Last night’s US economic statistics make you understand why the Chinese are so mad with the Americans.

The Americans’ $600 billion QE2 money printing exercise is like pumping huge quantities of water down a blocked pipe without first removing the blockage. Some water gets around the blockage but the majority floods the surrounding landscape.

The blockage in the pipe is the US housing crisis which is linked to the fact that about a quarter of US home loans have negative equity and there are about 4 to 5 million homes in the so-called ‘shadow inventory’, where loans have been foreclosed or are about to be foreclosed.

The foreclosure process has been stalled because of poor administration of the documents involved, which in turn is building up the foreclosure pressure on the market and pushing down house prices further — in other words, making the blockage worse.

Last night’s statistics were exactly what I and many others have been expecting — housing starts slump (who wants to build a house when pre-owned houses sell at a fraction of the cost?) and negative-equity scared consumers won’t spend unless prices are cut, so inflation is low, and so it goes.

The remedy (removing the blockage) involves first getting the foreclosure process back on track, and that is starting, but given the US legal system it will drag on. Secondly the banks are scared stiff of the housing market and while their housing loans are at low interest rates, the bank equity requirements are so high that most people can’t meet them — so house prices keep falling because buyers can’t raise the cash to buy.

To fix the problem you have to have something like a home buyer’s grant or some other mechanism to get Americans to borrow money to buy houses and lift prices, which will return equity to consumer balance sheets and kindle consumer confidence — that is, remove the blockage.

But the powerful bankers on Wall Street do not like that idea, so instead the Americans began printing money. And because the housing blockage remains, the ability of that enormous money printing exercise to turn the US around is stunted, although some money will get through the blockage and accelerate growth.

But most of the money is flooding into the surrounding landscape with big impacts on speculative markets around the world. Chinese inflation, which was already on the rise, is likely to accelerate. So the Chinese are taking action and screaming from the roof tops to anyone who will listen how risky the whole situation has become. If China oversteps the market, it will tip itself into a correction which will boost unemployment.

None of these dire events have happened, but from time to time fears of them taking place along with the fragile situation in Europe will lead to global share market corrections like we saw yesterday.

Peter Fray

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