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Housing prices have been inflated to the level of a " bubble" by the Federal Reserve, which is always its main inflator. The Fed has kept interest rates at zero for almost a decade. And people could borrow money to buy a home, you know, at a two or three percent mortgage. This gave them a lot of purchasing power because the monthly payments were lower, so they could afford much higher prices, and prices went up.
But right now mortgage rates are still low, by historical standards, you know, six and a half percent or so. However, they are twice as high as they were before. And this means that real estate prices have become absolutely unaffordable, which is what is happening now. And one of the reasons we haven't seen a bigger price collapse yet is that many homeowners don't need to sell their homes .
Since they either have no mortgage or it is very low, they can make their payments. So there is not much pressure to force them to leave. But over time, you know, people have to sell houses, they move, they lose jobs. So houses will start appearing on the market. The problem is that very few buyers can afford to buy them unless the price drops, which it eventually will, because home prices are ultimately set by buyers .
Sellers may hope for a good price, but ultimately, if they really want to sell their property, someone has to buy it. So, the buyer must be able to afford it for the deal to happen. I think prices need to drop 30-50% from current levels to become affordable. I believe that the numbers have been showing a completely different picture than reality for some time now.
I think we have been in a state of creeping recession for years now. That's why Donald Trump became president, because the economy was very weak under Biden, and it's even weaker now under Trump. The situation has not improved. And housing is obviously part of that problem. Home ownership is extremely expensive right now, not only because mortgage rates have risen, but also because insurance costs, property taxes, utility bills, and maintenance costs have increased.
So, everything related to home ownership is now much more expensive than it used to be. And that puts pressure on existing owners, but obviously it makes owning your own home even less affordable for young people. In fact, Donald Trump, when asked about the housing affordability issue, stated that his main concern is preserving the paper wealth of current homeowners.
That its main goal is to ensure that real estate prices do not simply fall to the level of affordability, but continue to rise so that those who already own a home become richer. He says he doesn't care about young people who don't have their own homes, they just need to work harder so they can afford it.
I think the idea of a 50-year mortgage is just terrible. If it takes you 50 years to pay off your mortgage, then you shouldn't buy a house. Even 30 years is too long. But, you know, we've already done that with cars. Car loans used to be issued for two or three years. Now these are five-, six-, seven-year loans, which means people have negative equity on their cars, because cars become cheaper over the years, and the loan remains large.
But all these tricks: state guarantees for mortgages, the ability to deduct mortgages from income tax—all this is designed to make housing more expensive. The idea is that the government helps people afford housing, right? The government wants to step in and help people buy homes, so let's guarantee mortgages, let's allow them to be tax deductible, but that doesn't help people buy homes.
This helps people sell their homes. For young people trying to buy a home, the best thing the government can do is get out of the real estate market. Stop subsidizing mortgages, stop guaranteeing them, and let house prices fall significantly. This would be a good opportunity because now you would be able to buy a house and you would n't need government assistance because a house would become much cheaper.
I would be surprised if rates moved in either direction, but they should go up, and not just by a quarter of a percentage point. They should be several hundred basis points higher. So, let's look at the import and export prices that we have. Import prices increased, I think, by 1.6% or something, and export prices jumped very significantly.
Year-on-year, export prices increased by almost 12%. Import prices increased by about 6.7%. You might think: well, why should we care about export prices? We don't pay them. But this is a reflection of what is happening with prices in the US. If the goods we produce for export are 12% more expensive than a year ago, that means the cost of production in the US has increased by the same amount.
I think we have at least 5-6% inflation , maybe more, 7-8%, it 's hard to say, but inflation is much, much higher than the Fed's 2% target. This is not even close to 2%. They are so far behind schedule. And even if they raise rates, people are only talking about 25 basis points. I mean, what difference would that make?
This is nothing. Because inflation is much higher than the rate. And a lot of people don't understand, you know, where inflation comes from. And that's why, you know, Trump can exploit this ignorance by blaming Biden for all the inflation. And that does n't mean I'm saying Biden shouldn't bear some of the blame.
But Biden inherited a lot of inflation from Trump. Trump points out that the CPI was very low when he was president, which is true. But the CPI works with a delay. First you create inflation, and then it affects prices. And this takes time. And the reason we had a big price spike in 2021 and 2022 was the huge deficits we had under Trump in 2020.
