[jgillisp]

Tuesday, 7/31/07 10:30 AM[mod]copyright[/mod]

[bale002]

The reported inflation rate is largely based on a basket of mostly worthless consumer goods most of which produced in China which virtually pegs its currency to the USD.

Reported inflation is bogus. Real inflation, based on things that real people actually need - like housing, energy, food, education and healthcare - is at high levels, even near hyperinflation levels by some measures.

It seems to me that these "consumer confidence" indices are also pretty much bogus.

The real issue is indeed credit spreads: dirt cheap credit is what has fueled asset price inflation (real estate, stocks) as well as consumer consumption rates (yeah, consumers feel confident because they are high on the money supply).

As a result of the subprime mortgage debacle, credit spreads have tightened: in other words, investors (entities with excess saving) are now less willing to lend to risky borrowers at dirt cheap rates, so they now are more willing to invest in "risk-free" government bonds and they are shying away from lending to mortgage companies and even to corporations.

In the current relatively more risk-adverse climate, investors are less willing to invest in mortgages and corporations, hence mortgage rates and US Treasury rates are moving in opposite directions. If confidence in lending to risky borrowers at dirt cheap rates is restored, then mortgage rates will once again move in tandem with US Treasury rates.

Now that a significant portion of potential home buyers has been cut off from the credit supply (and the cut off to some extent has spread even to the corporate sector), housing inventory is likely to remain high for the foreseeable future.

High supply, limited (actionable) demand, what usually happens to prices?

I hope this helps.

[compelled to reply]

Wow, hubbert peak theory, nothing new, its been encroaching on us for years. in 20 years, oil production will be down at the same level as it was in 1980, but consumption levels will be higher than they are right now. Our entire world economy is based on energy from oil, and it's a bit late to think about diversifying our energy sources.