Tuesday, August 24, 2010

How a bubble works

Housing prices fell during July:

Sales of previously occupied homes in the United States fell 27 percent in July, the weakest showing in 15 years, the National Association of Realtors said Tuesday. It was the largest monthly drop in the four decades that records have been kept.

Vox Day has a helpful chart over at his site.

Add this to the list of the reasons there is not and will not be an economic recovery--at least in the near future. But not only is this news not surprising, it's actually good.

Everyone recognizes that there was a bubble in housing. Apparently, though, no one knows what a bubble is. If they did, they wouldn't be greeting this as bad news. A good in a bubble is priced too highly. There are two ways to rectify this. The most obvious and straightforward way is to allow prices to fall on the bubble good; once they reach the prices the market is willing to pay, the bubble has been popped. True, those who bought at the peak of the bubble will be out of luck; but this is the inevitable nature of bubbles.

The other way to rectify the bubble problem is to inflate like mad. That way, homeowners can sell their houses at the bubble price. This is illusory, of course, since the real value of money has been reduced through inflation, but the hope is that the people don't notice this. It's problematic, too, because it runs the risk of creating another bubble. So when the dot com bubble burst, we got the housing bubble, which was worse than its predecessor.

Housing prices need to fall. They will do so. Government cannot defy the laws of economics. They can only pretend to do so for a time.

It's becoming apparent that the stimulus did little good for the economy. It is becoming even more apparent that, in the absence of government intervention, the economy will go about correcting itself. When it does this, it's called a depression.

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