The Embers of Inflation

posted on June 6th, 2008 filed under: Real Estate News

AP reports that a couple in Massachusetts caused a fire in their apartment complex when they hoarded plastic containers of gasoline in a closet.  They had nine containers of five gallons each, in a closet where an air-conditioning unit was also located.  (Not that it would have been o.k. if the a/c hadn’t been there.)

Too bad they didn’t read the New York Times story with the headline: Fire Department Warns Against Hoarding ‘Gas’.  Or maybe they did and can’t remember.  After all, the story ran on November 11.

November 11, 1973, that is.

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Thunder and Lightning

posted on June 2nd, 2008 filed under: Real Estate News

What happens when negative real interest rates encounter overindebtedness?  Seems we’re in the midst of that very storm.

Negative real interest rates are inflationary.  People chase goods and services when it’s cheaper to buy now with borrowed money than to buy later when prices have risen.  The incentive to buy creates demand and drives prices up.  As you can see on the chart below, we spent a lot of time below the zero line on real interest rates back in the inflation-heavy ’70s.  Real rates turned mostly positive in the ’80s and ’90s.  For the ’00s, however, we’ve hit the skids again, hanging out at the cheap-money saloon.

RealInterestRates.1970-2008

Overindebtedness, by contrast, is eventually deflationary.  There’s only so much debt a person — or a people — can carry.  The housing sector, for example, boomed as rates fell and lending standards disappeared.  But when there was no way to cram any more debt onto buyers’ balance sheets, borrowing receded and prices followed.  This process has implications for the broader economy, where we’ve piled one debt binge upon another, far outpacing the growth of our economic output (see chart below).  When the limit is reached, it will seem like just another day.  But it won’t be.

DomNonfinDebtToNomGDP

Of course, these are two vastly different scenarios.  If high inflation lies ahead, then real assets are important.  Even real estate will look good again; home prices rose during the inflationary 1970s.  And debt will be desirable, as it becomes easier to repay with depreciating currency and inflated wages and assets.

In deflation, nothing beats cash safely held.  Except perhaps a job.  And nothing is more evil than debt, which is harder to repay in the face of lost jobs, tight wages and falling asset values.

If the thunder don’t getcha then the lightnin’ will.

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All Betters Now

posted on June 1st, 2008 filed under: Real Estate News

We live in interesting times.  Sharply negative real interest rates versus massive indebtedness.  A highly unpopular second-term Republican President versus a Democratic party in disarray and potentially headed for a convention-floor meltdown.  A resilient stock market versus record declines in home values.  Stare decisis versus the new majority on the Supreme Court.  Deflation from globalization versus inflation from basic commodities.   Aging populations versus tax cuts.  Emerging economies versus carbon caps.  The Man versus the internet.

Care to bet on how these forces play out?  Oh wait, I forgot.  Whoever you are, your bet is made.  The only question is where you’ve placed your chips.

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