I agree that in general the fed views inflation as a bad thing, but it’s not their only goal. I also think the fact that our government has a lot of bills to pay is going to neccesitate the printing of a lot more money.
It seems to me higher interest rates are also a sign that inflation is on the rise.
2. Bugs raises several good points, many of them about wether or not an inflationary scenario is a good solution.
My Response: I agree with most of what you say, and I don’t view the iflationary scenario as a “good” solution overall, but merely as a one that has a good chance of occuring. As happened in the 70’s, the inflationary envrionment, makes debt’s cheaper and hard assets more valuable. All other things being equal, this would be a net benefit to people who have a high debt to asset ratio.
3. The Fed is the Banks – why would the banks want to deflate their assets to bail out the consumer ?
The bank’s assets aren’t dollars. The bank’s merely need a spread between assets to make money. Inflation is not a necesarily a bad thing for banks at all. Especially considering that most banks have packaged and sold all their mortages.
Overall, I’m not sure what the bank’s view of this is and what the pros/cons are in their view, but faced with a choice of an inflationary evironment or collapsing real estate market, I’d think they would pick the former.
4. Say the bank goes under and recalls its loans and you have to get a new loan but can’t because the interest rates are too high.
30 year fixed loans cannot be recalled unless they are in default. If the bank or entity that is holding the loan goes under they will sell that loan off to the highest bidder of that debt. The debt markets are very liquid and large nowdays.
There is no doubt if we did have an inflationary argument, having a fixed 30 year loan will grow in value.
My conclusion. I need to look into this scenario more and I’d be very curious to here Rich’s take on how this might play out. Overall, I think there are a lot of interests lining up (consumer, govt, etc.) for an inflationary environment and I for one want to be ready to take advantage of that.
I do plan to buy TIPS (Treasury Inflation Protection Securities) these are T-Bills that tie the principal repayment to the CPI. They could be a great bet if inflation does come into play and if it doesn’t the small premium you pay for them is a small and worthwhile price.
