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America's Playground Economy

At record-low interest rates, the San Francisco Bay Area’s real estate market may have officially reached its inflection point.

Properties in the Bay Area have seen losses of greater than 20% over the past year, while other metropolises are plateauing or following this trend.

Indeed, if this price decline were the consequence of expanded supply or the ease of manufacturing new homes, this would be a sign of economic progress; however, this is not the case, as this price drop is the consequence of an artificial valuation rooted in a debt-frenzied, speculative marketplace with tepid material growth in productivity, ironically in a market wherein zoning laws, building restrictions (such as San Francisco’s law limiting the height of buildings to 40 feet), and a scarcity of building permits, have choked the Bay Area of the style of growth which would likely ensue to accommodate existing demand from the population who have elected to settle for all of the features of what Jim Cramer derides as the sharing economy.

Oddly, though, the Federal Reserve and the pundits in Washington and their eminent economic advisors claim that rising prices largely benefit an economy.

This is, of course, true for a remote faction of the population, while it is largely untrue for everyone. Rising prices dilute the the real value of debt loads, thereby enabling debtors to pay creditors at a rather unseen discount, while savers’ funds are discreetly liquidated and debased by the principal cause for the maintenance of these price increases, the total of which responds to the available credit in the marketplace as a function of interest rates (the cost of capital), which is rendered lower by an expansion of said capital, or US Treasuries in the form of bond purchases, otherwise known as an expansion of the money supply, inflation or quantitative easing.

What’s more, the United States is a debtor nation, meaning that its balance of accounts of all assets and liabilities, largely in the form of bonds held locally or by foreign creditors, tracks into negative territory. In fact, the United States is the world’s greatest debtor nation, boasting more debt than all debtor nations combined.

Moreover, the United States economy is leveraged upon a delicate strength indicator known as the US Dollar Index, which gauges the dollar’s purchasing power relative to six other major world currencies.

Of course, this is incomplete, failing to include many emerging currencies such as the Chinese yuan, which, by the way, has not experienced the type of depreciation cited in yesterday’s debate; instead, the yuan has appreciated dramatically since the ’08 financial crisis.

The strength of the dollar, along with the vitality of bond purchases, is representative of the sum expectations for US economic productivity, which rests upon the believability of the recovery narrative, a story which supposes that the United States economy has materially and infrastructurally improved since the Great Recession.

In short, rising prices will breathe life into that narrative by furthering the wealth effect generated by the perception of available equity in real estate and the financial market, wherein you will find savers being encouraged to become speculators to seek a return on investment.

The primary benchmarks of GDP, employment (see Phillips curve) and the stock market are buttressed by this magical potion widely known as inflation, and this validates more of the antidote which has merely afforded benefit for those who are already in possession of the capital or who are sufficiently well-networked to benefit from the new capital, while sacrificing the interests of the unwitting majority for the political expedience of busybodies in Washington, their cronies and their worshippers.

There was only one fact gleaned from this debate: Janet Yellen is keeping rates artificially low to buoy asset prices to continue the proliferation of the wealth effect: a playground economy dependent upon progressive, record-level debt in auto loans, student loans and credit cards, each of which breaches $1 trillion while total mortgage debt approaches $9 trillion.

What’s more, we’ll find a lot of top so-called economists in a state of surprise when their predicted December rate hike is taken off the table in the face of lagging payrolls, contracting GDP figures, a collapsing real estate market (see estimates on Zillow and recent months’ reported sales inventories), rising delinquencies in mortgages, auto loans and student loans, and a stagnant stock market, let alone the lower-than-expected personal consumption expenditures (PCE) which forms the basis of the Fed's outlook on reported inflation to warrant the continued disingenuous repudiation of debt.

Another fascinating yet unsurprising outcome of tonight's debate was captured on Google Trends, whereby one finds the ultimate failure of per-capita-style democracy: the knowledge of the average voter.

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