And all the money the Fed printed in 2020 before Biden took office. And actually, if you look at those CPI numbers in the last four or five months of Trump's term, they really started to go up, and they continued to go up sharply during the first months of Biden, even before any of Biden's policies were passed by Congress.
The policies Trump has pursued since he took office for the second time are more inflationary than those he pursued during the first three years of his first term. No more inflationary than the last COVID year, as the big " beautiful" bill kept all the increased spending under Biden and even added to it.
So, the deficit is growing rapidly. In fact, if you look at the numbers on an annual basis, the budget deficit has increased by about 34% compared to last year. We currently have a deficit of three and a half trillion dollars a year. I mean, it could be closer to 4 trillion. We currently spend 1.6 trillion a year on interest alone.
This was the overall federal budget back in 1997. Now it's just percentages. This is 30% of tax revenues. Of course, the government pays part of this interest to itself. He pays them to the Social Security Fund, and part of it to the Federal Reserve System. But it's still a payment. And even if you add it all up, I think it's still about $1.3 trillion in interest paid to the private sector or foreign governments that own U.S.
Treasury bonds. Therefore , interest costs are rising rapidly. Interest rates are set to skyrocket. And the only thing that will stop them from doing so is for the Fed to print a huge amount of money, which will cause significant inflation, and that is what I ultimately expect from Kevin Warsh, despite his previous criticism of quantitative easing.
Under Varsha, quantitative easing is likely to be greater than under any previous Fed chairman. The world knows this. I mean, the Republican Party is not the party of fiscal responsibility. Of course, neither does the Democratic Party. Both parties want big government, and both want to pay for it with debt and inflation.
That's why, you know, Republicans want to take credit. No tip taxes, no overtime taxes, no social security taxes. Yes, but the price we pay for this is higher prices because we haven't cut government spending to cover these tax breaks. We just lowered taxes. And so yes, you will pay less taxes, but you will pay higher prices.
So you'll have a little more money in your paycheck, but you'll need a lot more money to buy things. So, in the end, waiters and waitresses are left at a loss. They don't pay taxes on their tips, but they can't buy much with those tips because prices have risen due to inflation created for their tax cut.
That's why Thomas Massie voted against that big, beautiful bill, because he was probably the only Republican in Congress who had the courage to oppose a fake tax cut that was actually a tax increase. That big beautiful bill was a tax increase , because what did it do? He made government bigger and more expensive.
And we have to pay for it . So the way to find out if your taxes are going up is to look at government spending. Government spending is rising, you are paying more. No matter what these politicians say about your income tax, your inflation tax will cover it all. That's where inflation comes from. So when they talk about a big increase in the cost of living, it's actually the cost of government going up.
The cost of living is decreasing. Capitalism takes care of that. This government is becoming more expensive. And we are forced to pay for government operations every time we buy something because the government keeps printing money to cover expenses that it does n't have the courage to raise taxes for, because they want to pretend they're giving us a tax break.
So they print money. Look at the war. I mean, we spent over a hundred billion dollars on this war. Where did this money come from? They didn't raise taxes on anyone. No. But we still have to pay for the war. We will pay for this with higher prices. Everyone would now pay at least 50% more in taxes. And of course, we would have a crisis, would n't we?
Everyone would understand that. There is n't enough money left in my salary. I can't buy groceries. I can't pay the rent. The government took too much of my money. Well , that's exactly what's happening now. The government took your purchasing power instead of your money. The reason why food, rent, energy, and everything else are so expensive is because the government created all this inflation to pay for all that increased government spending.
Watch for questions at the press conference. No one will ask him about the massive increase in the money supply, the huge increase in the US national debt , the size of the Fed's balance sheet, the fact that it is growing, and the fact that the Fed is keeping rates too low when they should be much higher.
I mean, how can they talk about 2% inflation as their target when we've been above that level for almost six years? And they try to argue that inflation expectations are firmly anchored at 2% . No, that's not true. Look at the level of consumer confidence and all the numbers. Consumers expect inflation to be 4-5% over the next 10 years.
So how can they say that expectations are fixed at 2% ? I mean, the rate hasn't been at 2% for at least the last 5 years. And I think consumers are wrong because inflation will be higher than they think. They are closer to the truth than the Fed, but they still underestimate how bad it will actually be.
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