The Economics of Fast Times

Incredibly, the earth spins at the same rate every day, and we make up for the 4-minute shortfall every 4 years. Undeniably, people do not move at the same speed, have the same countenance, or desire the same results in the time that it takes the earth to rotate about its axis.

The hard won lesson is the economics of fast times. We cannot move faster, or perhaps beyond, the sum of our income and net wealth. So we were lead to believe. And even though most of us have taken at least high school mathematics, we believed this notion that you could overcome the natural mathematics and achieve fast times with little or no downstream, negative impact. We believed that in fact it was okay to take out a loan that was greater than the underlying value of the real estate and the improvement, be it currently standing or proposed. We demanded faster even still. Let's take that out to 40 years versus 30 years. So, the deed is done. The river has now overflowed its banks.

Also, the economics of fast times suggests that every dollar beyond the limit (the sum of income and net wealth) has to be repaid at some sum greater than the amount by which we surpassed the limit. Interest, additional financing costs, and potentially even loss of equity play into this. But, that was never supposed to happen. Real estate is a fixed commodity, with only so much of it left. We cannot, technically, create more real estate. The value has to continue to rise. But how far should it rise? No farther than the lowest yield (interest rate) will allow. In my opinion, housing prices are very similar to bond prices, which are inversely related to bond yields. As the yield goes up, the price comes down.

Ah! The economics of fast times also catches us in its snare outside of our homes. Our cars, our manicured lawns, and our expensive habits. Prices rise, and, according to our central bank, rates should indeed rise to curtail inflation. Oh, but I have an adjustable rate mortgage. Rates (yields) rise and prices fall. What, pray tell, is the cure?

As you would have expected, and by the very nature that I don't wield a Harvard MBA, it is a very simple answer. The economics of slow times. We have ingested all we can hope to devour and ultimately we will have to purge ourselves of it. What will this ultimately lead to for you and me? Learning, I hope. Understanding the nature of people is really is what is at the heart of this meltdown. Capitalism is often called out as the ruthless, unrelenting monster in this tale. I give its detractors some credit if they only would add the phrase "and greed" after the term. I don't believe that capitalism by itself is the pensioner's executioner. It is the greed we have assigned to it that catapulted us into these most recent fast times. Our understanding, and admitting to it, will help us to see clearly what it is that is a matter and find reason before spending in the next cycle.