Will Rising Interest Rates Torpedo Stock and House Prices?

This asset meltdown is the reason for the likely recession.

The crisis culminated in a collapse of asset prices at the end of 2008.

Some will then try to sell their overpriced homes, and the resulting market imbalance will cause prices to fall.

Housing prices are being propped up temporarily by myriad subsidies, while a commercial real estate tsunami looms.

Faced with a vicious combination of collapsing housing prices and imploding credit markets, the Fed has been aggressively cutting interest rates to try to stave off a recession.

Conversely, a crash in house prices does not destroy any real wealth (the houses still stand).

They were slashed again in 2001 and kept ultra low after the dot com bust.

With household wealth seriously damaged by the housing crash and other asset price declines, pensions and retirement provisions are in disarray.

However, it seems that in the short run, the inverse relationship between oil prices and the dollar exists only under very specific circumstances, such as a crash in real estate prices and volatile financial markets.

With the housing collapse lowering spending, the Fed, in an effort to ward off recession and help banks with fragile balance sheets, has been cutting interest rates since the fall of 2007.

And emerging markets will suffer once the US contraction and global slowdown undermines commodity prices.

The prospect of falling prices reflects the collapse of industrial production, the resulting high level of unemployment, and the dramatic decline in commodity prices.

When such demand falters, developing countries find themselves with collapsing export prices, and, too often, a protracted domestic crisis.

This would drive up interest rates in the US and, ultimately, could trigger the dollar s collapse.

It supports the purchase of equities by central banks to reduce asset price volatility, restore the value of wealth, and prevent a future market crash.

Few Russian policymakers, much less the Russian public, expected oil and gas prices to collapse as they have.

A disorderly rush to the exit could lead to a dollar collapse, a spike in long term interest rates, and a severe double dip recession.

As world energy prices collapsed, Brazil fortuitously turned off its subsidy tap, whereupon a brutal Darwinian free for all ensued.

The ECB will have to cut interest rates in 2008 if it wants to avoid a hard landing for the euro zone economy.

The drop in oil prices after the mid 1980 s is said to be due to the collapse of the OPEC oil cartel.

But, now that house prices have collapsed and credit is unavailable to underwater households, demand has plummeted.

After all, a collapse in oil prices would be a death sentence for several new energy technologies, and, not incidentally, would increase demand for oil.

The government may have to shore up the financial system if the changes in asset prices that undermined the dollar sink risk loving or imprudent lenders.

It is down by nearly 5 since the beginning of 2011, matching the lowest level plumbed since the Bretton Woods System of pegged exchange rates collapsed in 1973.

But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage.

In unwinding QE, Bernanke must avoid another landmine, namely an unwelcome collapse in asset prices. Many savvy Wall Street traders are convinced that QE is just the old Greenspan put on steroids.

Why hasn t the huge spike in oil prices cut the world to its knees, as it has on so many other occasions? Again, the answer is low interest rates.

A Great Breakdown?

Crash report

Capitalist Meltdown

Fifth, in the long run, a weaker dollar decreases supply and increases demand. However, it seems that in the short run, the inverse relationship between oil prices and the dollar exists only under very specific circumstances, such as a crash in real estate prices and volatile financial markets.

Perhaps burned by the way stock prices and real estate collapsed when the 1980 s bubble burst, savers would rather go for what they view as safe bonds, especially as gently falling prices make the returns go farther than would be the case in a more normal inflation environment.

Perhaps the dollar will collapse and there will be a burst of inflation in the US as the Federal Reserve Board decides that temporarily abandoning its price level peg is a lesser evil than the unemployment fallout that will result from a dollar collapse and interest rate spike.

The Middle East Crack Up

Free Trade Breakdown

Motor City Meltdown

Japan s economy has suffered two decades of slow growth because of the poor policy decisions that followed the collapse of the country s massive asset price bubble in the early 1990 s.

With the collapse of the second bubble in a decade, central banks again acted quickly, lowering rates to zero (or close to it) almost everywhere.

Some critics object that a collapse of US Treasuries and a dollar crash are not the same.

Crashing the SDR

Both foundations collapsed.

With tax revenues collapsing due to falling home prices and incomes, dozens of US municipalities could well go into receivership, as New York City did in the 1970 s.

Conversely, a crash in house prices does not destroy any real wealth (the houses still stand). On the contrary, a crash makes the dream of ownership more affordable, which benefits first time buyers typically the young and less well off.

Housing prices peaked in 2006, and equity prices peaked in 2007. With the collapse of these bubbles, paper wealth of perhaps 10 trillion, or even as much as 15 trillion, will be wiped out.