The housing bubble is over!

[cr]

Prices will still fall.

http://data.bls.gov/cgi-bin/cpicalc.pl

[Anonymous]

Interesting discussion Diego et al.

I think most people understand the effects of inflation and the negative purchasing power in relative terms against other mediums of weath transfer to the dollar. And, i think we can all agree that housing prices are not set in a vaccum against gold/oil/euros, or even dollars.

Housing/land is abundant and plentiful in the USA. 88Lumber sells homes for $14K on up. Housing isnt expensive. Housing people WANT is expensive. The price of housing is set by peoples desire, and ability to pay in whatever medium of transfer desired.

Ill 100% agree with you that it takes less barrels of oil now, than 8 years ago to buy the same house. The thing is, those with the oil dont acutally want to buy those houses….even if they are able to (which one would argue they are)

If wages quadrupled during the next year, even with 10% inflation, and a 50% drop in the purchasing power of the dollar against Euros/oil or loonies, housing prices would rise; assuming people’s desire to buy homes persists…which is probably a safe assumption. Basically if their ability to buy increases….so does the price.

Neither wages nor inflation are the only items used to determine housing prices. High transportation costs will make outlying areas more expensive…..unless the government were to subsidize transportation…..or lower taxes etc. Im sure we can all agree that there are many factors involved.

Sure, the value of the dollar and wages make up a large component. Disposal income….sapped by inflation and the rising prices of necessities will negatively affect housing prices. There is no quesiton you are correct, the falling dollar saps wealth from those who hold assets denominated in dollars, if the price of that asset is constant, or falling at a lower rate than inflation, which housing is. So you are spot on with that. No question.

One big thing missed in this whole thread is the rental price of money. Qualifing for, and obtaining loans is becomming, and might continue to become, more difficult. The majority of people arent buying homes with pure cash. Interest rates and qual metrics have a major influence in home prices. Regardless of the falling dollar, the higher barrier to entry on the rental of money is enough, in itself, to continue to negatively influence housing prices. There simply arent enough people holding gold, oil, or euros that want the number of homes available.

Diego, regarding people being robbed by inflation….that is only true if you keep your money in USD. In terms of daily wages. Those are paid realitive to their value the world places on them. Americans making $10/hr today have less purchasing power than making $10 five years ago. However, if that is the value the free market places on their skills, and if they spend everything they make in the same realtive time period (say one month), there is no robbing of wealth due to inflation…..it sort-a just sucks. Their purchasing power has declined, yes. But they havent been robbed. They can choose to move to Europe or somewhere else where their skills are more valuable….if there is that place. In theory they should be able to negotiate a wage increase (in dollar terms) to reflect the same value for their contribution as 5 years previous.

The farmer growing an acre of corn can trade the produce, through dollars, for roughly the same realtive value as 5 years ago. The fact that it wont buy the same # of barrels of oil is not dollar inflation. It is the futures market demand for oil, gold etc. He could probaby trade that corn for the exact same number of yen/euros as 5 years ago (havent checked that). In theory, inflation doesnt rob them.

Homes are a classic inflation hedge, like gold. In theory, people who own homes are protected from inflation, all else being equal. But, as we all know, all else is not equal.

There is no one robbing you of your money, espeically since your obvious understanding of the situation gives you every reason to capatalize on the situation. If you’ve had your savings in dollars………no one to blame but yourself.

Personally, i believe that housing prices will continue to fall. Renting money is more prohibitive, inventory is growing, the must-sell component of that inventory is growing, even if wages are growing, disposable income isnt. Buying a house right now would be a worse investment than holding US dollars regardless of how many barrels of oil it might take to buy it.

And that last statement is something which with i think we can all agree 🙂

Jasper

[Anonymous]

Interesting discussion Diego et al.

I think most people understand the effects of inflation and the negative purchasing power in relative terms against other mediums of weath transfer to the dollar. And, i think we can all agree that housing prices are not set in a vaccum against gold/oil/euros, or even dollars.

Housing/land is abundant and plentiful in the USA. 88Lumber sells homes for $14K on up. Housing isnt expensive. Housing people WANT is expensive. The price of housing is set by peoples desire, and ability to pay in whatever medium of transfer desired.

