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The Vicious Cycle of a Falling Dollar

Higher interest rates are extremely bad news for the upcoming resets in Alt-A and Option Arms, and as well for the selling prices of homes. And the resets of commercial real estate over the next few years. With high rates fewer buyers will qualify at current prices. Fewer people will be able to refi, and the resets will cause payments on existing variable rates to skyrocket. This could definitely signal another leg down in home valuations along with increasing inventory and a jump in foreclosure rates. It will be interesting to see if the government printing office (Treasury+Fed) can come up with a way around this. One shudders to think what that might be.

On top of this inflation is the weed wacker of the green shoot of personal savings. When the consumer realizes (and he will, he's not that stupid) that his savings have a negative real interest rate, we will see personal savings reverse and consumer consumption jump back to the bad old ways. The good news now is that amassing large credit balances will be a lot harder. The piggy bank of home equity is broken, and banks are being very retentive about other loans, and are about to get even tighter because of the recent credit card legislation.