How weak housing prices are hiding the real rate of inflation

[InRareForm]

http://www.businessinsider.com/how-weak-housing-prices-are-hiding-the-real-rate-of-inflation-2011-9?utm_source=twbutton&utm_medium=social&utm_term=&utm_content=&utm_campaign=moneygame-contributor

[CosmicCowboy]

Nice find

[boutons_deux]

Inflation due to price-push or demand-pull?

"make it really hard for the Fed to live up to its promise to keep interest rates low until 2013."

Raising interest rates can dampen demand-pull (see Volcker early 1980s), but not so effective against price-push.

[RandomGuy]

Meh. Not sure I entirely agree with the premise. The correlation he points to in his graph is a good fit but not a perfect one.

The grind of foreclosures, and the fact that so many people are underwater in their mortages does not signal to me any real strength in the housing market that would cause any housing inflation. Seems like the guy is a bit too focused on his ability to make fancy technical graphs at the expense of a more comprehensive view of a complex system.

I also tend to view proclomations about the "real rate of inflation" with some amusement, because there are so many people saying that their real rate of inflation is so much better...

[CosmicCowboy]

Meh. Not sure I entirely agree with the premise. The correlation he points to in his graph is a good fit but not a perfect one.

The grind of foreclosures, and the fact that so many people are underwater in their mortages does not signal to me any real strength in the housing market that would cause any housing inflation. Seems like the guy is a bit too focused on his ability to make fancy technical graphs at the expense of a more comprehensive view of a complex system.

I also tend to view proclomations about the "real rate of inflation" with some amusement, because there are so many people saying that their real rate of inflation is so much better...

Whats the point of having an official inflation rate that excludes food and energy?

[MannyIsGod]

Whats the point of having an official inflation rate that excludes food and energy?

There's a point to it although it might not be an overall incredibly useful tool. That still doesn't mean the OP has a good case for what he's saying.

[Wild Cobra]

Housing prices are still too high, but they are hiding the real inflation?

Get real. It's a correction. Inflation was too high then as housing prices were being overpriced.

[boutons_deux]

Housing prices are still too high

No, they aren't. The bubble is fully deflated.

Prices have fallen to the 40-year trend line.

http://www.jparsons.net/housingbubble/

[ElNono]

Hmm, not sure what the conclusion needs to be after reading that.
4% isn't an exorbitant inflation rate, and it's well within what it's been in the last decade or so.

[boutons_deux]

The Fed's "definition for full employment is an unemployment rate in a 5% to 6% range over the medium-term."

Of course, the politicians have been dicking around with the rate calculation to make the rate lower than "real" unemployment, so one can't compare rates decade to decade,

http://www.gecodia.com/Fed-Funds--US-Federal-Reserve-interest-rate_a1266.html

Obviously, the Fed has cared much more about financial sector health (and salvation) than about Human-Americans' well-being.

Fed's target inflation rate:

http://www.usinflationcalculator.com/interest-rates/long-term-inflation-target-of-17-to-2-set-by-fed/1000388/

[boutons_deux]

http://www.jparsons.net/housingbubble/real-mortgage-rate.png

The rates went really low as the lenders suckered in millions, then the bubble popped, and the lenders (most of them bankrupt technically) jacked up the mortgage rates and began applying federal borrow qualification requirements, rather than ignoring them.

[CosmicCowboy]

Hmm, not sure what the conclusion needs to be after reading that.
4% isn't an exorbitant inflation rate, and it's well within what it's been in the last decade or so.

4 1/2% inflation means interest rates need to rise to the 8-10% range for our financial system to work. And yeah, that's bad when you are already in a recession.

[ElNono]

4 1/2% inflation means interest rates need to rise to the 8-10% range for our financial system to work. And yeah, that's bad when you are already in a recession.

Not really. We've been with near zero interest rates for a long time, and inflation has still being going on at about those rates.

The whole point of keeping interest rates low is so people invest that money in the economy in order to beat inflation, without parking that money in the bank/bonds.

[CosmicCowboy]

Not really. We've been with near zero interest rates for a long time, and inflation has still being going on at about those rates.

The whole point of keeping interest rates low is so people invest that money in the economy in order to beat inflation, without parking that money in the bank/bonds.

Do you realize how hard it is in this current environment to earn 5% on your money with minimal risk just to STAY EVEN with inflation?

[ElNono]

Do you realize how hard it is in this current environment to earn 5% on your money with minimal risk just to STAY EVEN with inflation?

