inflation vs bursting RE bubble
hi
im not well grounded in economic theroy, and maybe someone will care to help me out with this.
it occurs to me that while investing a 20% downpayment and renting for a while would be a smart move if the local RE bubble pops and prices drop.
but if the Fed cares less about inflation and more about preventing a very painful market correction, then not buying could be a bad move. what i mean is that inflation will reduce the buying power of my invested downpayment, and inflation will drive up wages and the costs of goods and services, so that the overall economy catches up with the currently overinflated house prices.
It would seem economically sensible to take an uncomforatable correction, but politically sensible to avoid such a correction. Since the Fed is political, it seems inflation is more likely.
Am I missing something?
im not well grounded in economic theroy, and maybe someone will care to help me out with this.
it occurs to me that while investing a 20% downpayment and renting for a while would be a smart move if the local RE bubble pops and prices drop.
but if the Fed cares less about inflation and more about preventing a very painful market correction, then not buying could be a bad move. what i mean is that inflation will reduce the buying power of my invested downpayment, and inflation will drive up wages and the costs of goods and services, so that the overall economy catches up with the currently overinflated house prices.
It would seem economically sensible to take an uncomforatable correction, but politically sensible to avoid such a correction. Since the Fed is political, it seems inflation is more likely.
Am I missing something?
Comments
I tend to fall more on the deflationist side of this argument. I believe that the government's ability to "print" money is limited (without immediate disastrous consequences) and that deflation will be the order of the day, at least in the short term. What the government, and central banks, are very good at (and willing to do) is to boost credit and debt through low interest rates. This has worked for quite some time, and caused a great deal of asset inflation (e.g. commodities, real-estate, etc). However, debt-induced bubbles always implode at some point, when credit contracts.
Japan's experience with deflation in the 1990's is a case in point. The Japanese central bank dropped interest rates BELOW zero and they still couldn't jump start the economy, or prevent the collapse in asset prices (Tokyo real-estate is still 50% less than it was in the late '80s).
At some point people won't borrow money, no matter how low the interest rate, since they are afraid of taking on extra liabilities.
Yes, I admit that is possible for the government to actually print money and flood the economy, but I believe that this would result in the immediate destruction of the dollar, and no-one would want to buy US treasuries at all. The Fed would become the buyer of both first and last resort for all T-bills. Despite Bernanke's talk about helicopters, I think that the Fed's hands are tied and that the best they can do is drop interest rates in a futile attempt to blow more bubbles.
Also, keep in mind that creating inflation will cause lenders and pensioners to scream bloody murder, as their savings go right out the window. This isn't exactly a pleasant prospect for the politicians.
Whenever I go to the gas station or the grocery store I sometimes become convinced that we are experiencing real inflation right now.
Didn't you hear? Inflation is really low right now, unless you happen to eat food or drive a car of course, which it seems like you're doing. I recommend you stop eating and driving.
Seriously though, I understand that gasoline and food are volatile in the short term so it can make sense to remove them from the immediate inflation figures. But when gasoline is consistently twice as expensive as it was a couple of years ago, why can't that be reflected in the inflation figures?
If food and energy are so volatile, why don't we do what we do with other volatile measures and use a moving average?
You couldn't possibly be saying that we are being lied to about actual inflation. That kind of thing just doesn't happen!