The Ghost of Christmas Present

Let us revisit the "theory" that printing enough money will solve the problem. This seems to be the preferred solution, and we need to see why it will fail.

The theoretical position is correct. Print enough money and you will boost the nominal price level enough, and the insolvency problem goes away.

Unfortunately, that's not how it works in practice.

Firstly, the Fed doesn't "print" money. What it does do is lower the price of money below the market rate which has an effect similar to but not the same as printing money. This is an exceedingly critical point, and I cannot emphasize it enough.

What that means is that it cannot control the channel in which this money will flow. It could flow into commodities, or it could flow into absurd Internet ventures, or it could flow into gold. They have no control over where it goes.

Everyone with me so far?

Now, where the money goes is a matter of psychology. No banker or trader in their right mind is going to throw money at a clearly collapsing asset (which is what housing currently is.) You'd have to be borderline retarded to do so,

The bankers are in it for the money. They don't give a crap about what economists or central banks desire.

In fact, you can see it in the headlines. Wells Fargo now wants 25% down in California. Whether the Fed likes it or not, this is tightened credit for housing (which means they are balking at loaning money for a collapsing asset.)

In fact it is precisely this reason that no bubble in history has ever failed to collapse, inflation or no inflation, central banks be damned!

Now in order to "cushion" housing prices, the money would have to flow into wages because the borrowers need to make their monthly payment. Anybody who believes that wages will increase in the presence of China and India online also believes in the Tooth Fairy.

Even assuming the Tooth Fairy actually shows up to town, the wages would have to go up right now not 12-18 months later because the borrowers need to make their monthly nut now not 12-18 months later.

Theoretical economists don't worry about time lags. etc. Wave the wand and double the money supply. Yeah, OK.

In what time frame, sir? And what will the borrowers be doing while you're waving the wand?

Finally, we come to the coup de grâce. This is where micro trumps macro every single time.

The needs of an individual are clear. First air (which is free), then food and fuel (heating, getting to job.) Only after that do they need shelter, and clothing. Everything else may safely be classified as discretionary. (Note if you can't get to your job, you won't be making any money.)

Now, each household has a finite pot of money each month (and this pot will not be increasing as explained above.) If food and fuel costs increase, then the amount of money they can spend on the rest must go down. Since food and fuel are absolute necessities, there is less money left over for shelter. I leave it as any easy exercise to the reader to figure out what happens to home prices in that situation.

So while theoretically inflation solves the problem, it has absolutely no chance of doing so in practice. In fact, it is going to make house prices collapse faster i.e. it will actually have the perverse effect of doing the exact opposite of what is intended.

Put that in your pipes and smoke it, economists!