Where are we in the financial crisis?

The typical crisis will see debt deflation. The question is whether the debt deflation in the US is over. The market's focus on housing activity is based on the desire to predict the turn in the debt deflation within the housing market. The turn will come in two forms, an increase in sales activity and an outright increase in prices. The turn is sales means that consumers are willing to make a major investment and lock in a mortgage. That tell us that the level of optimism about the economy is increasing. bu that does not create wealth.

Wealth creation has to come from an increase in the value of assets. Home prices have to increase to gain a wealth effect. We are seeing some stabilization but there is not real increase in prices. so there is no wealth effect. In fact, there are still increases in foreclosures which increases the supply of homes. The turnover from this increase in supply has increased which shows up in sales but there is still wealth destruction if the price that clears the market is below the purchase price. Credit expansion actually decreases because there is write down of the old loan at the higher value and a new loan at the lower price. The net impact shows a lower expansion of credit but not from a consolidation but from wealth destruction.

We are still in deflation. This is worse than the case of asset inflation in say commodities because more of consumer wealth is tied to homes. Asset inflation in commodities will increase costs for consumers while asset deflation in homes destroys wealth. This is a poor combination. This combination is happening while interest rates are near zero which means that creditors are not receiving any interest rate cash flows to generate income. One pundit noted that at current T-bill rates it will take over 6000 years to double your money.