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There are a lot of economist that hope you are right. The big fear now is an inflationary spiral. The fact is, while there are big problems in the US, there are even bigger problems elsewhere. Relatively speaking, the USD is in much better shape than other currencies.

The best thing the government can do to beat deflation is to print and spend money. People that get hung up on the national debt forget is that the government can print money. China wants to call in their bonds you say? No problem! Fire up the printing presses.

Let me reverse Brother Phantom's statement--The economists worst nightmare is a DEflationary spiral. Inflation can be horrifying most especially to those on un-indexed fixed incomes, but deflation is deadly--it stops consumer and most other spending dead in its tracks. Let me ask you--would you buy something for $5 this week if you could get it for $4.50 next week? Or $4 the week after that? And never knowing when the bottom had been reached? Unless it was dire necessity, of course not. And that in return stops production, employment, spending by consumers and business, and all other sectors of the economy. Inflation takes years to overcome; deflation takes decades. In personal terms everyone wants cheaper prices; in macroeconomic terms, it's disastrous.

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"A man accustomed to hear only the echo of his own sentiments, soon bars all the common avenues of delight, and has no part in the general gratification of mankind"--Dr. Johnson
"Amen, brother"-ED

JazzboCR on the mark on this. Uncontrolled deflation ultimately leads to depression. The U.S. economy has had only ONE experience with something like that and that occured during the Great Depression. The seriousness by which the FEDS have finally now taken this was evident yesterday with the Fed Funds rate target taken down to 0% and the FED announcing that it is going to throw everything INCLUDING the kitchen sink to reflate the economy. My home equity loan which is tied to PRIME I think just dropped to 2.25% and I suspect 30 year fixed rate loans will be below 5% and well into the 4%'s before long. Ultimately..Housing has to be the leader out of this downtown and already we're starting to see small..and I emphasize small signs that housing may be bottoming in 2009. If 30 year mortage rates do get down to 4% or 4.50% that will ultimatelylikely be a once in a lifetime opportunity.

Actually, the US economy has experienced several deflationary episodes, but they occurred in the 1800s except for the Great Depression. I am convinced that no matter how low the Fed lowers interest rates (they are essentially at 0% now) it won't change the situation regarding the housing crash. Adjustable rate resets are just now kicking in and you can expect another giant lump of foreclosures. Housing prices still have a ways to go down to reach the point where the price to median income ratio is reasonable. With rising layoffs and falling wages, I doubt we'll see a turnaround in 2009. There is a lot more to the situation than that, of course, but the economists who were correct in the first place expect to see an L shaped downturn where the 'recovery' is a long ways off.

I hope I am wrong but I read a lot on this subject and nothing I have read leads me to believe we will see a turnaround soon in the real economy (read: not Wall Street). I hope I am wrong, but as someone said, hope is not a plan.

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"The only normal people are those you don't know very well." Joe Ancis

The last line in Brother Srilm's post points bluntly to a fact that I made obliquely in another post/thread: That tax policy isn't just to raise revenue but to set official social policy. Absent the mortgage interest deduction, housing even at the height of the recent frenzy would have been worth a third less. Why on earth were Home Equity Loans deemed tax-deductible transactions? To rephrase Brother Srilm (though his words don't need it)--This whole home-ownership-as THE-American Dream has seriously skewed investing values for at least 70 years (FannieMae was set up in '38) and I'm still not reading anywhere that this equation needs re-examination--homeowning = true American or that the mortgage interest deduction shouldn't be sacrosanct.
P.S. I don't have the foggiest where that emoticon came from or how to get rid of it--I meant '38

_________________
"A man accustomed to hear only the echo of his own sentiments, soon bars all the common avenues of delight, and has no part in the general gratification of mankind"--Dr. Johnson
"Amen, brother"-ED

All depends on what you bought, when. My house is paid off in two years and it cost a small portion of what it is currently worth, even in today's market. I had to pay for housing all those years anyway and my monthly cost was virtually frozen with my fixed rate mortgage. Renting would have cost the same as buying after the first few years as inflation raised the price of housing except that renting has no return and the tax break has been very nice.

I agree that buying at the top of an inflated market is not wise.

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"Your love gives me such a thrill
but your love don't pay my bills,
I NEED THE MONEY!" - John Lee Hooker

Disclaimer: The above is merely the opinion of the author unless specific scientific data is included.
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It is serious and I am starting to get scared as chit. The last couple rate cuts didn't really do anything too positive to the stock market and not too much to lending interest rates either. Banks are scare and keeping rates artificially high to hedge against any more losses. Then this final cut to almost zero did send stocks up 360 but back down already 100 today. Not big moves esp. compared to -777s and -687s back to back etc. but the sense to me in my simpleton mind anyways is that they have done everything they can with the interest rates and yes we are in a dangerous deflationary spiral.

I don't know, I don't know. Totally agree if the RE was bought at the peak or anywhere above what it cost to run it without a loss. I did some quick calculations last night on my 1 rental property and if it was completely paid off I would be making 9% clear and safe, 6.5%-7% after taxes. That beats any CD and lately most stocks plus it is very stable. Now you need a good renter who themselves doesn't default but it can happen ok. Unfortunately many models esp. those after 2001/2002 still just don't work and are only negative cash flows. One time RE could actually be purchased and positive cash flow from day 1. Even though I bought in 2000 just now having an even cash flow. Was always slightly negative before tax deducts. plus pay a prop. mgmt. fee since a few hours from my house. Traditional RE investments are very long term.

I thought of trying to sell my property right before the stock market crash before it further deflated but now so long as my 4 yr. renter stays in I keep getting a 2% bump in rent every yr. and more and more princ. paid off. Just starting to make a little money now when I could very well need if I lose my job. I will not raise his rent much but a little to pay for increased insuranace, HOAs fees etc.

Got a client in town who is an investment banker in London.... Interesting talking to him, but seems like nobody really knows what is going on..

Brother Thirdworld just uttered the most chilling words of all--"...nobody knows what's going on..." All systems especially these global ultra-complex interrelationships depend on a bedrock of stability and certainty, and all that seems to have evaporated. That's why there's an almost total freeze on credit--nobody knows with any certainty who's future-trustworthy and who is a house of cards built on shifting sands. Everybody is suspect--that most certainly includes governments and sovereign wealth funds. Madoff's Ponzi scheme is only the biggest SO FAR., although he did scam some pretty sophisticated investors. Funny world we live in when a scam like Dreier's with the fake promissory notes at $380Million only rates a footnote.

_________________
"A man accustomed to hear only the echo of his own sentiments, soon bars all the common avenues of delight, and has no part in the general gratification of mankind"--Dr. Johnson
"Amen, brother"-ED