When you or I lower our expectations about our future earnings, what is the rational response? Is buying a new wardrobe on a credit card, taking out a second mortgage to remodel the bathroom, taking a mortgage out on a summer home a rational response? It is not.

The rational response is to cut back, tighten the belts and work harder.

What everyone agrees is true for individuals somehow becomes false for Krugman when those individuals are aggregated into a group. That sounds rather counter-intuitive. The following is Krugman’s “common sense”:

is America — not state governments, but the nation as a whole — less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago?

Anyone with a pulse knows the US’ growing and unfunded social security and medicare liabilities are likely to drive the country into bankruptcy. Despite this, Krugman thinks now is a great time to do further damage to our balance sheets:

Of course not. [... The] true cost of government programs, especially public investment, is much lower now than in more prosperous times.

It makes no sense to add to the problem by cutting public spending

Is Krugman interested in placing social security and medicare benefits on more solvent grounds? Common sense suggests now is the ideal time to fund those unfunded liabilities when credit is the cheapest it has been in decades. It sounds like he just wants the US federal government to issue massive amounts of new debt in order to build bridges to nowhere:

right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle

We need to access credit to meet our social security and medicare obligations. Credit we use to build bridges to nowhere — bridges that were unaffordable when the US had to borrow money at 4-5% interest — is unavailable for social security and medicare. The more we use for bridges, the more insolvent our other liabilities like medicare become.

Krugman wants a US government debt bubble. We may get one, and it think its inevitable rupture will be far worse than the present problems. I fail to see how this is common sense.

Many people in Seattle believed property prices become increasingly unaffordable; the limited flat land and strong job market are often cited as reasons. This contradicts common sense so long as we produce buildings faster than we destroy them.

News from the Puget Sound Business Journal suggests commercial property may become more accessible in 2009:

Commercial mortgages are repaid over five-, seven- or 10-year terms, with balloon payments at the end of the term. If refinancing is unavailable, an owner would be faced with a distress sale or losing the property in foreclosure.
[...]
Many of the CMBS loans issued at the height of the CMBS market in 2004 are five-year, interest-only loans that will come due in 2009, just as 10-year loans issued in 1999 are expiring.
[...]
At least 85 commercial properties — representing $3.1 billion in investment — are classified as either “distressed” or “potentially troubled” in the Seattle area, according to Real Capital Analytics.

Banks will refuse to refinance a property if the owner needs to lease the property at prices no business can afford. The solution is to sell to someone else who can afford lease the property at a lower price.

Property owners will only foreclose on a property when no buyers can afford to pay the price they want. Foreclosure clears the debt and brings the property and money back into commerce at affordable prices (Bankruptcy is good for the same reason).

The core problem today is that prices are unaffordably high for today’s market. Companies cannot stay in business paying them. That is why JPMorgan selectively defaulted on their Seattle leases, why Weyerhaeuser recently froze wages, and why the state government froze wages and cut a few sectors’ budgets.

Businesses need lower prices to stay solvent and avoid laying people off. Lower lease and purchase prices for commercial real estate will make it much easier for someone to grow a current or start a new business and employ people looking for a job.

Many already want a job now, and many more will soon. Unemployment is at a 26 year high and Christmas sales numbers look dismal. Even with enough cash to run for 2 years with no revenue, Microsoft may lay off people next month:

Is the following a list of head-count cuts or expected percent cuts?

3 in omps
9 in stb
12 in msd
7 in devdiv
18 in UA
5 in MSX
Beyond product groups:

Finance is cutting 10% of work force.

Some CRE speculators want the US Treasury and Federal Reserve to bail them out with free credit. Every dollar Bernanke and Paulson direct to an insolvent, over-leveraged Seattle commercial real estate speculator is a dollar out of the pocket of someone who anticipated and prepared for this scenario by saving.

Why should Bernanke, Bush, Paulson, Obama and Murray punish men who wisely saved their income for more affordable prices? Extending a life-line to foolish speculators keeps prices at unaffordable levels. Misallocated resources results.

Let prices fall.

Another bit of silliness amid this deflation is Olympia’s decision to raise the minimum wage:

The minimum wage in Washington will rise to $8.55 an hour on Jan. 1, up from the current $8.07 and it will remain the highest state minimum wage rate in the country.

