Home › Forums › Financial Markets/Economics › Inflation in CPI vs. Inflation of Assets
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February 11, 2007 at 11:53 AM #8366February 11, 2007 at 12:31 PM #45091
FormerOwner
ParticipantMakes sense. The thing that’s very different now vs. the 70’s is that wages are not keeping up with price increases. I don’t see any way that wages will go up very much for most people any time in the foreseeable future. This means that eventually asset prices will HAVE to come down substantially because no one will be able to pay the prices and banks have pushed lending standards too low already. The purchasing power to pay the current prices doesn’t exist and the prospects for the future indicate a worsening of the purchasing power scenario.
When you look at the younger generations and think about their career/income prospects, current asset prices look even MORE inflated. I too think there’s a high probability of us experiencing a Great Depression II, if not as a result of the current R/E downcycle then at some time in the not too distant future.
I find it funny when all the baby boomers say “my kids won’t be able to afford to live here”. Well, nobody’s kids will be able to afford to live here and that’s why there can’t be any buyers to replace the baby boom generation when their houses come on the market! The house-price problem will take care of itself and it’s started already.
February 11, 2007 at 1:54 PM #45093Diego Mamani
ParticipantThis is a very timely topic, and something that will have economists busy for some time. One of the reasons for the lack of consumer price inflation is international trade, and the entry (re-entry?) of China and India to international markets.
In the past, when consumers had more cash, and demanded more shirts, pans, cars, etc., prices of such items went up. Supply and demand, as we say. What is new nowadays, is that there’s an almost infinite supply of labor in those emerging countries. If Americans want X millions of shirt, that’s no problem, they can be produced without pushing wages in those countries. If consumers want twice as many shirts, then more workers are recruited at the same (low) wages, and therefore, shirts don’t become more expensive.
We have enourmous liquidity in the system, but it has only resulted in asset inflation (think real estate, gold), but the prices of everyday consumer items have not gone up; if anything, they have dropped!
This has serious implications for the collapse in real estate prices many of us anticipate. If there is really an oversized amount of liquidity floating around, and if consumer prices won’t go up because there’s unlimited labor (an almost perfectly elastic supply curve), then house prices may remain overpriced when measured in dollars.
Perhaps it’s not really that house prices have doubled entirely because of an speculative bubble. House prices may have spiraled in recent years mostly because dollars are more plentiful. Supply and demand applies to dollars too: if there are too many of them around, their value will drop. How do we know dollars are less valuable now than five years ago? Answer: Half a million dollars buy about half less house today than back then.
I’m not saying that there wasn’t speculation in RE. There was plenty of it. But other mechanisms, such as asset inflation in a context of easy money and cheap overseas labor, may have had a larger role than previously thought.
JG: Care to clarify your assertion that “cheap loose money kills manufacturing competitiveness”? I would think, that if anything, cheap loose dollars would boost US manufacturing competitiveness by making US products relatively cheap to foreigners.
February 11, 2007 at 3:48 PM #45096Anonymous
GuestDM, I agree with the logic in your first five paragraphs.
‘Cheap, loose money kills manufacturing competitiveness’ is an overstatement by me. If exchange rates move to reflect the number of dollars and remnibi outstanding, no problem. But, as you know, the Chinese refuse to let the remnibi move to its natural, stronger level against the ever-growing number of dollars, keeping prices-from-China artificially low and prices-from-U.S. artificially high. That is what is killing U.S. manufacturing, that dollar exchange rates with the remnibi and yen are artificially strong.
The end is here; the game is over. American’s debt-to-income levels are at all time highs, and folks are increasingly having problems making the required monthly payments (see the ever increasing number of notices of default and foreclosures). Cheap money has inflated home and stock prices; the associated debt is now going to be written off, and asset prices and household incomes are going to fall. Our current household debt to disposable income ratio of 130% is exactly that at the height of the Japanese bubble in the late ’80s.
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Do not hold bonds, stocks (gold mining stocks will be okay), or real estate. All are coming down.
Repent, rent, save, and arm!
February 11, 2007 at 3:50 PM #45097GuestFO, I agree with all of your points.
February 11, 2007 at 4:14 PM #45098GuestThe end is here (from Calculated Risk and Prudent Bear):
http://www.sptimes.com/2007/02/09/State/Tax_shortfalls_crimp_.shtml
http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2007/02/06/state/n141047S96.DTL&feed=rss.news
http://www.ocregister.com/ocregister/money/article_1567285.php
It breaks my heart to see slowing state tax revenues and slowing consumption in The OC.
February 11, 2007 at 4:42 PM #45099ParticipantYes, the non-market exchange rate has a lot to do with the manufacturing situation. But, the enormous availability of labor probably has more of an effect than the Chinese currency overvaluation. In other words, even if the Chinese were to allow their currency to float, we would still see rapid manufacturing growth in China. The trade deficit, measured in dollars, would noticeably improve, however.
February 11, 2007 at 5:13 PM #45103GuestApricots in Silicon Valley
First disclaimer: I have never lived in Silicon Valley nor would I have any desire to. I live just over the Golden Gate bridge from San Francisco proper in Marin County. I think this thread is extremely interesting in terms of asset vs. commodity inflation. I don’t think it’s a question of one versus the other. In the 1970s, both asset classes appreciated. Were we to revert to a 1970s style inflation, the same could occur again. And the longer resources are squandered in Iraq, the greater the chances of that happening again. I seem to recall a school of thought that at least a good chunk of 1970s inflation was a hangover from the 1960s monetary expansion occasioned by the war in Vietnam.
That being said, I just don’t foresee subdivisions in Silicon Valley being razed to replant the cherry and apricot orchards. Economic efficiency and all that.
No, expect housing prices to erode at varying rates around the country. Highly speculative areas will of course see more damage, as will areas without good wages.
February 11, 2007 at 6:47 PM #45105CAwireman
ParticipantJG,
For somone who has money in the company 401K plan, quite often a Fidelity 401K, what can you do to avoid investment in Stocks, Bonds?
Would a fund affiliated with Gold be the only option?
I’d be interested in your thoughts on this.
As always, nice post.
February 11, 2007 at 7:03 PM #45106GuestHey, cawm.
At my company, I have my 401(k) funds parked in a U.S. Treasuries, only, fund. U.S. Treasuries (not U.S. Agencies, which include FNMA, GNMA, et al.) will clearly be safe over the short and intermediate term.
If you’ve been at your company a long time; have a good chunk in your 401(k); and are feeling frisky and risky, you can do as I did: take out a 401(k) loan and park the proceeds in UNWPX or a similar gold mining company mutual fund.
Good luck, sir!
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