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Not "Stagflation," But DEflation...
Was "Headed in the Other Direction" An Understatement?
Stocks finished lower on Friday (Feb. 22), and on the week overall.
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Thursday on this page I suggested that it's absurd to compare today's ailing economy to the economic woes of the 1970s. I asked the rhetorical question, Can you have "stagflation" -- or even a strong overall inflationary trend -- if home prices are headed in the other direction?
Unfortunately, what I've read today makes me wonder if "headed in the other direction" was an understatement. The source of my wonder was (yet again) a front-page story in The New York Times, which included this staggering quote:
"Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com."
That is not stagflation, dear reader. The correct word is "deflation." And I take no pleasure is saying that there's more:
"Bank of America, which is in the process of acquiring Countrywide Financial and has potentially huge exposure, has circulated a proposal to create a new federal agency that would buy vast quantities of delinquent mortgages at a deep discount and replace them with fixed-rate federally guaranteed loans.
"The bank warned that tightening credit conditions were leading to 'escalating levels of delinquency and default among borrowers' and 'an unprecedented number' of homes that would enter foreclosure."
I went to the Moody's economy.com site, where it didn't take long to find a visual representation of exactly why Bank of America is sounding the alarm. The chart below clearly shows the disturbing rise in the trend, but note as well that the data only goes through the end of 2007.
There's no doubt that the big picture is ugly, and that the trend will get uglier still. No individual investor need assume, however, that he or she is at the mercy of that trend. You can get yourself and your finances ahead of the news. Discover what we mean via the fast steps below.