Home Sales Down Despite Tax Credits

Recent Yahoo Finance article shows home sales are down despite the tax credits that were offered to home buyers.

http://finance.yahoo.com/news/May-home-sales-dip-as-housing-apf-1632613040.html?x=0&sec=topStories&pos=2&asset=&ccode=

This is another example of how government programs that are designed to create false demand fail. Why does the government run this desperate program?

Uncle Sam wants YOU to buy a house! And an expensive one! Seriously. That is the only game in town. Let me explain why.

When we borrow money, banks create brand new money. They do not lend existing money. Here is how banks create money:

http://www.tradingstocks.net/html/banks_create_money.html

This is called credit inflation. FED has been inflating credit for the last 50 years faster than GDP growth. This extra money in the economy makes it easier to earn it. People feel good. They forget that entire money supply is borrowed bank credit that needs to be paid back someday with interest!

This flood of money makes the current administration look good. Remember all the talk about "Affordable Housing"? And right after the government promised American dream come true, they made mortgage easy, and propelled the home prices. That is not really affordable housing. Now finally the home prices are coming down, and instead of celebrating that home prices are affordable they are trying to propel them up again. This is because uncle sam wants you to borrow money so that banks create money! As simple as that. The more you borrow, the better it is. This is the only tool that the government has to make it look like they are doing good. Here is how the government uses home prices and easy mortgage to inflate the money supply:

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

Expensive is NOT good. Stocks should be cheap. Why would you want to own something that does not pay a dividend? Homes should be cheap. Why would you want an expensive house? Until these things get cheap, we are NOT going to be wealthy. If people are not able to afford a home, then higher prices are not good.

Anyway, now you get the idea. This is why government subsidizes mortgages with interest deduction from income. That is a direct wealth transfer from renters / owners to the banks and makes it more attractive to buy expensive homes so that people borrow big, banks create money and inject it into the economy. That is why cash for clunkers. So that you borrow and buy a car. That is why 8K first time home buyer credit. Sounds like a good plan, right? Well, there is a limit to how much people can borrow. When the entire population reaches it's natural limit, the bust arrives and the same process reverses itself, and it is called deflation:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html