages that ensures no actual savings are needed to help fund the house -
and they could now "afford" a $418,000 mortgage and a $418,000 home ($50,000
income, 3.5% teaser rate, 45% of income to 1st & 2nd mortgages).
This was still not enough, however, for people with a bad history of
repaying small loans were being kept out of the market for large loans. So
they were allowed in with the explosive growth of subprime lending, and were
allowed to borrow their down payments, even while the percentage of income
available for housing shot upwards. Changes in underwriting standards may
sound a bit obscure, but the practical result was that a family that
couldn't have bought a home of any kind in 1996, due to their lack of
savings and poor credit history, could now buy $400,000 and $500,000 homes.
So let's review. Going from a historical average 9.31% 30 year fixed rate
mortgage to underwriting based on fixed mortgage rates of 5.75% boosts the
amount that can be borrowed - and the home that can be purchased - by 42%
(Step 1). Underwriting at a teaser rate of 3.5% on a one year adjustable
rate mortgage boosts the amount that can be borrowed even more, up to a
total of 84% (Step 2). Going from 28% of income being allowable for housing
payments to 45% of income (combined 1st & 2nd mortgage), separately boosts
the amount that can be borrowed by 61% (Step 3). Combining the lower rate
and more aggressive underwriting standard boosts the maximum amount of the
mortgage by 196% (1.84 X 1.61 = 2.96), as the amount that can be borrowed by
a family with a $50,000 annual income rises from $141,000 to $418,000. Add
in an expansion of the homebuyer pool to include those who don't have enough
excess income to save down payments (Step 4), thereby increasing the
competition for each home. Add in an expansion of the homeowner pool to
those who have poor histories of repaying loans (Step 5), further increasing
the competition for each home. This 1-2-3-4-5 combination needs only one
more ingredient to predictably set off an explosive rise in housing prices. 

Human Nature
Home prices rose as payments fell and more buyers entered the market; human
nature came into play and a speculative frenzy was born (Step 6). People
looked at the sharp home price increases that were happening, month after
month. They saw the new easily available credit that was flooding the
market, with banks competing to offer massive loans allowing the purchasers
to buy houses with essentially no money down, even if the borrower didn't
have the means to pay for it. Millions of people quickly saw that buying and
flipping homes would make them far more money than just about any job for
which they could qualify. So a speculative frenzy kicked in that drove
prices higher and higher as it drew more and more people in.
This of course led to an unsustainable environment. Because of the
speculative frenzy, because of the easy underwriting, home prices reached
levels in many metropolitan areas where the average family couldn't afford
the average home even at very low mortgage rates. On the underwriting side,
loans were being made to individuals with poor credit histories at teaser
rates, where those individuals had no known means to make their mortgage
payments when the interest rate inevitably reset as part of the contract.
The time had come when the popping of the bubble was inevitable.
Where The Markets Want To Go
In the aftermath of this bubble it is quite clear what the housing market
wants to do. Like any market that is recovering from a frenzy, what it seeks
is sustainable equilibrium. Those are the fundamental economic forces in
play here.
What the housing market wants to do is reach a place where the average
creditworthy and stable middle-class family can afford an average home,
spending no more than about 30% or so of their income on housing. For this
to happen, prices truly must be much lower than they were at the peak in
places like Southern California, Las Vegas, Arizona and Florida. Those were
simply unreal prices. If the average home is completely unaffordable to the
average buyer, but there are sellers who must sell, then the basics of
economics tell us that prices must drop until sellers can find buyers - as
with any other market. 
Obviously, the specifics vary by the market, and this doesn't mean that
three bedroom homes on big lots in good neighborhoods suddenly drop below
$200,000 in Southern California. But it does mean that townhomes with
postage stamp lots and a long commute have to return to a place where
mortgage payments are realistically affordable for a college graduate
earning the prevailing wage in that area.
In terms of mortgage rates, where the market wants to go is to a place where
private lenders are bidding against each other with gusto to make mortgage
loans, because the risk return combination is healthy and attractive to
them. They are being substantially rewarded for taking the risk of funding
housing.
Now what this translates to is materially higher mortgage rates, almost by
definition. The reason the Federal Reserve has taken the unprecedented step
of maintaining massive monetization to fund the mortgage market is that the
alternative of mortgage lending by private participants would have been at
unacceptably high interest rates. If true market rates return, this likely
means that payments rise for the given price of a house, which then drives
down the prices still further until home prices reach a point where - at
market interest rates - the average family can afford the average home.
Unfortunately this return to normalcy is very difficult for many millions of
truly innocent homeowners. By truly innocent I'm not referring to the people
who in many cases were quite knowingly speculating in the housing market, or
to those who never should have been able to buy a home in the first place.
