Good comments, made me think; now here’s my response.
I agree I should use the term “high inflation” instead of “hyperinflation” because I’m talking about the former.
Think about what happens if our government just starts printing more and more dollars, increasing the amount in circulation. (that can be done in many ways, from physically printing lots more dollars, to more traditional stimulus methods such as Fed lending to banks which then lend multiples of that, pumping money into the system). At the same time, global use of dollars, holding of dollars, declines dramatically as the non-USA world switches to Euros, or whatever.
As a first stage analysis, let’s hold nominal wages constant, assume economic growth unchanged, and assume balance of trade unchanged…etc..etc.
What happens?
EVERYTHING goes UP in nominal dollar prices, from food to houses to the stock market. If you double the dollars in circulation (holding all else constant), they are worth half as much and prices then double in nominal dollars.
Next, let’s start thinking about wages no longer being constant. Nominal-dollar wages must go up in a highly inflationary environment, because labor is a commodity just like anything.
In real dollars, average wages are falling now, and will keep falling in the USA (no matter if inflation remains as it is or if it dramatically increases). This is a natural outcome of global economics and our failure as a nation to manage the transition of our economy away from a manufacturing growth driven economy (into something else providing similar wage growth)
In a highly inflationary environment, would housing prices rise in real dollars? That’s a complicated question depending on multiple variables, particularly in the short-term; however, long-term I’ve stated above that I don’t see USA real wages keeping pace with inflation, which certainly doesn’t imply significant real dollar appreciation in housing prices. Look at Japan’s 10+ years of deflation in real housing prices. Long-term I don’t see how USA housing prices will show significant real dollar appreciation, unless we also have significant population growth.
Of course, if nominal wages are CONSTANT in an inflationary environment there is zero benefit to buying a house with a fixed-rate mortgage, because while future fixed rate mortgage payments will involve your paying the bank less real money, you’ll have less real salary to make those payments.
However, nominal dollar wages won’t be constant. I believe that in the high inflationary period ahead of us, wages will increase at rate which is a significant proporton of inflation, similar to what’s happening now.
Short-term, YES we are experiencing a massive credit contraction, which is deflationary, yet it is being fought with massive stimulus measures. So short-term, anything goes, as far as inflation or deflation.
However, my basic theory is that we are now entering a new epic where the primary dynamic will be INFLATIONARY pressures driven by multiple factors, just one of which is our government conspiring to devalue the national debt (and also stimulate the economy)
Based on this scenario, one can brainstorm financial moves to hedge against that and take advantage of it.
This is why we personally own property in China, but none in America. This is why we have lots of our money in bank accounts in China also. This is why I seek jobs where I act as a consultant making money off helping 3rd world nations evolve into the world’s manufacturing base, and eventually regions of technology innovation (because acting as global facilitator to emerging nations can be our value-adding product to the world)
What about purchasing homes in America?
It seems to me that it would be smart to let housing prices continue to fall in the very near term until just before rising inflation will dramatically affect mortgage rates; then at that point buy property in America, particularly when you can rent with positive cash flow, always financing with minimum money down using a fixed rate loan.
That’s how you can screw the bank, because each year the bank will be getting less and less real dollars in those fixed mortgage payments.
Timing will be important, particularly if inflation dramatically forces up mortgage rates BEFORE this housing market bottoms out. If you don’t buy before then it becomes a moot point because higher mortgage payments erase the positive (rental) cash flow from renting, and also the house payments become unaffordable. It becomes the old conundrum of lower housing prices, but still unaffordable because of much higher mortgage interest rates.