Ill 100% agree with you that it takes less barrels of oil now, than 8 years ago to buy the same house. The thing is, those with the oil dont acutally want to buy those houses….even if they are able to (which one would argue they are)

If wages quadrupled during the next year, even with 10% inflation, and a 50% drop in the purchasing power of the dollar against Euros/oil or loonies, housing prices would rise; assuming people’s desire to buy homes persists…which is probably a safe assumption. Basically if their ability to buy increases….so does the price.

Neither wages nor inflation are the only items used to determine housing prices. High transportation costs will make outlying areas more expensive…..unless the government were to subsidize transportation…..or lower taxes etc. Im sure we can all agree that there are many factors involved.

Sure, the value of the dollar and wages make up a large component. Disposal income….sapped by inflation and the rising prices of necessities will negatively affect housing prices. There is no quesiton you are correct, the falling dollar saps wealth from those who hold assets denominated in dollars, if the price of that asset is constant, or falling at a lower rate than inflation, which housing is. So you are spot on with that. No question.

One big thing missed in this whole thread is the rental price of money. Qualifing for, and obtaining loans is becomming, and might continue to become, more difficult. The majority of people arent buying homes with pure cash. Interest rates and qual metrics have a major influence in home prices. Regardless of the falling dollar, the higher barrier to entry on the rental of money is enough, in itself, to continue to negatively influence housing prices. There simply arent enough people holding gold, oil, or euros that want the number of homes available.

Diego, regarding people being robbed by inflation….that is only true if you keep your money in USD. In terms of daily wages. Those are paid realitive to their value the world places on them. Americans making $10/hr today have less purchasing power than making $10 five years ago. However, if that is the value the free market places on their skills, and if they spend everything they make in the same realtive time period (say one month), there is no robbing of wealth due to inflation…..it sort-a just sucks. Their purchasing power has declined, yes. But they havent been robbed. They can choose to move to Europe or somewhere else where their skills are more valuable….if there is that place. In theory they should be able to negotiate a wage increase (in dollar terms) to reflect the same value for their contribution as 5 years previous.

The farmer growing an acre of corn can trade the produce, through dollars, for roughly the same realtive value as 5 years ago. The fact that it wont buy the same # of barrels of oil is not dollar inflation. It is the futures market demand for oil, gold etc. He could probaby trade that corn for the exact same number of yen/euros as 5 years ago (havent checked that). In theory, inflation doesnt rob them.

Homes are a classic inflation hedge, like gold. In theory, people who own homes are protected from inflation, all else being equal. But, as we all know, all else is not equal.

There is no one robbing you of your money, espeically since your obvious understanding of the situation gives you every reason to capatalize on the situation. If you’ve had your savings in dollars………no one to blame but yourself.

Personally, i believe that housing prices will continue to fall. Renting money is more prohibitive, inventory is growing, the must-sell component of that inventory is growing, even if wages are growing, disposable income isnt. Buying a house right now would be a worse investment than holding US dollars regardless of how many barrels of oil it might take to buy it.

And that last statement is something which with i think we can all agree 🙂

Jasper

[Anonymous]

Interesting discussion Diego et al.

I think most people understand the effects of inflation and the negative purchasing power in relative terms against other mediums of weath transfer to the dollar. And, i think we can all agree that housing prices are not set in a vaccum against gold/oil/euros, or even dollars.

Housing/land is abundant and plentiful in the USA. 88Lumber sells homes for $14K on up. Housing isnt expensive. Housing people WANT is expensive. The price of housing is set by peoples desire, and ability to pay in whatever medium of transfer desired.

Ill 100% agree with you that it takes less barrels of oil now, than 8 years ago to buy the same house. The thing is, those with the oil dont acutally want to buy those houses….even if they are able to (which one would argue they are)

If wages quadrupled during the next year, even with 10% inflation, and a 50% drop in the purchasing power of the dollar against Euros/oil or loonies, housing prices would rise; assuming people’s desire to buy homes persists…which is probably a safe assumption. Basically if their ability to buy increases….so does the price.

Neither wages nor inflation are the only items used to determine housing prices. High transportation costs will make outlying areas more expensive…..unless the government were to subsidize transportation…..or lower taxes etc. Im sure we can all agree that there are many factors involved.

Sure, the value of the dollar and wages make up a large component. Disposal income….sapped by inflation and the rising prices of necessities will negatively affect housing prices. There is no quesiton you are correct, the falling dollar saps wealth from those who hold assets denominated in dollars, if the price of that asset is constant, or falling at a lower rate than inflation, which housing is. So you are spot on with that. No question.

