Currency Crisis Scenarios

[bigs]

So I've followed this blog for over 2 years but here is my first post. We sold our house in Feb of 2007. My big concern is the risk of hyper-inflation/currency crisis due to the current actions being taken. I think most things are over priced, but would like to have some sort of ceiling on a housing purchase price.

I thought of doing a lease with buy option. What are peoples thoughts on this. Of course having a fixed mortgage in that scenario is the best case, I'm just trying to figure out the best angle to approach this and thought this forum might make an interesting discussion space.

[rose-colored-coolaid]

I might be wrong here, but I feel like hyperinflation will be presaged by high inflation. We should start to get some kind of clue in advance, which would be a sign to buy a house or move your money to harder assets. Once you're in a house, hyperinflation is a boon as it would make your monthly payments tiny compared to your now oversized income.

Right now, assets are deflating, so I'm not too worried about hyperinflation for the time being.

[Markor]

I agree with rcc. I'm betting there will be a sweet spot at which house prices are close to rational and severe inflation has yet to happen. Of course you'll need wages to keep up with inflation! I would not do a lease-to-buy, which locks in today's excessive price. We're still at 2006 price levels in Seattle, even though the economy is a lot worse than it was in 2004, when house prices were ~25% less. I think the dam will break in the next year; for a seller, it's one thing to see that comparable houses with price x have been on the market for 6 months, and another to see that they have been on the market for 18 months.

[deejayoh]

I don't personally believe we will face hyperinflation , for two reasons:

1) despite everything that has happened, the Dollar is actually in reasonably good shape compared to other international currencies/economies. The fear that drove it down in the last year has reversed - as I thought it would and the dollar has come back against other currencies - so I don't think the dollar collapses unless you are predicting a global fiat currency meltdown
2) Even though we have dramatically increased the money supply through government lending in the last few months, this only marginally counteracts the impact of credit contraction on the money supply. If the depression was caused - as many contend - by the rapid contraction of the money supply, what you see now is the government pulling out all stops to prevent a repeat of this. I don't think it is enough and we are still looking at deflationary pressure

[rose-colored-coolaid]

[perfectfire]

I have been wondering about the rationale behind the "deflation for a while then high inflation" thesis. I think I have an idea of why this might happen, but maybe others can enlighten me. Also, how long would it be before deflation has run it's course?

[deejayoh]

[Wanderer]

As they say... in a credit crisis its not the assets that you want to sell that matter; it's the ones you have to sell. Less money floating around and asset prices decreasing sounds like deflation. The problem is that Ben Bernanke won't let that happen if he can help it. He is a big student of the Great Depression and knows that deflation is much more disruptive than inflation. That's how he got the nickname Helicopter Ben... he said he would throw money from helicopters before he allows deflation to set in. Now, that is a little drastic, but don't doubt for a second that he would push for 100s of billions of $$ in "fiscal stimulus" to affect the same thing. The odd thing is just that the world recently came to the conclusion that lending money to the US is the least crappy option. This has kept inflation and all rates pretty low.

I generally agree that things should change slow enough toward inflation that there will be time to act (buy a house) before it gets too bad. But who would have guessed that that dollar would strengthen as quickly as it did? I have faith in only a couple things with this crisis:
1) Even with the best of intentions by some really smart people, no one knows all of the unintended consequences of these amazingly quick actions on a global level. There are too many large moving parts for any one person to claim they know exactly what is going to happen.
2) Even so, our leaders feel they have to react at every turn. Trying to predict their over-reaction to every unintended consequence is impossible... even for them.
3) If there is hyper inflation, higher mortgage rates means less money left for principal. Housing prices will get even more downward pressure since fewer people will be able to afford them.
4) I would rather make a mistake of having too much cash in my pocket than the potentially larger mistake of tying it up in a depreciating asset.

For these reasons, I would not enter into a lease to own deal.
But, hey... I know even less than the brilliant guys who got us into this mess.

[rose-colored-coolaid]

[lamont]