Deflation

This week we have seen more downward pressure placed on mortgage rates. However it is interesting that the increased demand in the debt market which normally drives down mortgage rates is not being passed through by the lenders. It seems as if a threshold has been put in place were the banks are no longer willing to lower interest rates. The hot topic is focusing on the “double dip” and if we could enter a period of deflation (a contraction in the volume of available money or credit causing a decline in prices.) On the surface this does not seem bad; but it will further erode home values. Most experts also point to the importance of consumer spending to help spur the economy forward in recovery. Our current average savings rate is 6.4% of after-tax income compared to pre-recession rates of 1 to 2 percent. It is great people are saving more; however, our economy has become dependent on massive consumer spending to create growth. Currently, we are not seeing the necessary spending. I feel like the current environment of experts trying to forecast what is going to happen; are we declining or growing; will probably be here until the end of the year. What I do know is rates are at their lowest levels ever and we have plenty of money to lend. We are still closing our loans on average of 2 weeks and 8 days for an appraisal. Please keep me in mind for any of your clients who need to purchase or refinance.
Have a great weekend and stay cool!
Damian
*Source: Time Vol 176 NO.4 pp 28-31

Top Economists Differ Sharply on Risk of Deflation
ECONOMIST, DEFLATION, UNEMPLOYMENT,
The New York Times
06 Aug 2010 08:10 AM ET
When the latest unemployment figures are announced on Friday, all of Wall Street will be watching. But for Richard Berner of Morgan Stanley and Jan Hatzius of Goldman Sachs, the results will be more than just another marker in an avalanche of data.
Instead, the numbers will be a clue as to which of the two economists is right about where the American economy is headed. Their sharp disagreement over that question adds yet another twist to the fierce rivalry between the firms, Wall Street’s version of the New York Yankees and the Boston Red Sox.
Mr. Hatzius is arguably Wall Street’s most prominent pessimist. He warns that the American economy is poised for a sharp slowdown in the second half of the year. That would send unemployment higher again and raise the risk of deflation. A rare occurrence, deflation can have a devastating effect on a struggling economy as prices and wages fall. He says he may be compelled to downgrade his already anemic growth predictions for the economy.
For months, Mr. Berner has been sticking to a more optimistic forecast, despite growing evidence in favor of Mr. Hatzius’s view. Last week, Mr. Berner was caught by surprise when the federal government reported that the economy grew at a 2..4 percent pace in the second quarter, well below the 3.8 percent he had forecast a month before. Mr. Hatzius came closer to hitting the mark, having projected a 2 percent growth rate.
Mr. Berner and his deputy, David Greenlaw, still expect a pickup in the second half of the year, which would help gradually bring down unemployment. They play down the danger posed by deflation, the malady that deepened the Great Depression and contributed to Japan’s lost decade of the 1990s.
“I’d say at this point the data and the sentiment in the marketplace have certainly gone more Jan’s way than mine,” Mr. Berner said. Some people, he added, “think I’m out of my mind. But I have a conviction in my beliefs that’s based on my analysis.” Full article http://www.cnbc.com/id/38590742