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Falling Home Prices Mock Inflationists

By Rick Ackerman Posted on April 1, 2009, 2:12 am EDT Last Updated April 1, 2009, 2:59 am EDT

Inflationists and their crackpot theories took another pounding yesterday on news that home prices had plummeted at a record pace –19 percent since last January. Residential real estate values have now fallen by 30 percent nationwide since peaking in 2006. In trying to reverse this trend, the Fed would appear not to have gotten much bang for its buck, since the central bank has committed an estimated $11 trillion already, targetedeggs-small mainly at large mortgage lenders. Success is certain to become even more elusive after New York City’s real estate market implodes, as it soon will. The last time the Big Apple was seriously on the ropes, President Gerald Ford told the city to drop dead. What will Mr. Obama tell them? And, will the Daily News still be around to report it so memorably?

Concerning the rampant inflation that nearly all mainstream economists expect, we would ask these dismal scientists to predict exactly where it is most likely to surface. Will real estate values finally catch fire again, pushing tract homes into the billion-dollar range?  Will a dozen eggs cost $90.  Will assembly line workers at Ford negotiate a package worth $300 an hour?  Will college tuitions quadruple in the next few years?  Of course not. Where would the money come from?  Surely not from wages, since the businesses that would pay them are doing well merely to survive these days. And not from a massive credit binge either, since the only collateral we could use to borrow up another storm is…our homes. Why can’t economists see this?  And why can’t they understand that the deeper taxpayers go into hock to “stimulate” the economy, the more drag there will be on future growth?

Only  Hyper-Inflation Is Logical

To be clear, let us note that hyper-inflation seems entirely possible, even if mere inflation does not. Hyperinflation will arrive when The Government decides that fiscal stimulus alone cannot ever get us out of debt, given the vast sums of debt that need to be inflated away. No, only a hyperinflation could do the job, albeit at a price that presently seems much too high. Creditors and savers would be wiped out, life insurance policies would become worthless, pension funds would be devastated, and all of the institutional conduits of lending, including the bond markets, would cease to function for a generation.

If you think the decisions Mr. Obama is making now are tough, wait till he figures out that America’s multi-trillion-dollar boondoggle is barely causing a ripple in the economy, much less the kind of boom that would make our debts manageable.

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  • Andy G. April 4, 2009, 2:19 am

    It seems that essential items, like food and fuel, would increase in price due to scarcity from decreased global trade. But, if the US dollar collapses 30 or 50 percent, like when it no longer becomes the world reserve currency, wouldn’t sellers (automakers, car dealerships, homebuilders, etc.) have to raise the prices of even cars or houses maybe 30 to 50 percent to compensate for receiving devalued dollars?

    Also, if the US government deliberately creates hyperinflation, wouldn’t that wipe out the bank reserves of those too-big-to-fail banks? Why would those elite US bankers let the US government create hyperinflation if those bankers would also lose all their US dollar bank reserves? It seems that hyperinflation is a possibility, but it would be finincial suicide even for the influential elite US bankers.

    Also, if hyperinflation is inevitable, then trying to save US dollars in a 401K or other retirement account is unnecessary as it would all be lost eventually.

    Trying to think practically, should someone buy a house or car before the US dollar collapses, or will those prices keep deflating even after a US dollar collapse? Should someone keep contributing to a retirement account- or is hyperinflation (wipe out)inevitable?

    There is a lot of theory, but more guidance and examples are requested about the practical (everyday life) application of theory.