One big thing missed in this whole thread is the rental price of money. Qualifing for, and obtaining loans is becomming, and might continue to become, more difficult. The majority of people arent buying homes with pure cash. Interest rates and qual metrics have a major influence in home prices. Regardless of the falling dollar, the higher barrier to entry on the rental of money is enough, in itself, to continue to negatively influence housing prices. There simply arent enough people holding gold, oil, or euros that want the number of homes available.

Diego, regarding people being robbed by inflation….that is only true if you keep your money in USD. In terms of daily wages. Those are paid realitive to their value the world places on them. Americans making $10/hr today have less purchasing power than making $10 five years ago. However, if that is the value the free market places on their skills, and if they spend everything they make in the same realtive time period (say one month), there is no robbing of wealth due to inflation…..it sort-a just sucks. Their purchasing power has declined, yes. But they havent been robbed. They can choose to move to Europe or somewhere else where their skills are more valuable….if there is that place. In theory they should be able to negotiate a wage increase (in dollar terms) to reflect the same value for their contribution as 5 years previous.

The farmer growing an acre of corn can trade the produce, through dollars, for roughly the same realtive value as 5 years ago. The fact that it wont buy the same # of barrels of oil is not dollar inflation. It is the futures market demand for oil, gold etc. He could probaby trade that corn for the exact same number of yen/euros as 5 years ago (havent checked that). In theory, inflation doesnt rob them.

Homes are a classic inflation hedge, like gold. In theory, people who own homes are protected from inflation, all else being equal. But, as we all know, all else is not equal.

There is no one robbing you of your money, espeically since your obvious understanding of the situation gives you every reason to capatalize on the situation. If you’ve had your savings in dollars………no one to blame but yourself.

Personally, i believe that housing prices will continue to fall. Renting money is more prohibitive, inventory is growing, the must-sell component of that inventory is growing, even if wages are growing, disposable income isnt. Buying a house right now would be a worse investment than holding US dollars regardless of how many barrels of oil it might take to buy it.

And that last statement is something which with i think we can all agree 🙂

Jasper

[Anonymous]

Interesting discussion Diego et al.

I think most people understand the effects of inflation and the negative purchasing power in relative terms against other mediums of weath transfer to the dollar. And, i think we can all agree that housing prices are not set in a vaccum against gold/oil/euros, or even dollars.

Housing/land is abundant and plentiful in the USA. 88Lumber sells homes for $14K on up. Housing isnt expensive. Housing people WANT is expensive. The price of housing is set by peoples desire, and ability to pay in whatever medium of transfer desired.

Ill 100% agree with you that it takes less barrels of oil now, than 8 years ago to buy the same house. The thing is, those with the oil dont acutally want to buy those houses….even if they are able to (which one would argue they are)

If wages quadrupled during the next year, even with 10% inflation, and a 50% drop in the purchasing power of the dollar against Euros/oil or loonies, housing prices would rise; assuming people’s desire to buy homes persists…which is probably a safe assumption. Basically if their ability to buy increases….so does the price.

Neither wages nor inflation are the only items used to determine housing prices. High transportation costs will make outlying areas more expensive…..unless the government were to subsidize transportation…..or lower taxes etc. Im sure we can all agree that there are many factors involved.

Sure, the value of the dollar and wages make up a large component. Disposal income….sapped by inflation and the rising prices of necessities will negatively affect housing prices. There is no quesiton you are correct, the falling dollar saps wealth from those who hold assets denominated in dollars, if the price of that asset is constant, or falling at a lower rate than inflation, which housing is. So you are spot on with that. No question.

One big thing missed in this whole thread is the rental price of money. Qualifing for, and obtaining loans is becomming, and might continue to become, more difficult. The majority of people arent buying homes with pure cash. Interest rates and qual metrics have a major influence in home prices. Regardless of the falling dollar, the higher barrier to entry on the rental of money is enough, in itself, to continue to negatively influence housing prices. There simply arent enough people holding gold, oil, or euros that want the number of homes available.

Diego, regarding people being robbed by inflation….that is only true if you keep your money in USD. In terms of daily wages. Those are paid realitive to their value the world places on them. Americans making $10/hr today have less purchasing power than making $10 five years ago. However, if that is the value the free market places on their skills, and if they spend everything they make in the same realtive time period (say one month), there is no robbing of wealth due to inflation…..it sort-a just sucks. Their purchasing power has declined, yes. But they havent been robbed. They can choose to move to Europe or somewhere else where their skills are more valuable….if there is that place. In theory they should be able to negotiate a wage increase (in dollar terms) to reflect the same value for their contribution as 5 years previous.