Raising the minimum wage only protects the living standards of some workers because it forces other workers out of a job. Employers who may have been able to reduces wages to control costs now must lay people off. How did Olympia decide it is better to force employers to lay off workers than pay them a lower wage?

One way or another the number of saved hours of labor required to own these properties will fall. The only difference between Bernanke’s inflationary default and an Austrian’s deflationary one is that: a.) banks profit from inflation since they spend the new money first and b.) inflationary default punishes everyone who uses the currency. Deflationary default punishes only those involved in the poor decisions.

Every year we produce more hard drive space than we destroy. Every year we produce more LCD televisions than we destroy. Every year we produce more video games than we destroy. Anyone who wants a particular hard drive, LCD television or video game need only wait until it gets cheap to afford it. This is often called deflation, a wonderful symptom of wealth and prosperity.

Wouldn’t life be wonderful if the same thing held true for homes, cars, food and clothes? Anyone who wants a particularly sized home need only wait until the price drops to where he can afford it. Anyone who wants a particular car with a particular set of amenities need only wait — prices will come down and he can afford it. Want to eat steaks and fine Italian suits? Wait until the world produces enough that the price drops to an affordable level.

Things used to work this way. A basked of goods purchased in 1800 for $20 cost the same $20 or less in 1912, more than a century later. That is incredible when you think of the increasing demand due to population growth.

The population of Europe doubled from 203m in 1800 to 408m in 1900 (Wikipedia). The population of North America exploded more than 1000% from 7m in 1800 to 82m a century later.

In other words the United States needed ten times as much food to feed itself in 1900 than a hundred years prior. But prices did not rise; prices fell. The United States produced so much more food that prices fell. A basket of goods in 1800 cost around $50 but produced so much more food a century later that the cost dropped to around $20-$30.

The United States created the Federal Reserve in 1913. Life has become more and more unaffordable ever since. Bankruptcy is now more common than divorce. The same basket of goods that cost $50 in 1800 and $30 in 1900 now costs $600. No wonder people can no longer afford to retire!

Before he was chairman of the organization Benjamin Bernanke believed the Federal Reserve would make life forever more expensive and unaffordable:

I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Will the economic commanders at the Federal Reserve be any more successful in the end than their soviet counterparts? I hope not. Prices are falling:

The Commerce Department’s price index for personal consumption expenditures, a closely watched inflation gauge, fell 1.1% in November

Prices are falling enough that people can once again afford to save and build wealth:

savings from lower gasoline prices is showing up as savings – as opposed to other consumption

So the first part of Bernanke’s belief — that the Fed can always prevent savings, prosperity and the lower prices he calls deflation — looks increasingly false by the day. It is now up to us to decide whether we will allow him to reverse the course of society.

Saving will not be easy. It means working hard. It means earning more than you spend and learning to live without:

I believe that each of us, the communities we live in, and the organizations and companies we serve, are going to have to make choices. We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained. And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past 20 years: “I can’t afford that.”

I believe it is worth it. Learning to live without lowers demand. Lower demand lowers prices. Lower prices are a good thing. Celebrate lower prices.

Money measures the value of goods. It helps people who are not experts at building homes, writing software or growing food set a desirable exchange rate between them and with what they produce. Nowhere in this equation is the creation of more money necessary.

Creating more money makes it easier to acquire a particular nominal amount of that money. Does the amount of work required to write software or grow food change? No. it still takes the same amount; people bid up the exchange rate between money and food/software as a result.

Goods and services are what make prosperity. More money does not create more goods or services.

Saving is what makes us wealthy. Saving for a rainy day gives us the confidence to invest in new ways to produce more of those goods. Producing more goods makes those goods more affordable — not creating more money.

People who believe life becomes more affordable with more money may as well believe they can lose weight by moving from the US to Europe. Sure the scale now says 72 instead of 160, but 1kg is heavier than 1 pound. Bernanke is trying the same hocus-pocus on society right now by printing unfathomable amounts of money:

Bernanke thinks this improves life. Maybe for bankers at JPMorgan and Bernanke’s family. How about for the rest of us? Bill Bonner of the Daily Reckoning begs to differ:

It is amazing to us that so many people have so much faith in so much humbug.

We’re talking about the bailout…the fix…the save…the plan to revive the world economy by giving it more of what it least needs – more debt. [...] the feds aim to make [people] borrow more [...] and make them spend more…by causing prices to rise. [...] It’s a consumer economy, they say; all we’ve got to do is to lure people to consume. The simpletons.