  • Psycho April 2, 2009, 5:35 am

    I do apologize for the intrusion into this interesting coversation. I would like to state some things at a fear of being ridiculed. Did anyone have an idea that all of the events that have taken place are a pure orchestration. There is no panic all the way on top where the real decisions are made. We are merely pawns looking up from the very bottom of the pyramid, trying to understand what is really happenning. You all speak with an agenda of making money out of making the right decision or at least coming out unscathed, betting either on deflation or inflation(I am too). The sad truth is that the economic “crisis” is a carefully planned spectacle meant to put the general public into a state of worry with no clear view of the future. It has been accomplished. I urge you to research the notion that banks and major players fell victim to greed and stupidity, this is what the general public did and that was the whole point. The coming events are not even an issue of inflation or deflation, but of survival( and not the financial one). The outcome depends on the big fight up top, if the US/UK/EU western world will succeed in establishing that central control government with the world bank intact, without Asia/Middle East/Russian bitter fighting, all the way to military escalations. We are seeing the finishing stage of a thorough centuries long plan. It either goes through or it doesnt, but will be violent no matter what. We will be seeing deflation until all the players who aren’t on board the train will be unable to service their debt and default, transfering their assets into the center of the ring. Once all the needed assets are assumed and controlled by the government players, they will signal the green light, and all the liquidity being held up by the major banks will release( especially if that central world bank is setup). The purpose would be to destroy anyone lucky enough to survive deflation clinging to the cash based instruments. That would be the finish stage of bankrupting the general population. Voila! We would be all equal in our poverty. As far as all those derivatives and unimaginable sums of money in liabilities go, don’t worry yourselves too much. It is kind of like playing at the poker table with your friends using monopoly money. You can pitch in 10 bucks to start or use stacks of money amounting to hundreds of trillions. If you are all in the game with an agenda to have some fun, it doesnt matter how many zeroes are at stake, it is all virtual money. Every player knows its worthless, and they dont care who keeps how much, or if a hundred trillion is going to fall of the table and disappear. Its the real assets, the table and the cards, that matter, as that is where they have their fun(total power) and it is more important than phony money. And you better believe it that the game now is to kick out from the table all the players who don’t understand these rules or dont want to play by them. I advice you carefully research the ownership structure of ALL the banks, companies, insurance, brokerages, media, industries, etc…that are in the news and you will be amazed how out in the open this game is. It is like a glorious 3 hour hollywood flick that is playing for us the people and we are currently at 2:55. It doesnt seem it has a good engding though, and I hope I have some popcorn left over.

    I apologize for the long post and hope I at least entertained someone here except for myself.

  • TKO April 2, 2009, 3:14 am

    No confidence=no velocity=no spending=no inflation. Deflation continues and it feeds on itself up to a point, although it is hard to quantify how much worse it would be now without the various stimuli and bailouts thus far engineered. These have had the psychological placebo effect that Cameroni alluded to. At least it managed to provide the stock market with a dead cat bounce. The rate of decline in some real estate sectors is slowing, although some markets (New York) are just beginning to feel the slide.
    The economic policymakers are well aware that they look like the biggest bozos in the universe for not nipping this disaster in the bud, or even recognizing the possibilities of catastrophe. They will do whatever is necessary to ensure that they are not reponsible for the ultimate deflationary depression. At this point I believe that they think that the situation is manageable with the measures taken thus far. However, they will spend 4X GDP, sell all the gold in Fort Knox, Give away free cars, go back to giving away houses, nationalise everything, maybe even declare a tax holiday(!) to achieve their desired results. THE BEATINGS WILL CONTINUE UNTIL MORALE IMPROVES.

  • misunderstood April 1, 2009, 9:57 pm

    Rick,

    This is a great debate and I appreciate everyone’s thoughtful opinions. Your opinion that deflation is a certainty and is underway is logical and I have no argument there. But you also say that inflation is not going to happen and that hyper inflation is only a possibility.

    Let’s assume that you are 100% correct and that deflation continues and that the possibility of hyperinflation does not occur. If that is true then wouldn’t I be better off to sell my gold and silver and stuff the cash back in my safe deposit box? With continuing deflation and no inflation then gold will soon be below $500 an ounce and my treasury bill hoard will double in value. Well, won’t it?

    The cash will buy twice as much gold and should also buy twice as much milk, eggs, gas…

    Or, am I missing something? If your deflation theory is dead on then how can U.S. treasury notes not be a better investment than gold or silver? I do believe you are right about the deflation but I just can’t force myself to make this trade.

    As an aside, did you know that the treasury says that 50% of all the U.S. paper money in circulation is outside of the United States? And they also admit that 50% of the money circulating outside of the U.S. is counterfeit. Not copy machine quality but bills printed on the same printing presses the treasury uses and with equal quality printing plates, ink and paper. They are printed by sovereign governments and are pretty much indistinguishable from genuine currency.

    Just a thought. Rick, you may be right on but I’m going to hold back a little bit of that gold and silver… jack

  • Brian Ciarallo April 1, 2009, 9:44 pm

    Do you want to know how right Rick is in what he says? Listen to the new video just out!!
    “The OBAMA Deception” a remarkable video on what’s really going on behind the scenes!!
    Listen on youtube.com or on the Alex Jones show at infowars.com .
    Rick is pretty much on the money!! If you care about your money and well being…

    Brian

  • HARRY April 1, 2009, 8:50 pm

    Look at any example of a country with galloping inflation and you will see that
    – the workers are downtrodden and have no pricing power
    – people are poor and not competing to drive up prices
    – the guy in charge is printing money and giving it to his cronies

  • David April 1, 2009, 7:09 pm

    rg writes: “IMO deflation is a certainty thru 2009 & possibly way beyond…(unless a major govt policy change happens).”