The farmer growing an acre of corn can trade the produce, through dollars, for roughly the same realtive value as 5 years ago. The fact that it wont buy the same # of barrels of oil is not dollar inflation. It is the futures market demand for oil, gold etc. He could probaby trade that corn for the exact same number of yen/euros as 5 years ago (havent checked that). In theory, inflation doesnt rob them.

Homes are a classic inflation hedge, like gold. In theory, people who own homes are protected from inflation, all else being equal. But, as we all know, all else is not equal.

There is no one robbing you of your money, espeically since your obvious understanding of the situation gives you every reason to capatalize on the situation. If you’ve had your savings in dollars………no one to blame but yourself.

Personally, i believe that housing prices will continue to fall. Renting money is more prohibitive, inventory is growing, the must-sell component of that inventory is growing, even if wages are growing, disposable income isnt. Buying a house right now would be a worse investment than holding US dollars regardless of how many barrels of oil it might take to buy it.

And that last statement is something which with i think we can all agree 🙂

Jasper

[Anonymous]

Interesting discussion Diego et al.

I think most people understand the effects of inflation and the negative purchasing power in relative terms against other mediums of weath transfer to the dollar. And, i think we can all agree that housing prices are not set in a vaccum against gold/oil/euros, or even dollars.

Housing/land is abundant and plentiful in the USA. 88Lumber sells homes for $14K on up. Housing isnt expensive. Housing people WANT is expensive. The price of housing is set by peoples desire, and ability to pay in whatever medium of transfer desired.

Ill 100% agree with you that it takes less barrels of oil now, than 8 years ago to buy the same house. The thing is, those with the oil dont acutally want to buy those houses….even if they are able to (which one would argue they are)

If wages quadrupled during the next year, even with 10% inflation, and a 50% drop in the purchasing power of the dollar against Euros/oil or loonies, housing prices would rise; assuming people’s desire to buy homes persists…which is probably a safe assumption. Basically if their ability to buy increases….so does the price.

Neither wages nor inflation are the only items used to determine housing prices. High transportation costs will make outlying areas more expensive…..unless the government were to subsidize transportation…..or lower taxes etc. Im sure we can all agree that there are many factors involved.

Sure, the value of the dollar and wages make up a large component. Disposal income….sapped by inflation and the rising prices of necessities will negatively affect housing prices. There is no quesiton you are correct, the falling dollar saps wealth from those who hold assets denominated in dollars, if the price of that asset is constant, or falling at a lower rate than inflation, which housing is. So you are spot on with that. No question.

One big thing missed in this whole thread is the rental price of money. Qualifing for, and obtaining loans is becomming, and might continue to become, more difficult. The majority of people arent buying homes with pure cash. Interest rates and qual metrics have a major influence in home prices. Regardless of the falling dollar, the higher barrier to entry on the rental of money is enough, in itself, to continue to negatively influence housing prices. There simply arent enough people holding gold, oil, or euros that want the number of homes available.

Diego, regarding people being robbed by inflation….that is only true if you keep your money in USD. In terms of daily wages. Those are paid realitive to their value the world places on them. Americans making $10/hr today have less purchasing power than making $10 five years ago. However, if that is the value the free market places on their skills, and if they spend everything they make in the same realtive time period (say one month), there is no robbing of wealth due to inflation…..it sort-a just sucks. Their purchasing power has declined, yes. But they havent been robbed. They can choose to move to Europe or somewhere else where their skills are more valuable….if there is that place. In theory they should be able to negotiate a wage increase (in dollar terms) to reflect the same value for their contribution as 5 years previous.

The farmer growing an acre of corn can trade the produce, through dollars, for roughly the same realtive value as 5 years ago. The fact that it wont buy the same # of barrels of oil is not dollar inflation. It is the futures market demand for oil, gold etc. He could probaby trade that corn for the exact same number of yen/euros as 5 years ago (havent checked that). In theory, inflation doesnt rob them.

Homes are a classic inflation hedge, like gold. In theory, people who own homes are protected from inflation, all else being equal. But, as we all know, all else is not equal.

There is no one robbing you of your money, espeically since your obvious understanding of the situation gives you every reason to capatalize on the situation. If you’ve had your savings in dollars………no one to blame but yourself.

