America's Bubble

From the Daily Reckoning:

America's housing bubble
By Bill Bonner

Tomorrow is the 4th of July. Independence Day for the United States, the land of immigrants. Many people in America are taking a long holiday weekend. But here at The Daily Reckoning headquarters in London we recognise no national holidays. There is always something to be reckoned with, regardless of time of day or country of origin. Today, we reckon with the fact that gold has jumped back from its recent correction and now is once again over our dollar-target buying price of $600.

We laid out our best guess as to what is happening on Friday: The US is still following Japan into a long, hard slump – with softening real estate leading the way. That we had expected Britain to get their first has yet to change our opinion. “America’s day of reckoning is nigh,” says a headline in this week’s MoneyWeek. Quoting Barron’s Alan Abelson, MoneyWeek remarks that “it has been the greatest housing bubble since shelter-seeking man first crawled out of his dank cave.”
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“A housing slowdown is especially ominous since the sector has underpinned growth over the past years...” MoneyWeek warns. Why? Because the US recession of 2001-2002 was followed by very weak job growth. Those few jobs that were created tended to be related to one of two big industries – housing and war. Both industries flourished on cheap credit. US homebuyers, just like their British cousins, need low rates in order to buy houses they otherwise can’t afford. They need cheap credit, too, so that they can refinance...taking out what little equity they have so they can spend the money on things they don’t really need. And the empire needs low rates in order to finance its war against terror - more specifically, its periphery wars to subdue the poppy growers of Afghanistan and the desert tribes of Mesopotamia.
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But now, Ben Bernanke is fighting his own war. He is out to prove that he can battle inflation, and win. As we pointed out last week, this use of overwhelming force against a minor enemy may have unintended and unpleasant consequences. It may trigger an unexpected flank attack - by deflation! As the US housing bubble deflates, a lot of people are going to have a lot less money in their pockets – agents, brokers, granite counter-top makers, developers, road builders...and all the millions of people who have come to depend on rising house prices for their spending money. That’s why David Rosenberg of Merrill Lynch puts the odds of a US recession next year at 40%...and why we would put them even higher.