VIRTUOUS CYCLES AND VICIOUS CYCLES-WARNING: THIS IS NOT A POST ABOUT MOTORCYCLES. BUT IF IT WERE, THE AUTHOR WOULD ELECT TO RIDE THE VICIOUS CYCLE.

One of the Author’s favorite sites is “Calculated Risk”. It is an economics site that focuses on mortgage lending and finance. An article from September 18th discusses two types of cycles, virtuous and vicious. Below is a high-falutin’ economic and academic description. But in basic terms these cycles are series of events that have good or bad outcomes. The mechanisms are usually self-reinforcing, so they generally continue and amplify until something big derails them.

From Wikipedia:

In many parts of economics there is an assumption that a complex system of determinants will tend to lead to a state of equilibrium. When this tendency is absent terms like virtuous circle and vicious circle (or virtuous cycle and vicious cycle) to describe these unstable patterns of events are used. Both circles are complexes of events with no tendency towards equilibrium (at least in the short run). Both systems of events have feedback loops in which each iteration of the cycle reinforces the first (positive feedback). The difference between the two is that a virtuous cycle has favorable results and a vicious cycle has deleterious results. These cycles will continue in the direction of their momentum until an exogenous factor intervenes and stops the cycle. The prefix “hyper” is sometimes used to describe these cycles. The most well known vicious circle is hyperinflation.

Calculated Risk describes these cycles relative to interest rates and the housing price cycles. Basically, the “Virtuous Housing Cycle” is over. We may have started into a “Vicious Housing Cycle”.

Below are the cycles with text descriptions and graphics, as modeled by Calculated Risk.

FUNNY THINGS ABOUT CYCLES. THE FASTER THEY GO, THE MORE DIFFICULT THEY ARE TO KNOCK OFF THEIR PATH

Several physical forces are at work while a motorcycle is rolling. But it is the gyroscopic force that keeps the cycle upright as it moves. And the faster a cycle goes, the stronger the gyroscopic force that keeps the bikes upright.

Physical forces do not often have perfect economic analogues. But comparisons and metaphors are helpful. And if the economy moves into the “Vicious Cycle”, it might take a mighty poke to knock it out of the cycle.

NOT ALL CYCLES ARE VIRTUOUS, EVEN IN THE DESERT OF THE REAL!

VICIOUS CYCLE

From Calculated Risk

As housing cools down (prices do not need to collapse), mortgage equity withdrawal declines. Then less MEW leads to a slow down in GDP growth and lower imports.

Lower imports might lead to a lower trade deficit, depending on the strength of exports. This could lead to less foreign CB investment in dollar denominated assets. And this could lead to higher interest rates followed by even lower housing prices and the cycle repeats.

The result: a Vicious Cycle with lower housing prices, less consumption leading to higher interest rates.

VIRTUOUS CYCLE

FROM "CALCULATED RISK"

Starting from the top (during the housing boom): Lower interest rates led to an increase in housing prices. And those higher housing prices led to ever increasing mortgage equity withdrawal (MEW) by homeowners.

A large percentage of this equity withdrawal flowed to consumption, increasing both GDP and imports during the boom years. There is a strong correlation between the trade deficit and mortgage equity withdrawal, and although correlation doesn't imply causation, it appears mortgage equity withdrawal was a meaningful contributor to the widening trade and current account deficits during the housing boom.

To finance the current account deficit, foreign Central Banks (CBs) invested heavily in dollar denominated securities. Some analysts have suggested that these investments lowered interest rates by between 40 bps and 200 bps (Roubini and Setser: "Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006")

If these analysts are correct, and foreign CB intervention lowered treasury yields, then this also lowered mortgage interest rates ... and the cycle repeated. The result: a Virtuous Cycle with higher housing prices, more consumption and lower interest rates.

FEDERAL RESERVE BOARD GIVES-RISING MORTGAGE FORECLOSURES TAKE AWAY

In a move that many did not see coming, the Federal Reserve cut the Fed Funds rate (the interest rate that member bans charge each other for overnight loans) by 50 basis points, from 5.25% to 4.75%. Most Fed watchers expected a .25% drop, with a .5% pairing possible.

Said CNNMoney.com:

Stocks surged following the announcement, with the Dow finishing the day up more than 330 points, or 2.5 percent. The Nasdaq shot up 2.7 percent while the S&P 500 closed nearly 3 percent higher. Bonds fell, sending the yield on the benchmark 10-year U.S. Treasury up to 4.5 percent. (Bond prices and yields move in opposite directions.)

Most Fed watcher agree that more cuts will follow.

MORE MORTGAGORS HIT THE BRICKS

At the same time, MSNBC reports in “U.S. home foreclosures soared in August-New data suggest homeowners can’t make mortgage payments” that:

LOS ANGELES - The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2006 and jumped 36 percent from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes amid a national housing slump.

A total of 243,947 foreclosure filings were reported in August, up 115 percent from 113,300 in the same month a year ago, Irvine, Calif.-based RealtyTrac Inc. said Tuesday.

There were 179,599 foreclosure filings reported in July.