Colleague Simone Wapler explains that it doesn’t work that way:

“Of course, a consumer economy requires consumption, but that’s not all it requires. Imagine an island where a fisherman, a hairdresser, a doctor and a central banker live. The fisherman sells his fish. The hairdresser cuts hair. And the doctor does whatever doctors do. They all live on their services, using shells for money. The population is stable; everybody does what he’s supposed to do. Everyone is fed. They all have nice haircuts. And they all get medical treatment. The number of shells is stable too. That’s all there is to the story.”

Simone gores on to explain that the only way people can get their hair cut two times a day…eat twice as many fish…or get sick more often and expect to get the same treatment they got before is by INCREASING PRODUCTION. And that requires saving…and investment. Otherwise, increasing consumption isn’t possible. Even if you add more shells, the productive capacity remains the same.

We don’t even know why we are pointing this out. Every fool knows it. But every fool also believes that if you mix in a little macro-economic mumbo jumbo that, somehow, central bankers can increase consumption by discouraging saving…and just getting more shells into consumers’ hands.

Increased production allows sustainable consumption growth and comes from saving. The Federal Reserve openly opposes saving due to the resulting price deflation — deflation is bad for banks. The faster the United States dissolves the Federal Reserve the better of the rest of us will be.

Join the cause.

End the Federal Reserve.

The Federal Reserve bailed out JP Morgan when Bear Stearns collapsed. They received another bailout when Washington Mutual collapsed. JP Morgan defaulted on all of Washington Mutual’s debts but kept all the deposits.

JPMorgan keeps what is profitable and let’s the public suffer the consequences of the rest:

JPMorgan Chase & Co. will officially tell Seattle property owners [they] will not be taking over the bank’s thousands of feet of downtown office space.
The move will leave a gaping hole in Seattle’s commercial real estate market. [...] WaMu leases about 543,000 square feet and subleases an additional 185,000, according to Seattle-based Flinn Ferguson Corporate Real Estate [...] JPMorgan (NYSE: JPM) will move all of WaMu’s remaining employees and those on its transition team to WaMu Center, the 42-story high-rise tower that Washington Mutual built in partnership with the Seattle Art Museum [...] WaMu employed 4,200 people downtown but JPMorgan is cutting 3,400 of those jobs.

Why give JPMorgan the right to keep the retail buildings and deposits it wants but default on Seattle’s pensions, leases and anything else? Why should Seattle’s Commercial Real Estate suffer for JPMorgan’s benefit?

Reminder: Murray voted to hand hundreds of billions to these vultures. Senator Patty Murray sold out Seattle and Washington State. Replace her at the earliest opportunity.

Overpriced homes do not sell:

The months of supply for October was revised up to 11.8 months – the ALL TIME RECORD!
[...]
This is the lowest sales for November since 1981. (NSA, 28 thousand new homes were sold in November 2008, 27 thousand were sold in November 1981).

Which is no surprise given deteriorating macroeconomic conditions:

[Weyerhaeuser] reduced its quarterly dividend from 60 cents to 25 cents and also froze all executive and salaried wage levels at 2008 levels.

The company’s board also reduced capital spending next year from $425 million to between $200 million and $250 million.

On the bright side, home prices are falling:

The median resale price fell 13 percent from a year before, to $181,300, “probably the largest price decline since the Great Depression,” National Association of Realtors Chief Economist Lawrence Yun said in Washington.

The hours of work needed to repay a mortgage needs to fall to more affordable levels. Falling prices helps new home owners, but destroys equity for current mortgaged owners. That is why modifying only the terms of an overpriced mortgage does not work:

Data from the Office of the Comptroller of the Currency show that 55% of mortgage mods redefault within six months. Even more discouraging, the three month re-default rate was higher for loans modified in the second quarter of 2008 than the first.

I expect the auto bailout will find no more success. There are too many cars priced far above what people want or can afford to pay:

Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times.

For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.

And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.

Government can try determining who feels the pain, but the hours of work needed to repay debt needs to fall. Nothing they do will change this.

Printing and bankruptcy are both forms of default. The main difference is that printing punishes everyone who uses the currency. Bankruptcy merely punishes those involved in the bad decisions. Bankruptcy is the more honest, straightforward and capitalist approach to default.

Bernanke and his colleges at the Federal Reserve seem to disagree. We will all suffer as a result.