Housing and the ripple effect

It’s true, the housing bubble effected perhaps a dozen areas of the U.S. that are now paying a high price for earlier giant gains in equity.

There seems to be a lot of talk from areas that didn’t see great price gains that this violent downturn won’t effect them.
Think about it, the run up was all perceived value, mere psychology. A lot of people fixated on ‘get rich quick’. They fooled themselves into believing the party would never end. They borrowed on equity, bought big screen TVs, vacations to Maui, ‘spend, spend it will never end’.

Now the psychology has experienced a paradigm shift. The party is over, equity is falling and so is spending which brings us to the point of the ripple effect.

Domestic spending is around 70% of the US domestic economy. This is serious! Not only is the equity liberation boom finished, as it goes, so does the spending it spawned. Goodbye good economy. This is an effect that will spread like wildfire across North America. If no one is spending, less people are producing, simple math. A down shift in jobs means less and more of less.

Here is where you will see the ripple spreading across the pond.
Japan is experiencing a comeback after what, 14 years of zero growth? A complex economy anchored by production and export of consumer goods, their biggest customer of course, the U.S.
Bad news for them.

China, a growing economy on fire! But also complex and highly dependent on production and export. The US being the largest consumer nation on Earth is their largest customer. Bad news for them.

The Euro-Zone. A little more complex but it’s safe to say, now that the world is flat they will be effected also as the ripple reaches their shores.

The resulting psychology of contraction will take a long time to filter out of the minds of all the internationally connected economies. This bias alone will prove a formidable obstacle to overcome.
Bad news for us all.

Vern