No loan, you lose?

[anxvariety]

What if the fed decides to keep printing money and lets inflation go rampant to make house prices look more normal.. this is one of the more popular scenarios that’s been tossed around.

Do we have any reason to think this won’t happen? Is it any doubt that the government will serve the interests of the rich and the voting majority?

Wouldn’t this be realy bad for cash holders?

I’m tempted to buy a house somewhere very remote where prices are very relatively low and when(now) interest rates are relatively low… sure these houses have probably seen gains, but 20% on a 100k house isn’t as outrageous as 20% on 500k when you compare it to wages… I’m going to need a place to live, and I don’t want to pay any more in rent.. interest rates are only going up.. What are the questions against this.. Where am I going to work? That’s not a difficult one for me to answer when compared with the challenges of staying in southern california during a recession.

[vcguy_10]

The Fed primary goal is to ensure monetary stability and prevent inflation from getting any higher than, say, 3.5% or 4% per year.

Back in 1991-1992, Bush Sr wanted the Fed to go easy on money to help with his reelection efforts. We were in a mild recession, aggravated no doubt because of Persian Gulf War I. Greenspan is a registered Republican, so he would help Bush, right? Well, no, Greenspan did what was right and did NOT increase the money supply (through many of the monetary policy tools at his disposal).

Bernanke, the current Fed chairman, is a highly respected scholar who made his name in academia. He is far less likely than any of his predecessors to be influenced by the Administration or even the banking industry. The scenario you propose is virtually impossible.

[anxvariety]

vcguy_10, I’m interested then what your opinion is of the decision to stop publishing m3 money supply? To the untrained eye it appears they have something to hide.

[FormerOwner]

anxvariety, I’m wondering the exact same thing. My guess is that we will end up having pretty significant inflation within the next couple of years, once the Fed has to print money to bail out the “to big to fail” banks and mortgage backed securities holders – I think that’s a couple years away though.

In that case, people sitting on cash (in dollars) and people sitting on houses with no mortgages will get hurt. I’m thinking that if and when I feel So Cal R/E prices have returned to historical norms, it might be smart to buy a house or condo with a mortage on it. The house’s value (as long as it’s in a good location) should keep pace with inflation while it’s mortgage will not. This will be a way preserve your money in a hard asset. If you pay cash for the house, it would defeat the purpose. Another way to preserve your money would be to convert some portion of it into a foreign currency or into gold. I’m in a “wait and see” mode right now. Real estate would have to crash quite a bit for me to even consider buying again. I’m not keen on buying a place in location I don’t want to move to either. I think Peak Oil will make a lot of far flung places lose R/E value over time, especially if there’s no public transportation.

Buying at the bottom of the R/E cycle in a good location, with a mortgage, might work out to be a very good hedge against inflation. Even if interest rates were high, you could ride it out and refinance later on when rates drop again. It all depends on whether the values come back down to earth. If not, I’m not buying R/E – period.

[vcguy_10]

Conspiracy theorists will probably be disappointed if they take the time to look up the M2 and M3 definitions in a macroeconomics textbook. The short answer is that M2 is already so wide, that M3 adds little, or no information. There’s really nothing to hide by discontinuing the publication of M3 numbers, which were costly to assemble and pretty much useless.

This is a great answer from James Hamilton, PhD, a professor (meaning, full professor with tenure) at UCSD.

[powayseller]

I read Hamilton’s article, and noted in his chart, that M3 rose much faster than M2 in the last few years, for the first time ever in his charts. Thus he concludes with:

“Of course, the intriguing thing is that big surge in M3 growth relative to M2 of the last few years, which raises the possibility in some people’s minds that U.S. inflation will suddenly start being fueled by eurodollars and large time deposits.

But if that happens, it will be something new.” – Hamilton

[bubba99]

M3 is the real deal. M2 does not include T_Bills of 100k or more, any time depostit like a 3 month cd, repos, and euro deposits etc. This is the only measure that showed if the FED were printing money. Whey they stopped publishing it in March the growth rate was 8.7%. The “M3” component will be about 3.8 trillion by the end of 06 = growing to 4.04 in 07. This is a lot of money.

It is in this component of money supply that the trade deficit is managed. Here is where the FED buying govt securities would show up – printing money.

You would think the world would be up in arms about the US just printing money to pay debt, but the europeans are also cheating. They are growing their “money supply” at almost 9%.

[Author]

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