OK! WHAT IS THIS DEFLATION STUFF ANYWAY?

COMMODITY PRICE INFLATION
ASSET DEFLATION
EQUALS
DEFLATION???
POSSIBLY
What asset deflation concerns the Fed? Art, coins, stamps? No. Real Estate is the number one worry. Here's what is happening right now. A bunch of hustlers, the same ones who tried to get rich in the stock market, are playing a lot of games with real estate and pumping prices to the moon, HOPING a greater fool will take the property off their hands at higher prices. The end of this rainbow is a bust, or deflation. Remember, RE is illiquid; meaning you can't dump it.

First, Government housing that is only supposed to go to people who own and live in the housing is being purchased by partnerships utilizing "beards" (false persons) pretending to be the real buyer. This buyer pressure is causing huge false "asset inflation" in housing. Greenspan is rightly worried that this asset too will burst, and since banks finance a lot of this housing the banks could end up in big trouble. Another "asset deflation". Same thing is happening in private sector, with a twist.

When RE busts it really busts. Japan RE values plunged from $13 trillion in 1991 to $5 trillion today. When you realize that all real property is leveraged, meaning money is borrowed from banks to buy the real property, you can understand Greenspan's concerns. Banks are one asset class no country can afford to "deflate". Add to housing speculation the speculation in apartments, and other multiple family homes and you have the threat of the "bust". New York rentals are now so high nobody can afford them. Ditto San Francisco. Los Angeles is getting there.

Worse is this: there is always a domino factor in real estate. All prices rise together and all prices fall together. This leaves banks in a precarious situation with asset deflation. That is why Greenspan is so worried. Worse worse: since housing loans are non-recourse (the lender can't sieze cars, stocks, or anything else to satisfy the debt) people will just walk away from their properties leaving the banks holding junk housing that has no income.

The next asset is stocks. Stocks have fallen precipitously, causing some values to go to zero. Indexes don't tell the whole story. The Dow going from 11,000 to 7,000 is asset deflation of around 40%. Now the Dow is back to around 9,000 we can say there is an asset deflation of near 20%. For some people buying at the bottom, their assets rose nearly 30%. Indexes don't measure the interior of markets. Indexes are averages.

A man with one foot in ice water and the other foot on hot coals is, ON AVERAGE, very comfortable. The true state of the man is not measured by the average. So Greenspan is concerned about the number of people suffering asset deflation. How many people were ripped up by the Inclones, Enron's and Global Crossings?

So there you have it. Commodity prices are good. They are rising. It's the rest of the asset class that is worrisome.

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