No, the truly innocent are the responsible, middle class families who could
afford a home before this bubble occurred, and would have a healthy equity
in their homes right now in ordinary circumstances. However, during the
heart of the housing bubble they needed homes, and had no choice but to pay
much more than what those homes should have been worth. 
Which has left them with significant economic damage at this point, as they
are effectively underwater in their mortgages by quite substantial sums.
These families are essentially locked into their homes for the indefinite
future, unable to leave, unless they either take a major loss on their home
and come up with cash to pay for that, or destroy their credit rating. These
millions of families are the true victims of the reckless actions of Wall
Street and the Federal Reserve in creating the bubble.
When Reality Is Politically Unacceptable
There is the economic reality which we were just reviewing, and
simultaneously there is something entirely different: political reality.
Looking at the situation, the politicians in the United States collectively
determined that they could not accept economic reality. There was too much
bad news there, which would lead to too much voter discontent, which would
translate to too many incumbents losing elections.
So the decision has been made to make an all-out effort to support the
housing market, regardless of the cost and the risk.
Now, we're not really talking about cost and risk for the politicians. They
are not, nor have they ever been, the ones who are truly bearing the risk.
Rather, it is you and I bearing the risk and bearing the costs. The
politicians have made the decision that there is no limit to the cost
they're willing to pass on to all of us to get housing to a politically
acceptable place, and there is no limit to the relative risk that they are
willing for us to take. In other words, there is no limit to the financial
risk for you that the government is willing to take to stay in power.
So a massive, historically unprecedented intervention by the government has
been the result. An enormously expensive intervention by a government that
already couldn't pay its bills. Even as the housing bubble was created by
the convergence of five mortgage finance factors (not including human
nature), the government's efforts to prop up housing prices fall into three
broad categories.
Attempting To Reflate The Bubble - The Public Face
The public face of the government's efforts to support the housing market
are the homebuyer tax credits, as featured in all the headlines. These are
tax credits of up to $8,000 for first time homebuyers and $6,500 for
previous homebuyers. Some estimates are that total tax credits will end up
costing the government about $20 billion in foregone tax revenues. 
This could be viewed as an explicit partial socialization of home purchases,
where homebuyers who supposedly act in the national interest by purchasing
homes are funded by the rest of the population. Another way of looking at it
is every household in the United States pays an average of $180 each, so a
lucky few households can get up to $8,000 each. In some ways, this could be
viewed as a partial funding of the down payment for homes, allowing people
to participate who otherwise would not, thereby supporting the market.
The homebuyer tax credits are a very explicit short term attempt at market
manipulation. As soon as the tax credits stop, the housing market can be
expected to seek whatever levels it would've gone to if the tax credits had
never existed in the first place. Indeed, the market may even temporarily
fall further than it otherwise would have, because anyone who could have
reasonably purchased a home and benefited from the tax credit would already
have done everything in their power to do so, thereby depressing the pool of
homebuyers for the months or years after the program ends.
While they are the best known facet of the government's housing support
program, and the only component where the cost is being openly included in
the federal budget and voted upon in Congress, the homebuyer tax credits are
arguably the least important of the big three housing support programs. 
Attempting To Reflate The Bubble - Bigger Risks, Less Publicity
A more important form of governmental support for the housing market is both
more obscure than the homebuyer tax credits and potentially much more costly
to the nation as a whole. As previously discussed, it was the relaxation of
loan underwriting standards that drove the expansion of the housing bubble
as much or more than the reduction in interest rates. The popping of the
housing bubble effectively destroyed the use of private mortgage
underwriting standards. Private investors no longer want to take mortgage
credit risks, at least not without payments of substantially higher fees and
severe restrictions on who qualifies for loans. Which would be politically
unacceptable.
Therefore, the overwhelming majority of mortgage financings these days have
to meet the underwriting standards of FHA, Fannie Mae or Freddie Mac. These
entities now effectively bear the credit risk - the chance the homeowner
won't make payments and the losses that then need to be taken - for nearly
the entire mortgage market. Since the failure of Fannie Mae and Freddie Mac
and their takeover by the federal government, this means that the federal
government directly controls virtually all aspects of the mortgage credit
process, determining who gets mortgage loans, how large of a mortgage loan
they get, and under what conditions. The federal government determines the
standards for loan to home value, for payments to income, for what
constitutes income for underwriting purposes, for credit scores, and far
more. This is terribly dry and obscure stuff, and not at all suitable for
headlines or passing coverage by TV news anchors, despite being more
important than the far more public homebuyer tax credit programs in
determining how many people can afford how much house in the real world. 