    There will be no policy changes, only more of the same until the situation is so dire that handing out checks will be the only way to get money into consumer’s hands, thus depreciating the currency to save the economy. For a little while longer, at least.

    Rick obviously doesn’t believe that Bernanke won’t do what he said he would. But I assure you he will. For that matter, the government started handing checks out last you, setting the precedent for bigger and bigger checks.

    &&&&

    Exactly: “…until the situation is so dire that handing out checks will be the only way to get money into consumer’s hands.” This is what I meant when I wrote the following: ” Hyperinflation will arrive when The Government decides that fiscal stimulus alone cannot ever get us out of debt, given the vast sums of debt that need to be inflated away.”

    But I am not talking about some piddling $1800 tax refund; rather, the checks that the government hands out will need to be as big as the “underwater” part of everyone’s mortgages — plus some substantial cushion of perhaps $50k to $100k– in order to “solve” debtors’ problems and keep consumption numbers up. The cushion would tide us over until good jobs return — hardly a given, since the U.S. without a banking industry has almost nothing left to sell the world.

    Concerning Bernanke, a rank political stooge, he hasn’t come even remotely close to shoveling $100 bills out of helicopters. Whatever the guy said he would do, and regardless of what he allegedly learned studying the Great Depression, in practice he has been too chicken-hearted to do what it would take. That’s why the $11 trillion shot at the problem so far has done NOTHING to buttress the housing market. Bernanke has been behind the curve since the beginning, and he still is — still hasn’t copped to the fact that the only solution to deflation, other than via liquidations, is to hyperinflate, literally distributing large bills to the populace.
    RA

  • GlennK April 1, 2009, 7:03 pm

    It appears that some parts of the economy are rapidly deflating, therefore housing, cars, electronics and @ the same time others are rapidly inflating , such as food, health Ins., and others are going in both directions at almost the same time energy as an example. ( ex. the price of a b. of oil goes down as gas continues to go up after it’s rapid fall off last fall.) What’s happening here?

  • Occdude April 1, 2009, 5:30 pm

    By my estimation without government intervention we would have had a collapsed economy much greater than we had fulfilling your deflationary thesis. Now my question to you Rick, is how did the government intervention prevent the collapse? Is it a stretch to think that a phony recovery can take place with government intervention in orders of magnitude much greater than has already taken place? Is it also unthinkable that this recovery without true productive capacity being increased may be inflationary?

    The Fed agrees with you Rick and they are doing everything they can to get the channels of both money creation and deliverance operating again. Now they have a lot of resources and smart guys who can figure out how to get money in our pockets there is not one way but many too numerous to even count to do it.

    &&&&&

    This IS the recovery, Ron: a piddling 1500-point short-squeeze in the Dow Average. Concerning those “smart” guys, surely you are joking? Are you aware that they’ve shot $11Tr worth of stimulus already, to no effect? RA

  • cameroni April 1, 2009, 4:31 pm

    Oh Lord,

    I think I am in agreement with your article and comments.

    I am an inflationist though and I feel with a certainty that hyper-inflation is the eventual outcome of all of this mess followed by a devastating depression. Could I be wrong? It just occurred to me that I am actually hoping for inflation as a means to escape the inevitable. We are certainly deflating now and there does not seem to be any end in sight. The markets lurch up at any small news-bite that suggests a tiny recovery in housing and yet the big picture is really very ominous and the trend looks to be continuing down if stimulus does not re-inflate the economy. And frankly how can it? Even in the Trillions, the stimulus seems to be pocket change next to the problem. Perhaps our belief in the stimulus will be the real cure, more than the medicine itself. A kind of placebo effect.

    Maybe the extremists who suggest a Dow of 1500 or less will be proven prescient after all and that unemployment will eventually reach as high as 30%. Perhaps this is the real outcome that is needed to bring balance back to the economy. A total cleansing. However the threat of hyper-inflation is very real if aggressive stimulus continues globally while everything else winds down. We are going to get whipsawed by declining asset values followed by escalating prices for mundane consumables, food, fuel and imported goods and in an environment of increasing unemployment and where high interest rates will prove to be more damaging to the economy than even the current asset deflation. (Sounds paranoid but “they” will get us coming and going). I think the best thing to do is just keep focussed on the markets every day. Stay nimble and try to avoid the pitfalls that await at every turn.

