Central bank keeps telling us that inflation is "on target" at just 2% or 3% p/a for about the last 5 years. Meanwhile, housing inflated more like 40% (70% in Sydney!)[2] over that time, so how does that work?
OH WAIT, housing was excluded from CPI[3]. I wonder who decided that, and whose interest(heh) that might possibly be in?
[1] https://www.rba.gov.au/inflation/inflation-target.html
[2] http://www.huffingtonpost.com.au/2017/03/20/this-chart-shows...
[3] http://www.abc.net.au/news/2017-04-20/inflation-data-suffers...
Sadly it looked like this silliness was going to continue forever.
Fortunately, the market has given us inflation-proof cryptocurrency, and these central banking bastards are finally going to have to test their theories and put their ideological balls on the line in a free market with the ability of nation states to control currency as the price for shitty science. Good luck to them - they will need it.
Finally, cryptocurrencies with fixed, limited inflation schedules provide a competitive non-inflationary alternative to state issued currency.
People are not all affected by changes in housing prices immediately. If you own your home or pay below market rent you won't be affected until later. A survey asking how much people actually pay will have a built-in lag.
People borrow the vast majority of the cost of a house to buy it, so housing prices are largely only restricted by how much banks are willing to lend and how much it costs to borrow — all of which is heavily influenced by central banks.
The NYT has a good “buy vs rent calculator” that’s worth checking out:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
Even though the calculator is useful, it’s important to have a really good understanding of why housing is so much more expensive today (as a percentage of avg annual income) than it was 50-60 years ago. For that I recommend a short, but extremely useful book, The Housing Trap:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
That is incorrect. Loose credit most definitely affects rents, as in more people can now afford to buy real-estate (houses, apartments), that reduces the supply of available places to rent (assuming no new constructions take place, for the sake of the demonstration), and generally speaking a reduced level of supply has been accompanied by higher prices, in this case higher rents.
Is there a conclusion on the global movement of rent prices in comparison to house prices?
I guess it's fine if people want to describe that situation as low inflation with an asset bubble. But I think what is actually happening is that, although much of the world now gets to eat well and enjoy consumer goods, all kinds of assets (property, artwork, luxuries and anything requiring rare resources) are moving up and up out of people's reach).
We could consider that the inflation that was supposed to happen with QE ended up just inflating assets prices. But that would still be an overall good thing, because asset prices are not what harm the greatest body of people, nor affect their wages like regular inflation does. People will not be thrown into poverty because apple has historic highs.
In terms of housing, we should look at rental prices more than housing prices. Is that going up as fast as house values? I dont think so.
I think it takes a lot of gall to post this, considering that asset prices hurting people is the topic of the thread and the gist of GP's post. I would say it's certainly not an overall good thing; it's good for the landed class and hurts everyone else.
Inflation typically doesnt take into account investable assets, it just accounts for the requirements of daily living. Rental prices is one of those, housing prices are more tangential. Its reasonable to exclude the last.
> it's good for the landed class and hurts everyone else.
If it were cheaper and more people purchased land, then the landed class would be bigger. There is some paradoxical notion to saying the rules you have favors the 'rich' and they should change so there are more 'rich'.
Many types of loans are secured by assets, so when those bubbles pop, the loans get called, which depresses asset prices further and further.
Bubble implies it has to pop, inflation is just raise in prices overall.
To this moment its unclear if we have a bubble or not.
After Lincoln won they just weasled their way back in.
The Fed can just electronically debit an account and create money out of thin air. However, the power to control the US money supply is a constitutional right of Congress. We should take that back. It should be done via a k-percent algorithm. Get rid of fractional reserve banking while you're at it.
Actually, it isn't. The Fed was created as an end run around the Constitution. The Constitution does not grant this power because of the experience with the Continental Congress and their profligacy at printing money.
> Get rid of fractional reserve banking while you're at it.
Nothing wrong with that. Its excesses are held in check under a free banking system.
>"The Constitution contains only two sections dealing with monetary issues. Section 8 permits Congress to coin money and to regulate its value.
www.let.rug.nl/usa/essays/general/a-brief-history-of-central-banking/money-and-the-constitution.php
The fact the Fed's balance sheet swelled to 4.5trillion with free money is just outrageous. Wall St, nor the Fed, can regulate themselves and they their "dual mandate" is financial alchemy at best.
And replace it with what? The barter system?
Something Milton Friedman and Paul Krugman agree on, at least at times, is that commercial banks should be like utility companies.
Oh ... wait ...
https://www.foreignaffairs.com/articles/1932-01-01/crisis-go...
The problem, at its root, is that we have large parts of the world with negative trade balances. What that boils down to is that there are large parts of the world that don't have any economic use but get included anyway.
Those parts represent interruptions to an economy that only works long-term if it's a circle.
Now just so we're clear: the problem is overcapacity, and a demand-limited economy. The solution is obviously not to cut parts out and lower demand further (why not ? Because anyone doing that will get outcompeted in a credit-based economy and therefore doing this is not a Nash equilibrium).
Loans and Home mortgages would be impossibly difficult to get. You do realize that when we get a loan from the bank, the loan amount minus the down-payment exists only electronically? The balance is supposed to be wiped out if we repay the loan but that never happens.
I am not saying fractional reserve banking is perfect but what are the alternatives?
However, with a k-percent rule keeping inflation at 0.5-1% it would not be that much harder to get financing. I do agree we need monetary growth to avoid commodity money. In other words, we don't want people holding money because it grows in value--we want people to have some incentive to invest it.
If you want to give people free money to buy houses, just give them free money. Wall St & the Fed are a criminal middleman profiting off everyone else's expense.
