Assuming this burst in commodity prices brings on a rise in inflation, then whats the likely consequence for the property market? Is it fair to suggest that interest rates will rise, therefore property values will fall, as people can't afford the mortages. Or, are property prices at rock bottom, or is it more likely interest rates will remain low? I realise its a very general question, I'm just trying to find the main issues and how they might be related. Property is not my field and hence the question.
Inflation & the Property Market
- Thread starter trading1
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That's a bazillion dollar question. Pls let me know if you find a definitive answer.
Gubinec is correct, inflation can only lead commodity prices. As I have stated on other threads on several occassions, inflation is generally misunderstood. People confuse the imperfect measures we use for inflation, price change index measures, with inflation itself. There are other forces that drive prices to change beside inflation. A price change measure, a commodity index, can be driven by other dynamics beside inflation. Price change indexes simply measure price change badly, they don't distinguish if the change is caused by inflation or by suppy/demand imbalance, or by some government or other market sector dominating activity. Price change caused by inflation does have a distinct foot finger print however. Inflation is characterised by an expansion of private credit that facilitaties an aggregate flow of capital from financial assets to tangible assets. Independent economic actors on the micro level begin en mass to cash in thier financial assets and use them along with debt to acquire tangible assets. The other thing about inflation is that it is a monetary phenomenon in that it relates to a currency, the currency becomes worth less relative to the price of tangible assets and eventually all goods and services depending on the expiration of pre existing contracts.
When we look at the situation in the U.S. today, there is a mixed bag of evidence for supposed inflation. Certainly, international commodity prices denominated in dollars are lately elevated. On the other hand prices for domestic real estate, both residential and commercial, automobiles, both new and used, boats, furniture, antiques, and most durable goods continue to decline or seem to languish at historically low prices. More importantly, private credit has been contracting for over 20 months and continues to contract contributing to the loss of value in previously leveraged assets. We also see that unemployment remains high and wages at many skill levels have declined and continue to decline. This is of courese not a picture of emergent domestic inflation...flow is out of tangible assets in the context of a credit contraction.
Part of the answer to the apparent contradiction of commodity price behavior and U.S. domestic inflation lies in the use of the U.S. dollar as international reserve currency for trade. The rest of the world (ROW) outside of the U.S., Japan and most of Europe, have expanding private credit markets and growing GDPs. A lot of the dollar expansion that the U.S. Fed has been applying to reflate our domestic economy has been showing up in the ROW. These dollars are fueling credit expansion inflation...but not in the U.S. where they are trapped in the bankinig system due to aggregated private credit contraction. Some Chineese with excess capital have been buying metals and storing them in farm fields as an inflation hedge...they have been borrowing and buying apartments for the same reason. So, the ccommodity demand may in fact be driven by inflation that may in fact be sourced in expanded dollar supply but the effect of the inflation is expressed in ROW and not Domestically...nonetheless this dyanamic does push up the price of commodities.
When we look at the situation in the U.S. today, there is a mixed bag of evidence for supposed inflation. Certainly, international commodity prices denominated in dollars are lately elevated. On the other hand prices for domestic real estate, both residential and commercial, automobiles, both new and used, boats, furniture, antiques, and most durable goods continue to decline or seem to languish at historically low prices. More importantly, private credit has been contracting for over 20 months and continues to contract contributing to the loss of value in previously leveraged assets. We also see that unemployment remains high and wages at many skill levels have declined and continue to decline. This is of courese not a picture of emergent domestic inflation...flow is out of tangible assets in the context of a credit contraction.
Part of the answer to the apparent contradiction of commodity price behavior and U.S. domestic inflation lies in the use of the U.S. dollar as international reserve currency for trade. The rest of the world (ROW) outside of the U.S., Japan and most of Europe, have expanding private credit markets and growing GDPs. A lot of the dollar expansion that the U.S. Fed has been applying to reflate our domestic economy has been showing up in the ROW. These dollars are fueling credit expansion inflation...but not in the U.S. where they are trapped in the bankinig system due to aggregated private credit contraction. Some Chineese with excess capital have been buying metals and storing them in farm fields as an inflation hedge...they have been borrowing and buying apartments for the same reason. So, the ccommodity demand may in fact be driven by inflation that may in fact be sourced in expanded dollar supply but the effect of the inflation is expressed in ROW and not Domestically...nonetheless this dyanamic does push up the price of commodities.
They cant raise interest rates. That would cause more financial institutions to collapse (as more defaults happen) which would cause the government to borrow more money to bail them out. Its much more likely that the government will keep interest rates low and inflate our way out of this problem. The politicians will do whatever they cant to cause the least amount of pain possible while they are in office. They will then pass the buck to the next guy.
The American economy is really just a game of "hot potato" to them.
The American economy is really just a game of "hot potato" to them.
Traveler, the problem is that interest rate modulation is ineffective in igniting an iniflation where aggregate private credit is contracting.
I agree that the Fed wants to do this...my observation is that they have been trying to do this for over a year...but you notice that we are not getting much domestic inflation.
Private credit is contracting because of continuing defaults and credit writeoffs while new debt is not being created in aggregate. Almost all private credit activity, even in the corporate sector, is refinancing to restructure balance sheets. This financial restructuring in response to lower interest rates has not resulting in any expansion of private credit. Much of the refinancing has included the flow capital out of tangible assets and into short term financial accounts...aka money and money equivalents. Net private credit continues to contract.
In this context of contraction in aggregate private credit, the Fed's normal monetary policy transmission assumption, that an increase in money supply will result in an increase in bank lending through the operation of the money multiplier effect, does not work. The lowering of interest rates does not, has not, worked in increasing bank lending or effecting price change indexes that evidence inflaton, not has it resulted in increased tangible asset prices. All that has occurred is that excess reserves have been pooled within the governemen interbank system.
The reality of the current situation is that the Fed's power to reflate by increasing money supply by whatever means, interest rate or QE, is ineffective. The Fed has no tool to drive demand and it is private demand that needs to be driven. The reality is that monetary policy cannot reflate until fiscal policy creates incentive for private actors to borrow! Did you hear anything from Obama today that makes you think private borrowers will be running out to make enterprise loans tomorrow? There won't be any inflation relief until they do.
I agree that the Fed wants to do this...my observation is that they have been trying to do this for over a year...but you notice that we are not getting much domestic inflation.
Private credit is contracting because of continuing defaults and credit writeoffs while new debt is not being created in aggregate. Almost all private credit activity, even in the corporate sector, is refinancing to restructure balance sheets. This financial restructuring in response to lower interest rates has not resulting in any expansion of private credit. Much of the refinancing has included the flow capital out of tangible assets and into short term financial accounts...aka money and money equivalents. Net private credit continues to contract.
In this context of contraction in aggregate private credit, the Fed's normal monetary policy transmission assumption, that an increase in money supply will result in an increase in bank lending through the operation of the money multiplier effect, does not work. The lowering of interest rates does not, has not, worked in increasing bank lending or effecting price change indexes that evidence inflaton, not has it resulted in increased tangible asset prices. All that has occurred is that excess reserves have been pooled within the governemen interbank system.
The reality of the current situation is that the Fed's power to reflate by increasing money supply by whatever means, interest rate or QE, is ineffective. The Fed has no tool to drive demand and it is private demand that needs to be driven. The reality is that monetary policy cannot reflate until fiscal policy creates incentive for private actors to borrow! Did you hear anything from Obama today that makes you think private borrowers will be running out to make enterprise loans tomorrow? There won't be any inflation relief until they do.