Along with the federalization - that is, the straight up politicization - of
mortgage underwriting comes the complete socialization of mortgage credit
risk. The federal government sets the standards because it is willing to
bear the cost of all the mistakes, for all the loans that go bad, for the
entire housing market.
Except that, of course, the federal government doesn't really take any
losses. It's you and I who take the losses and bear all the risk.
So a more accurate way of phrasing what is happening is that political
appointees under instructions to keep the housing market propped up
regardless of costs - and effectively operating almost out of view of the
media and the public - are taking massive risks in the name of extending
credit to as many homebuyers as possible. Expensive risks that could dwarf
the homebuyer tax credits - but that don't have to be included in the
budget. After all, the losses haven't occurred yet, and can therefore be
quite easily made to disappear through the flexible use of optimistic
assumptions.
There is no way for anyone outside of the government to quantify the full
extent of the risk, and it is indeed unlikely that anyone inside the
government is keeping track on a multi-agency basis (with real world
assumptions anyway). However, recent congressional testimony about the
Federal Housing Administration can provide insight into a small part of the
bigger picture. FHA is in big trouble, with reserves down to about 0.5% of
mortgages insured, compared to the legally mandated 2.0% minimum. The agency
is treating mortgage modifications by people who previously couldn't pay
their mortgages, as if they were essentially of the highest credit quality,
rather than subprime. Yet at the very same time, the FHA commissioner
assured Congress that there wouldn't be any problems. A political appointee
telling incumbent politicians exactly what they wanted to hear, which was
that the housing market could be aggressively supported through government
guarantees of questionable but politically desirable loans -without worrying
about bothersome technical details.
The headlines about what has been happening with the complete politicization
of lending standards for one of the largest loan markets in the world may
indeed become quite common - after it is already too late.
Attempting To Reflate The Bubble - Risking Everything
The Federal Reserve had already created close to $1 trillion through
straight-up monetary creation as covered in my article "Creating A Trillion
Out Of Thin Air" for a short-term intervention in the commercial paper
market and emergency bank lending. It was a daring risk, a tremendous risk
on a scale that was unprecedented. On a scale that risked the value of the
dollar itself, and therefore put in peril the value of all of our savings. 
The Federal Reserve succeeded in their first gamble. The original plan, as
covered in my article "Containing Inflation Via Unlimited Money Creation:
The Fed's Strategy", was to quickly return that cash to the void from whence
it came, before the value of the dollar was jeopardized. However, because of
the problems in the housing market and political requirements, the Fed took
a different approach. They doubled down and more as they took that
fabricated money, and instead of getting rid of it, they just put it back
out in a much riskier strategy than the original one. What the Federal
Reserve did was create an entirely artificial market for mortgages, which
means an entirely artificial market for housing. The Federal Reserve wanted
mortgage rates lower than what a rational private lender would loan at.
So the Fed effectively bought the entire new mortgage security originations
market, essentially funding every conforming new mortgage that was coming
down the pipeline, and thereby funding the purchase of nearly every home
that was being sold in the United States. With the source of that money
being the trillion dollars that had been effectively created out of thin
air. This put a floor beneath the fall of the housing market, but it didn't
create a healthy market. 
The Plausibility Of The Exit Strategy
The economists at the Federal Reserve know that this is an unsustainable and
risky situation. They know that they can't indefinitely fund an artificial
market in the most real of assets through creating money out of thin air,
with no economic growth to support that money and no taxes to support that
money. So they know that they have to leave. And they're saying that their
plan is to start withdrawing from the housing market by around the end of
March of 2010, and to steadily pull out. Indeed, the Federal Reserve is
already expanding its list of eligible counterparties for transactions
designed to drain the cash it created from the system, and the New York Fed
has been conducting live trial runs in the marketplace. There are some
complications here, however. 
The Fed can do the fiscally responsible thing and get rid of the excess
money and unwind its positions, but what would really happen if mortgage
rates jump 1%? And what if this shuts down a housing market which is already
in pretty bad shape, and is not responding all that well even to these
artificially low mortgage rates?
Even worse, what happens if mortgage rates rise 2%, and not just the housing
market shuts down, but the construction industry also stops in its tracks?
What do the politicians do at that point? 
The Midterm Elections
There are some crucial political equations that we need to be taking into
account here. Being that the midterm elections are approaching, will the
government really withdraw its support for the mortgage market and thereby
the housing markets? Will the government be willing to endure steadily
growing pain as the economy likely plunges down along with the housing
market, with voters feeling ever more pain every month as the election
approaches? Will incumbent politicians of either party voluntarily lose the
upcoming elections for the economic good of the country?