The real question is how do you fairly grow the money supply if we cut out the Fed? Maybe finance national healthcare this way. Hospitals could issue currency and buy securities on the open market. We could even restrict it to treasuries to subsidize the national debt like we do now.
There are other circumstances at work here then more money in circulation, such as land use restrictions, building codes, nimbyism, credit costs/restrictions, tax policies, etc. If investors can build housing and make money they will certainly do it. It's not just the supply of money, but also the supply/demand of a product that effects prices.
Computer prices have been rapidly deflating since before I was born, but I've bought several computers. Deflation only prevents purchases when the savings from waiting outweigh the cost of not having the item.
Very true, but it simply is a semantic gap. I suspect(not know) most economics students are taught 'deflationary scenario' or 'deflation' is when savings from waiting outweigh (cost of not having the item or benefit of having the item).
.. which frees up resources into products/industries people value more. Why is that a bad thing vs people overspending a lot to buy things they might not need? To much deflation is bad but how about a stable money supply with very low (if any) injection of money by the government?
> how about a stable money supply with very low (if any) injection of money by the government?
Majority of money supply in existence is some form of debt. I have $1000 cold hard cash, I put it in a bank and the bank then lends it someone else. Now there are $2000 in existence. Central banks don't and can't control this process directly. This is the vast majority of money out there. The amount that CBs prints is really tiny in comparison. In fact they are aiming at exactly what you suggest - some relatively low inflation rate but they tend to overshoot because they can't get the precise inflation rate they want and undershooting makes the process much harder to control. The fact that money is debt is exactly the reason you're now seeing inflation in US, even though the Fed stopped printing money long ago. Now they'll be starting to reduce money supply but you'll continue to see inflation rise until some sort of equilibrium is reached or (more likely) next bust comes. The money printing is supposed to act as a sort of confidence boost in recession/depressions but now that confidence is back, the money supply is growing and growing even though money printing has stopped.
Good. I think the world could do with less consumerism.
People don't have a say in who or what is 'saved' by printing money. Or where the new money goes. A handful of people decide, most of whom are in a very comfortable position in life and quite often have vested interests in maintaining the status quo. After all, it works for them and got them to where they are, so very few people would do something to jeopardize their own wealth / position. How many politicians own more than one property for example? Are they really going to voluntarily introduce measures to lower property prices in the interests of the younger, less well off people / families?
I agree an entirely deflationary monetary system isn't the answer however the more you print money, the more you're effectively saying "It's no big deal if you get in to debt, we'll just create more money to clear it like we did the last time and the time before that".
The solution to the rich hording everything is taxation and redistribution.
How did that work out in countries with almost 100% tax and full distribution policies?
"I don't get it, people like drinking water but they don't like drowning"
"The only reason I am in debt, is because i can't ask for a big enough loan"
QE is not "printing money". It is exchange of interest bearing assets from the financial assets like government bonds from the private sector, for non interest bearing assets(cash). The net financial assets(money) owned by the private sector remain exactly the same, so there is no direct correlation with inflation.
QE is a strategy to manipulate/lower long term interest rates by changing the asset portfolio of the private sector. Traditionally, central banks only directly controlled short term interest rates. However, in the wake of the financial crisis, credit markets were still tight despite central banks reducing overnight interest rates to zero(the "liquidity trap"). Since you really cant go (much) lower than zero, new techniques were needed to stimulate the economy.
QE does not (directly) lead to inflation, as is further reinforced by the West post 2008 or even Japan in the 2000s. Inflation has consistently stopped short of target during QE. The precise changes to the risk portfolio of the private sector, along with the conditions of the economy means QE can have either inflationary or even deflationary effects.
The problem with only locals buying property are many, but mainly that prices stagnate. That is not bad per se, but there is a voting sector that doesn't want price stagnation (older people basically). Governments in Australia have used foreign investment rules as a kind of secondary economic switch to keep prices going up, to the benefit of some, the chagrin of others, and ultimately maintain a status quo that benefits politicians.
It's a tough problem, property prices, and one with no clear right or wrong answer.
Look at Donald Trump’s son in law as an example — I use him not to make a political point but because there’s alot of public information out there. He uses cheap capital to buy lots of cash flow in the form of apartment complexes. Being deeply in debt means that his liabilities get discounted by inflation, while inflation allows his company to escalate rents.
If you have cash or equity now, the smartest move you can to make is to borrow as much as you can afford and buy assets like real property or businesses that generate cash flow. Businesses like laundromats are probably more valuable than tech investments in the next decade.
Imagine there was only one bank, we'll call it Banky Mc Investment Inc. or BMI.
Fred wants to buy a house. That house "costs" $1 trillion dollars. Bob owns the house and decides to sell.
Fred goes to BMI and says, "can I have a loan for $1 trillion?" BMI says "sure thing Fred" and BMI transfers "$1 trillion" to Bob's account. BMI then goes to Bob, and says "hey Bob, it looks like you've got a lot of cash in your account. Would you like to invest it in the BMI morgage investment pool, ultra low risk, backed by valuable real-estate? Bob says "sure thing!" and BMI's books balance. Sure, Fred now has a lot of debt, but there is no reason why this couldn't happen, even with a "limited money supply".
You don't need cash to put IOUs on the books.
We've had unprecedented global quantitative easing over the past decade, so it's quite natural that house prices globally will meet and surpass all time highs.
This is what happens when you keep printing money and set precedents such as bank bail outs and debt write offs. If all money woes can be solved simply by printing money it begs the question why don't we just keep printing more? And the realisation soon hits home that if you were to do that, the price of everything would rise, the rich would get richer and they could simply hoard all land and property indefinitely while sucking every last cent out of people starting out in life...
It works up until the bit where people start getting angry and create a toxic environment in which nobody wants to live or do business...