Currency Crisis Scenarios
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.
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.
Comments
Right now, assets are deflating, so I'm not too worried about hyperinflation for the time being.
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
Looking a little further out though, once (if) trust is restored, do you see the excess money thrown around by the Fed becoming a problem? They have, historically, not been quick enough at raising rates or sopping up excess capital, which as we all know fueled the dotcom and housing bubbles. I'm at least a little concerned we may see the same mistake again.
I don't think lending is going to just snap back very quickly. Look at how decimated the financial sector is - take away all the leverage that the I-banks and hedgies were running, a whole lot of capital, and add a bunch of gun shy bankers and regulator. You have a recipe for a long run of weak lending. Add to that a fear of falling asset values and no one wants to borrow either.
I can't get my head around how that flips over to hyperinflation - but we'll see. I'm sitting moslty in cash right now. If I believed in hyperinflation I would load up on debt and property.
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.
Well, I'm not much of a proponent of hyperinflation. I don't even know if I expect we'll see high inflation in any relevantly near term. But, if I were to make an argument it would have to be something along the build-or-die argument to how we ended up with too many new housing units even after the crash set in. I would call the corollary lend-or-die.
This would be the scenario where the Fed injects too much liquidity and banks know if they stop lending they're out of business. So...
Anyways, that's my entire argument for (outside of the already mentioned global fiat currency crisis).
The value of dollar denominated debt/credit is what is being destroyed, however -- the moneyness of credit has dried up with a panic to currency. Granted this is fiat currency and can be created at will and inflated, but we're down nearly $4T in the US mortgage market alone. The value of US equities is also down nearly $8T and that wealth-destruction has follow-on effects in reducing monetary velocity.
The one bit of debt/credit which has not been devalued is US treasuries, which will continue as long as it is viewed as the only safe haven.
$100bn is nothing. That is about 0.2% of global GDP and we're seeing a global flight to $USD. The problem right now is the relative scarcity of US treasuries compared to global demand.
I would be worried about two things. The first is that central banks are currently selling treasuries in order to try to defend their currencies. So far this doesn't amount to much, but if China's dynamics switches to being a net importer and their GDP craters, and China has to start selling treasuries in order to prop up their currency then that would be some cause for concern. I still don't know that even China's liquidation would ignite hyperinflationary forces given the current demand for $USD. I'm not sure that you can ignite hyperinflation in this country via monetary supply at this point.
The second thing to worry about is a massive fall in GDP and productivity in the US without a decline in salaries. Take 50% off GDP while holding government salaries constant and running massive deficits and you'd see hyperinflation for sure. That is basically post-apocalyptic, though. With any kind of reasonable long and deep recession, I don't see that happening.
The problem comes with the eventual recovery which will hit headwinds of inflationary bias, higher interest rates, more expensive resources. We're likely to be entering an era of much strong boom-and-bust cycles more like the late-1800s/early-1900s than the post-WWII period.