Or will they instead choose an approach that stretches our fantasy mortgage
and housing markets out just a little bit longer?
That's the problem with a strategy like this. There never is a convenient
time to leave the strategy, because the markets always want to return to
fundamental levels. And the decision has already been made that those
fundamental levels are not politically acceptable. So any exit strategy may
be doomed before it even starts.
Increasing Foreclosures
Housing prices have temporarily stabilized, and have even recovered a bit in
some areas, but some fundamentals are getting even worse. Between five and
seven million homeowners are seriously behind on their mortgages, and may be
foreclosed upon at any time. The reason they haven't been foreclosed upon is
that the banks have been under intense political pressure not to foreclose
on too many homes. This creates another form of artificial market, where
there is an overhang of millions of people living in homes upon which they
haven't been making payments. There are strong indications that the pace of
foreclosures may pick up again in 2010, in which case a flood of repossessed
homes on the market could quickly drive down prices.
This wave of foreclosures is however quite different from the previous wave,
because it isn't about subprime borrowers. It's about responsible people
with good credit records who didn't borrow too much - but have lost their
jobs in the greatest depression/recession since the 1930s. Prime mortgages
extended to unemployed borrowers are what most threaten the mortgage markets
now.
Could Anyone Have Predicted This?
Using my background as a mortgage derivatives expert and author, in a series
of public articles in early 2008, I connected the dots as I saw them, and
drew what seemed to me to be the obvious conclusions: that the subprime
crisis would get much worse, and would have the potential to melt down Wall
Street in a week. Not from accounting losses, but rather from creditors
pulling loans from the highly leveraged financial giants when they realized
the extent of the losses. I further predicted that the government would not
allow this to happen, and that instead there would be a massive bailout that
would not only lead to huge deficits, but necessitate the Federal Reserve
resorting to creating money out of thin air in an attempt to contain the
damages. In other words - what has happened. While a number of people
predicted catastrophe, to the best of my knowledge, this makes me the only
person to accurately publicly predict not just that there would be a crisis,
but how the crisis would unfold, the government bailout, the Federal
Reserve's monetization, and where the response to that crisis would
logically lead: to the place we are covering in this article in early 2010.
In my opinion - this is a time where some more dot connecting is badly
needed.
(The referenced articles from early 2008 are "The Subprime Crisis Is Just
Starting", "Credit Derivatives Dangers In 2008 & Beyond", and "Why Inflation
Will Trump Deflation".)
Connecting The Dots
All three components of the government's attempts to reflate the housing
market are massive and need to be understood - but they aren't enough. What
history shows us is that there is no credible reason to believe that an
asset bubble can be successfully reflated in real terms (inflation-adjusted)
by a government. The irreplaceable element required for an asset bubble is
millions of people who are not just willing, but eager, to risk their own
financial security to bid prices to irrational levels - even after just
having been burned in the same market only a few years before. Bubbles can
quickly follow each other when the market changes, as shown by the housing
bubble so quickly following the tech stock bubble. (Particularly when the
central bank deliberately intervenes to facilitate creation of the second
bubble, in order to mitigate the economic damage from the first bubble.)
However, the public has to be able to convince themselves that the second
bubble really is different from the first bubble that just burned them, and
this is near impossible to accomplish in the same market.
This is why the housing market has not yet "recovered", despite desperate
and massive efforts by both the Federal Reserve and the US Government.
Everybody just got burned in the last bubble, and it is very hard to get
them to participate in another bubble with what is left of their savings,
particularly in the midst of depression / recession. To reflate the bubble
requires people risking everything they have to return prices to
fundamentally irrational levels - and it's no small wonder they don't want
to do that. As fundamental as this problem is however, it is also more or
less irrelevant as a determinant of government policy, for the reasons
previously reviewed. 
The Federal Reserve may be talking the talk when it comes to the economic
necessity of draining its artificial cash from the system and exiting the
mortgage market - but will it really pull out just as foreclosures
accelerate and new mortgage investors fail to return at below market rates?
During an election year?
The complete control of credit underwriting standards for the housing market
by political appointees, with the federal government unconditionally
guaranteeing the results of those political decisions - is financial
dynamite. Particularly when the explicit goals for the agencies involved are
now political, in terms of supporting the housing market rather than
minimizing losses. Off budget though they are now, the eventual financial
outcomes of this unprecedented change is sadly only too predictable.
In more general terms - the question is one of the public good versus the
re-election of incumbents (in both parties, this is very much a bipartisan
issue, and has been so at each stage of creation and response). If the value
of the dollar and of our investments that we have worked our lives to build
are to be preserved - then this extraordinary creation of an entirely
artificial mortgage market funded by an already bankrupt federal government
must be abandoned. Even if the cost is the destruction of the careers of
many career politicians.
