Friday, November 04, 2005

Michael Darda vs. the Truth

One of the most laughable claims this year came in today's NRO-column by Michael Darda who claimed that:

"the ratio of average home prices to personal incomes is not out of whack with historical norms. In fact, despite rising off the lows of the 1990s, the ratio remains below historical averages."

Huh? In the last Flow of Funds report for the second quarter the ratio of housing values to disposable income was a record 204% ($18433.1 billion/$9017.8 billion) , compared to the 1980-1999 average of 143%.

Needless to say, his column contains numerous other errors too.

Like when he tries to claim that personal income growth was 6.3%. This is true if you refer to nominal gross personal income, but a more relevant measure is real disposable personal income. And because of the surge in tax revenues that NRO is so happy about, nominal disposable income rose only 5.3% and because of the 3.8% increase in the PCE deflator (For the sake of the argument it is accepted as a accurate price gauge), real disposable income rose only 1.5%. That he "forgets" to adjust income growth for inflation is pretty remarkable given the fact that just two paragraphs later he himself emphasize the need to adjust for inflation.

He then tries to reassure us by saying that household financial assets have risen too. But financial asset prices are just as prone (if not more) to decline as real estate prices, as the decline in financial asset values between 2000 and 2002 illustrated very clearly, so this is hardly reassuring.

He then tries to tell us that gross private savings have risen slightly since 2000. Which is true but this reflects collapsing government finances. The total national savings (whether gross or net) rate have for the last few years been at their lowest level since the Great Depression (In fact because of Katrina, net national savings was negative during the third quarter )

Finally, he claims that "total outstanding credit-market debt is off the 1990 peak with respect to total assets". Assuming he refers to the "Credit market instruments" line in the Household balance sheet in the Flow of Funds report, this is simply not true. In 1990the ratio of "Credit market instruments" to Total Assets was 15.0% (3593/23940). In the second quarter of 2005, this ratio was 17.5% (10694.3/60976.3).


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