    And on the issue of interest rates,… we have cheap money now. Lucky for us,..but credit is tight and that means rates will begin to rise despite the Fed. There is little risk in going long on mortgages. You certainly don’t want to take a 6% mortgage in one year and be faced with 12% on renewal. I am very concerned about the future of interest rates and it is exactly because of our staggering debt levels and stimulus combined that I want to keep that risky scenario out of my longer term borrowing plans.

    And getting some in my portfolio too. (Does anyone else out there remember when quality strip bonds were paying 18% with 20 year terms? Those were some crazy days!)

    Cam

  • James April 1, 2009, 3:26 pm

    Rick,

    We’re seeing **asset** price deflation. I don’t know if you’ve been grocery shopping recently, but I’m not seeing falling prices there. Once the rest of the world stops buying Treasuries and the USD falls off a cliff, I think we’ll see significant inflation.

    If you really want a detailed answer, ask Eric Janszen.

    &&&&

    To repeat myself for perhaps the hundredth time: Gargantuan asset deflation is overwhelming puny, insignificant grocery-store inflation. Eric has the most detailed and consistently wrong answers on this subject that you can find anywhere. Please have him get in touch with me when the price of something other than a head of lettuce has risen substantially. RA

  • Peter Montgomery April 1, 2009, 3:07 pm

    As usual, cogent analysis that flies in the face of the popular specious fallacies of finance.

    The gigantic debt that allows the circus to continue has to be serviced. So the masters of the financial universe walk a tightrope – balancing the ever increasing demands for dollars and the subsequent flood of supply – with the necessity of satisfying the follies of excess.

    Deflation will inflict incredible pain on the repayment of debt as each dollar that has to be paid in the future is more precious today.

    Default will stop the merry go round and will not be allowed to happen.

    Hyper inflation is the most likely scenario and yet even this has its perils because it is a double edged sword – one edge cuts the debt due because of the decrease in the value of the debt’s dollar value while the other cuts the borrower due to higher interest rates that must be paid to cover the inflation rate.

    Seems our idiot financial savants have long agreed to a Faustian bargain that will result in a sure doom that will end horribly.

    The borrower becomes the lender’s slave was never more true.

  • rg April 1, 2009, 2:40 pm

    RIGHT ON RICK!!!
    You nailed it!
    The $10 T or so the fed has pumped into the economy won’t even make a ripple in the $600 + T market of CDS’s & CDOs that is imploding (ie. devaluing/deflating) around their ears. The $600T was ALL “funny money” to begin with and leveraged @ a 60:1 ratio to boot. The “jig is up” the market has found out these “securities” are WORTHLESS. They’ve realized that they’ve all been sold a “pig in a poke”. The daily market dance you currently see (ie.bear rally) is NOTHING more than folks trying to “get out from under” these bad/toxic/worthless “assets” by pawning them off onto others.
    The Obama Kenysians JUST DON’T GET IT!!
    They’ve got their collective heads so far up their A*ses they can’t see that the tail is wagging the dog.
    For those of you who want a REAL lession in TRUE economics, politics & human behavior read the following:
    1) “The Creature from Jeckyll Island” (re:the FED & monetary policy)
    2) “Common Sense” by Thomas Paine (re: human behavior & govt)
    3) Anything about/ by the “Austrian” school of economics re: real money economics.

    IMO deflation is a certainty thru 2009 & possibly way beyond…(unless a major govt policy change happens).
    The market ALWAYS RULES ! There’s more of us than them and we surround them !!!
    Take back our country.

  • ANK April 1, 2009, 1:36 pm

    You apparently haven’t gone food shopping in New York State lately. Prices of certain items have nearly doubled.

    &&&&

    How does the doubling of “certain items” at the grocery store compare in dollars to a 30% decrease in the value of one’s $450,000 home. RA

  • David April 1, 2009, 1:33 pm

    However real deflation presently is (which I for one don’t experience in my daily life), I think deflationists fail to take Bernanke seriously with regard to what he will do to fight it. Here’s what he said in a 2002 speech to the National Economists Club:

    “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

    Simply put, if it takes writing $10.000 or $100,000 checks to every man, woman, and child in America, that’s what the Fed will do. Everything so far (nearly $13 trillion worth) is just a warm-up.