Personally, i believe that housing prices will continue to fall. Renting money is more prohibitive, inventory is growing, the must-sell component of that inventory is growing, even if wages are growing, disposable income isnt. Buying a house right now would be a worse investment than holding US dollars regardless of how many barrels of oil it might take to buy it.

And that last statement is something which with i think we can all agree 🙂

Jasper

[Daniel]

Diego,

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.

[Daniel]

Diego,

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.

[Daniel]

Diego,

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.

[Daniel]

Diego,

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.

[Daniel]

Diego,

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.

[Daniel]

Follow-up to my previous comment: it may seem hard to believe to some, but there was a time in the recent past (late nineties) when oil, gold or the euro went down abruptly against the dollar. When measured by these yardsticks, prices of everything from toasters to tomatoes rocketed upwards. I didn’t hear anybody complaining that jeans prices tripled when measured in oil, and were therefore too expensive. Did you?

And another thing: there is current inflation, and a lot of it, outside the US. That is because many people worldwide used to keep their savings in dollars. They are the ones “being robbed”. But they can’t really blame the Fed: there is no mandate for the Fed to keep inflation low in Brazil or Kazahstan. Individuals and central banks outside the US keeping their savings in dollars did so at their own risk. They may think “fool me once, shame on you, fool me twice, shame on me”, and move away from the dollar, and that would hurt us. Fair enough. But, again, the bond market would go haywire if this happens. Interest rates would go up. That’s not good for housing prices, nominal or otherwise.

[Daniel]

Follow-up to my previous comment: it may seem hard to believe to some, but there was a time in the recent past (late nineties) when oil, gold or the euro went down abruptly against the dollar. When measured by these yardsticks, prices of everything from toasters to tomatoes rocketed upwards. I didn’t hear anybody complaining that jeans prices tripled when measured in oil, and were therefore too expensive. Did you?

And another thing: there is current inflation, and a lot of it, outside the US. That is because many people worldwide used to keep their savings in dollars. They are the ones “being robbed”. But they can’t really blame the Fed: there is no mandate for the Fed to keep inflation low in Brazil or Kazahstan. Individuals and central banks outside the US keeping their savings in dollars did so at their own risk. They may think “fool me once, shame on you, fool me twice, shame on me”, and move away from the dollar, and that would hurt us. Fair enough. But, again, the bond market would go haywire if this happens. Interest rates would go up. That’s not good for housing prices, nominal or otherwise.

[Daniel]

Follow-up to my previous comment: it may seem hard to believe to some, but there was a time in the recent past (late nineties) when oil, gold or the euro went down abruptly against the dollar. When measured by these yardsticks, prices of everything from toasters to tomatoes rocketed upwards. I didn’t hear anybody complaining that jeans prices tripled when measured in oil, and were therefore too expensive. Did you?

And another thing: there is current inflation, and a lot of it, outside the US. That is because many people worldwide used to keep their savings in dollars. They are the ones “being robbed”. But they can’t really blame the Fed: there is no mandate for the Fed to keep inflation low in Brazil or Kazahstan. Individuals and central banks outside the US keeping their savings in dollars did so at their own risk. They may think “fool me once, shame on you, fool me twice, shame on me”, and move away from the dollar, and that would hurt us. Fair enough. But, again, the bond market would go haywire if this happens. Interest rates would go up. That’s not good for housing prices, nominal or otherwise.

[Daniel]

Follow-up to my previous comment: it may seem hard to believe to some, but there was a time in the recent past (late nineties) when oil, gold or the euro went down abruptly against the dollar. When measured by these yardsticks, prices of everything from toasters to tomatoes rocketed upwards. I didn’t hear anybody complaining that jeans prices tripled when measured in oil, and were therefore too expensive. Did you?

And another thing: there is current inflation, and a lot of it, outside the US. That is because many people worldwide used to keep their savings in dollars. They are the ones “being robbed”. But they can’t really blame the Fed: there is no mandate for the Fed to keep inflation low in Brazil or Kazahstan. Individuals and central banks outside the US keeping their savings in dollars did so at their own risk. They may think “fool me once, shame on you, fool me twice, shame on me”, and move away from the dollar, and that would hurt us. Fair enough. But, again, the bond market would go haywire if this happens. Interest rates would go up. That’s not good for housing prices, nominal or otherwise.

[Author]

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