How do you think that decision will work out?
And more importantly, what are you doing to protect what you have?
Bubbles & The Redistribution Of Wealth
We face a tragic situation for many millions of people who have done nothing
wrong. Government policy and fundamental economics are combining to create a
situation of simultaneous monetary inflation and asset deflation. The
government can't reflate the housing bubble, but the political dynamics
require the attempt to be made. Even at deadly risk to the value of the
dollar, and to a lifetime of savings for many tens of millions of
households. So the value of the dollar falls, the value of the assets fall,
and eventually the fall in the value of the dollar exceeds the fall in the
value of the assets, thus finally creating the façade of a reflating bubble
in nominal dollar terms (but not inflation-adjusted). False profits,
existing only because the value of the dollar is falling, are then generated
across multiple asset categories, which lead to inflation taxes, and the
hapless average citizen ends up simultaneously losing the purchasing power
of their money and the purchasing power of their assets, while paying
whopping tax bills in the process.
This dire situation may appear overwhelming, and even hopeless, if one is
limited to conventional investment methods. For these methods generally do
not provide solutions for even one of these three problems, let alone the
catastrophic damage that can be wreaked by all three working in combination.
However, the good news is that where there is crisis there is also
opportunity, and this crisis is indeed rife with personal opportunities.
When we see with clarity and utilize unconventional methods, then
simultaneous asset deflation and monetary inflation can become an
environment of investment opportunity. Indeed it can be a potentially
"target-rich" environment, because so few investors see the world in those
terms. 
As one example, this environment creates major opportunities for precious
metals investing. Unfortunately however, purchasing gold as a simple
monetary inflation hedge at the highest prices in a generation with no
protection from inflation taxes may lead to substantial losses for most
investors in after-inflation and after-tax net worth, even if gold does
rises to $10,000 an ounce or higher with an effective collapse of the
dollar. When we buy gold or silver with an informed understanding of how
precious metals perform during a time of severe economic crisis - with
simultaneous asset deflation and monetary inflation - then we have the
ability to potentially create wealth on a multigenerational scale. Because
during crisis, gold performs best as an asset deflation play, rather than as
a monetary inflation hedge, and if we don't see that, then we may miss the
best precious metals investment strategy of our lifetimes.
Real estate is where things get counterintuitive. Yes, even if substantial
real estate price deflation persists in real terms over the coming years, we
can still potentially reap rich rewards through real estate investing.
Indeed, the Federal Reserve has created an unprecedented opportunity for
wealth creation through its actions. However, these opportunities are not
based upon the simplistic real estate investment methods of maximizing
leverage that are so successful when bubbles are inflating, but can be
deadly during a time of ongoing asset deflation. Rather, to make money as a
bubble continues to deflate even while markets are systemically manipulated,
we must play monetary inflation off of asset deflation, using a calculated
and deliberate methodology, and in the process, create wealth in a
risk-reduced and tax-advantaged manner.
Simply put, what we have reviewed in this article creates a situation of
enormous potential volatility. The pressure may be released at almost any
time, and in the process lead to a massive redistribution of wealth that
devastates most people, pension funds and governments. Conversely
individuals can take personal action to position themselves so that they
benefit from this redistribution. The difference between individual peril
and opportunity is one of vision - and education.

Would you like to find practical solutions to the issues raised in this
article? Find out how to position yourself to benefit from what happens when
political decisions place the value of the dollar at risk? Do you want to
know how to Turn Inflation Into Wealth? To position yourself so that
inflation will redistribute real wealth to you, and the higher the rate of
inflation - the more your after-inflation net worth grows? Do you know how
to achieve these gains on a long-term and tax-advantaged basis? These are
among the many topics covered in the free "Turning Inflation Into Wealth"
Mini-Course. Starting simple, this course delivers a series of 10-15 minute
readings, with each reading building on the knowledge and information
contained in previous readings. More information on the course is available
at DanielAmerman.com or InflationIntoWealth.com .
Contact Information:
Daniel R. Amerman, CFA
Website: www.danielamerman.com
E-mail: mail at the-great-retirement-experiment.com
This article contains the ideas and opinions of the author. It is a
conceptual exploration of financial and general economic principles. As with
any financial discussion of the future, there cannot be any absolute
certainty. What this article does not contain is specific investment, legal,
tax or any other form of professional advice. If specific advice is needed,
it should be sought from an appropriate professional. Any liability,
responsibility or warranty for the results of the application of principles
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