EVERY MESSAGE IS A MIXED MESSAGE IN THE DESERT OF THE REAL!

A SQUID AS KID? A BASKET CASE AT FORTY-EIGHT?

A recent Op-ed piece in the New York Times, “This is Your (Fathers) Brain On Drugs”, challenges the conventional wisdom that it is irresponsible youths that man the ranks of reckless deviants. Mike Males, a researcher with the Center on Juvenile and Criminal Justice, makes the argument that it is the parents that are the immature idiots.

Commentators brand teenagers as stupid, crazy, reckless, immature, irrational and even alien, then advocate tough curbs on youthful freedoms. Jay Giedd, who heads the brain imaging project at the National Institutes of Health, argues that the voting and drinking ages should be raised to 25. Deborah Yurgelun-Todd, a psychiatrist at Harvard Medical School, asks whether we should allow teenagers to be lifeguards or to enlist in the military. And state legislators around the country have proposed raising driving ages.

But the handful of experts and officials making these claims are themselves guilty of reckless overstatement. More responsible brain researchers — like Daniel Siegel of the University of California at Los Angeles and Kurt Fischer at Harvard’s Mind, Brain and Education Program — caution that scientists are just beginning to identify how systems in the brain work.

People naturally want to use brain science to inform policy and practice, but our limited knowledge of the brain places extreme limits on that effort,” Dr. Siegel told me. “There can be no ‘brain-based education’ or ‘brain-based parenting’ at this early point in the history of neuroscience.”

Why, then, do many pundits and policy makers rush to denigrate adolescents as brainless? One troubling possibility: youths are being maligned to draw attention from the reality that it’s actually middle-aged adults — the parents — whose behavior has worsened.

BOOZE BAGS, BAR SKAGS, PRISON WAGS

The numbers do not look good for the newly-middle aged, people between 35 and 54.

• 18,249 deaths from overdoses of illicit drugs in 2004, up 550 percent per capita since 1975, according to data from the National Center for Health Statistics.
• 46,925 fatal accidents and suicides in 2004, leaving today’s middle-agers 30 percent more at risk for such deaths than people aged 15 to 19, according to the national center.
• More than four million arrests in 2005, including one million for violent crimes, 500,000 for drugs and 650,000 for drinking-related offenses, according to the F.B.I. All told, this represented a 200 percent leap per capita in major index felonies since 1975.
• 630,000 middle-agers in prison in 2005, up 600 percent since 1977, according to the Bureau of Justice Statistics.
• 21 million binge drinkers (those downing five or more drinks on one occasion in the previous month), double the number among teenagers and college students combined, according to the government’s National Household Survey on Drug Use and Health.
• 370,000 people treated in hospital emergency rooms for abusing illegal drugs in 2005, with overdose rates for heroin, cocaine, pharmaceuticals and drugs mixed with alcohol far higher than among teenagers.
• More than half of all new H.I.V./AIDS diagnoses in 2005 were given to middle-aged Americans, up from less than one-third a decade ago, according to the Centers for Disease Control.

KIDS WILL BE KIDS. ADULTS HAVE TO WORK AT DISSOLUTION

What experts label “adolescent risk taking” is really baby boomer risk taking. It’s true that 30 years ago, the riskiest age group for violent death was 15 to 24. But those same boomers continue to suffer high rates of addiction and other ills throughout middle age, while later generations of teenagers are better behaved.

Today, the age group most at risk for violent death is 40 to 49, including illegal-drug death rates five times higher than for teenagers.
What to take away from this? Most adolescent idiots grow up to be functional adults. Disfunctional adults stagger on in a twilight of adolescent imbecility and a haze of booze and drugs. Fat, drunk and stupid is apparently a common way to go through life.

WE SAY WHEN IT’S OVER IN THE DESERT OF THE REAL!

HYPERTOUR

HYPERTOUR: THE WAIT IS OVER

Hypertour, the road event that brought the new Ducati Hypermotard to 12 different Italian piazzas this summer, offers everyone the opportunity to see and experience the excitement brought by the latest product from Ducati. Given the success of the summer schedule, Ducati has decided to continue the tour with new stops abroad.

Hypertour is bringing the Hypermotard to your city
This autumn, Ducati will tour European cities to give people the chance to experience the Hypermotard in first person. Every stop offers many activities for the whole family, some of which include:

• Test ride the new Hypermotard, Multistrada 1100, Sport Classic GT1000 and the Monster S2R and S4R
• Ducati Desmo Lady School: driving school for women with the Monster 695
• Biker kid area: a fun, educational area with Peg Perego Monsters
• Exhibition of different Ducatis
• Information on all Ducati activities

New international dates:

• Vienna (Austria): September 15th-16th at the Bad Fischau Motorsport-Park, close to Wiener Neustadt
• Barcelona (Spain): October 20th-21st
• Valencia (Spain): October 27th-28th

For more information, call 0039-039-2242661 from Monday to Friday from 9:30 a.m. to 12:30 p.m. and from 2:30 p.m. to 5:30 p.m.