I understand exactly what you mean, but I don’t agree with your arguments (although I do agree with some). Clearly, bringing house prices in balance with rents or incomes can be done by decreasing house prices, increasing rents/incomes (also known as inflation), or a combination of both. It seems that you were hoping the adjustment would come primarily from decreasing house prices, but now you are afraid that a larger than expected part would come from inflation.
First, let me say that I have exactly the same concerns as you. And I put my money where my mouth is: I have no money invested in dollar-denominated bonds, because the real returns are so low. I also agree that inflation is a very atractive political option, as most Americans are debtors, and the creditors are mostly foreign.
That being said, you need to realize however that current inflation is actually quite low. It has gone up every year since 2002, and that makes many people very nervous (including me). But it is still less than what it was in the early 90s, for instance.
Also, using euros, oil, or gold as a yardstick for measuring dollar-denominated prices is very misleading, in my opinion. Oil and gold are very volatile commodities. As such, they are terrible price measures. The price of a Honda Civic measured in oil or gold would have been all over the place over the last 30 years, while it behaved quite reasonably when measured in dollars. Simply put, I believe that measuring US house prices in anything else but dollars (real dollars, if you don’t like nominal) is meaningless.
So it all comes down to whether one believes that high commodity prices and a weak dollar constitutes inflation. I believe it doesn’t. However, I agree with you on one important point: high commodity prices and a weak dollar may be a strong signal of FUTURE inflation. This, indeed I’m afraid of. But if this does happen, I believe the Fed will raise, or the bond market will get spooked and do the raising for them.
Your argument, in a nutshell, is that all signs (gold, oil, euro) point to high inflation in the future and that the bond market has it terribly wrong (the TIPS predict less than 3% headline inflation going forward). Maybe. I believe your worst fears won’t come to pass, but I guess we’ll have to wait and see.
