Wednesday, December 17, 2008

 

The Risk of Hyperinflation

I am not very worried about this right now. There are very few signs of this although there are some things on the horizon that might make this a possibility. First, the gov'ts response to deflation has been to throw copious amounts of money at the problem which is not really a solution at all. Our problem is that asset prices are too high relative to income and they must come down. Making more money available will not cause rational people to buy those assets. Low rates of interest are not really much of an incentive to buying assets that are falling in price. The only solution is to let prices fall because the Federal gov't does not have enough money, i.e. credit, to buy enough assets to stop falling prices.

Ahhh, but the Federal Reserve does have enough printing presses to "create" the money some may say. Well not really. They can try and create credit but they can't make people use it. They can create make work jobs and build infrastructure but that does not add to the productive capacity of the economy. What they can do, perhpaps, is to trash the dollar and the credit rating of the U.S. treasury. The thing is I can't imagine how we would ever get to that point. Every investor, saver, everyone who has a vested interest in not seeing the U.S. turn into Argentina will be watching the dollar and watching long term interest rates. A falling dollar and rapidly falling U.S. treasury bond prices are the harbingers of hyperinflation. When that starts to happen there will be plenty of screaming, enough even to give the One pause.

So far, I have felt pretty good about not buying a house since my wife and I moved back from Russia but we are approaching a time when a home will be necessary. Our growing family will not sit well in a two bedroom apartment by 2010. By then I expect to be able to find something at least as cheap as now. In this case I will not be too early.

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