While inflation is making most of the headlines, there’s news from the deflation side too.
A headline tells us that homeowners are no longer remodeling as much as they used to. As expected, the people who hustle granite countertops are finally getting a rest.
Poor General Motors…GMAC says it’s closing offices in the United States and Canada following a $2.3 billion loss. First, the company takes it on the chin from mortgage losses. Now, it’s getting jabbed by losses from auto finance. Repossessions, like housing foreclosures, are rising. The repo lots are said to be bulging at the seams.
Jeremy Grantham says he thinks housing prices in the United States will go down 20% to 30% from their peak. That’s a potential loss to Americans’ implied wealth of as much as $6 trillion. This is part of what leads Financial Times columnist Martin Wolf to describe the coming slump in the United States as the “mother of all meltdowns .”
Wolf refers to the work of New York University economist Nouriel Roubini, who argues that the housing decline will put 10 million homeowners upside down, with more mortgage than house. It will lead to collapsing credit…defaults…and huge losses to lenders. It will also bring about a big cutback in consumer spending and unavoidably push the United States into a deep recession.
One of the wild cards of the doomsday scenario is the performance of the derivatives market. No one knows exactly what is in some of these instruments…and no one knows how they will hold up in a crisis.