    Inflation will have it’s say, and sooner than you think.

    &&&&&&

    The only say inflation has had so far is via the mouths of money-watchers who have been wrong since the early 1990s. I’ve asked inflationists to predict where significant inflation would surface in an economy where consumers have zero purchasing power, but neither you nor anyone else who has commented has done so. RA

  • coolsaint April 1, 2009, 1:12 pm

    I do not know if we are headed for inflation vs deflation but to answer your question why the world’s economist cannot comprehend the problems we face is easy : they (economist , wall street , congress and president) think the consumer will SOON begin spending money they do not have…NOT! The consumer economy is dead, and the sooner these BOZOS in Washington can perhaps (MIRACLE) figure out the right thing to do (MIRACLE).

  • Carol April 1, 2009, 12:11 pm

    Excellent article, Rick. The Obama administration is following the Bush administration’s footsteps, complete with the same Goldman Sachs connections (which has now gotten back all its losses thanks to TARP and AIG funding even though a year or so ago it was reported that Goldman had the least exposure to the “subprime” market. Paulson wants more “kudos” for “saving” the economy.

    We need to split up the banks, reinstitute strict investment banking and strict retail banking, eliminate the opacity of a hedge fund takeover of toxic fund management at taxpayers’ expense. The modus vivendi must change from trying to reflate to the recognition that there is no buying power out there in order to bring back “the good times”. We need to address all debt – corporate, individual, government. Otherwise, we might as well all learn to speak Chinese and Arabic as we revert to being their colonies when the “low” is found and these foreign sugar daddies pile in to take us over.

  • Occdude April 1, 2009, 6:40 am

    Rick I think one thing that intrigues me about orthodox deflationists is that they assume that people wont spend money even if they have it. People by and large feel the acute thermal burn of cash in their pockets and realize that paper with pictures of old ugly dudes don’t cut the mustard when it comes to satisfaction of all their earthly needs they eventually cry uncle, and run to their nearest Hummer dealership.

    First lesson of economics is that peoples DESIRES are limitless, It’s the RESOURCES that are limited and economics goes about parsing out those limited items in the most efficient manner possible using a novel invention, money.

    Now if peoples desires are limitless AND money supply is unlimited BUT resources still remain tethered to the reality of scarcity, the obvious result is inflation in response to money creation excess of goods production. Anything that requires credit will languish price wise while all “real items” that you can’t do without will rise in nominal and real value.

    Now all that remains is the conduit. How do you get people to spend money? Seems like a ridiculous question no? But lets entertain the thought. First you have HUGE unfunded liabilities in the pipeline but thats somewhat in the future. How about national healthcare, generous unemployment benefits, national emphasis on education, roads to nowhere, bridges to everywhere, inefficient subsidies of alternative energies, refurbishing the national energy grid, raises for all government workers etc, funding of all state, local and city obligations. All this consumption taking place with no production of anything else but more money.

    But I think the most important cause of inflation will be a gradual reluctance of our foreign creditors to accept ever larger amounts of green backs for all this “great society building” we’ll be doing on their dime. The Saudis will shake the sand out of the heads at some point and realize that it takes a lot of our paper to get the energy equivalent to a barrel of oil. The Chinese will poke their heads out of toxic chemical plumes and question why aren’t they getting happy meal toys for their kids. In short at some point we will be looking at a currency crisis with high inflation but probably not hyper inflation and at that point I think we’ll finally get it, take our medicine and have austerity measures.

    There will be cycles for sure vacillating between inflation, deflation and absolute panic, so enjoy the deflationary ride for now. Remember that inflation is the chosen governments response to deflation who has its hands on the money press in a death grip. Already the Fed and the treasury are our new economic “Alpha and Omega” so the market has to chew on this new developement and decide an adequate response. This is gonna take a while to get through all the different phases of of this because there are so many different dynamics at play, but I think a great depression redue or even a “lost decade” ala Japan just isn’t in cards. This will be a new economic event possibly titled “The Great Cautionary Tale”

    &&&&&

    Still looking for a response that even remotely answers my question. You have not accounted for how this inflationary money will get into the hands of consumers. Meanwhile, all of your public works projects put together don’t amount in dollars to what financiers in one square block of NYC were making just a year ago. RA


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