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Capital Markets

Bond Outlook December 21st

Mortgage equity withdrawal ("MEW"), the source of spending by US households despite stagnant earnings, is nearly over. Consider the implications: could savings turn positive? Will the Fed fear curve inversion?

Bond Outlook [by bridport & cie, December 21st 2005]

What happens when the "mewing" stops? (MEW = mortgage equity withdrawal). Stop it must as house values top out in the USA. In fact, it may have already stopped: mortgaging is as active as ever, but for purchasing, not taking out new loans on existing property. Thus the housing bubble in the USA is deflating in two steps: first, the source of extra borrowing by mewing is ceasing, second, the attraction of secondary residences and houses to let will fade. House prices and rents will move back into a more normal relationship, probably by house values declining.


The much vaunted superiority of the US economic system in achieving faster expansion than Europe is being subjected to a reality check, and not just in our Weekly. The Bill Bonner book, "Empire of Debt", spells out bluntly everything we have been saying here for about four years, but especially that real household incomes in the USA have scarcely changed since the turn of the millennium and that ever increasing consumer and government spending is based on debt, not earnings and invested savings.

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