Yes. THAT is the point. Create an incentive to take risks.

[Wild Cobra]

No, they aren't. The bubble is fully deflated.

Prices have fallen to the 40-year trend line.

http://www.jparsons.net/housingbubble/
Assuming it's true, I say it's about time.

Still seem high in my area, but I did see some good looking deals a few days ago. I figure they are in bad shape or something.

[Wild Cobra]

4 1/2% inflation means interest rates need to rise to the 8-10% range for our financial system to work. And yeah, that's bad when you are already in a recession.
But Carter Jr. can do it! He may have interest rates and inflation into double digits!

[boutons_deux]

Jimmy Cartah didn't cause stagflation.

What do you claim he did to cause stagflation?

[boutons_deux]

"Assuming it's true, I say it's about time."

you quoted the link, did you check it? no need to assume anything. the median house price is a little below the 40-year trend line.

[Bartleby]

And interest rates on a 15-year (or even a 30-year) fixed mortgage are at rock bottom. It's truly a buyer's market right now.

[ElNono]

But Carter Jr. can do it! He may have interest rates and inflation into double digits!

Already done by Reagan in '81.

[CosmicCowboy]

Yes. THAT is the point. Create an incentive to take risks.

Oh bullshit. People shouldn't have to put their savings at risk just to try to stay even with inflation.

[Winehole23]

+1

[boutons_deux]

And interest rates on a 15-year (or even a 30-year) fixed mortgage are at rock bottom. It's truly a buyer's market right now.

Except lenders don't want to lend at such low rates (they can put their funds elsewhere for higher returns), so they apply federal borrower qualification regs to the max (which is the opposite from their bubble crimes), and then some.

[MannyIsGod]

Do you realize how hard it is in this current environment to earn 5% on your money with minimal risk just to STAY EVEN with inflation?


Yes. THAT is the point. Create an incentive to take risks.

When unemployment is so high and the economy is slow why on earth should there be any type of incentives for people just to sit on the money? I don't understand that logic one bit.

[MannyIsGod]

Oh bullshit. People shouldn't have to put their savings at risk just to try to stay even with inflation.

Obviously its not ideal but neither is a stagnant economy. When that money is invested in ways that spur economic growth then the interest rates will naturally find their way back to palatable levels.

Yeah, not being able to build up interest is frustrating but not being able to save because you don't have income to begin with is worse, IMO.

[CosmicCowboy]

Obviously its not ideal but neither is a stagnant economy. When that money is invested in ways that spur economic growth then the interest rates will naturally find their way back to palatable levels.

Yeah, not being able to build up interest is frustrating but not being able to save because you don't have income to begin with is worse, IMO.

You guys advocating inflation as a good thing to "force people to take risky investments with their savings to stay even with inflation to stimulate the economy and create jobs" crack me up. High inflation WILL lead to high interest rates. It is absolutely inevitable. That should be the last thing you kids should want.

[MannyIsGod]

Well no shit CC. Who "wants" inflation at all much less high inflation? You're framing this shit in a vacuum acting as though we have a choice other than a shit sandwich and a glass of piss. All we're saying is that it would be stupid to make sitting on your money a more attractive option right now when that is exactly what people are doing.

[boutons_deux]

CC doesn't give shit because he's sitting pretty, while Ms of Americans are sitting in shit, and sinking deeper.

[CosmicCowboy]

Well no shit CC. Who "wants" inflation at all much less high inflation? You're framing this shit in a vacuum acting as though we have a choice other than a shit sandwich and a glass of piss. All we're saying is that it would be stupid to make sitting on your money a more attractive option right now when that is exactly what people are doing.

It's not people sitting on their money that is the problem, it's the artificially low fed funds rate (essentially zero) and the spread between that and treasury yields. The mega banks can make money with essentially ZERO risk and the Fed government can keep up their spending crack habit by "borrowing" the money back from the banks that the fed loaned them. Why would the banks want to loan that money to REAL people with REAL risks?

[ElNono]

Oh bullshit. People shouldn't have to put their savings at risk just to try to stay even with inflation.

No, really. If you sit on your money, then it's your fault.

Don't get me wrong. I wish we wouldn't be in a shitty economic period, and everybody had a job, and we would be coveted so we didn't need to risk it to outpace inflation. But that's not where we are now.

[CosmicCowboy]

CC doesn't give shit because he's sitting pretty, while Ms of Americans are sitting in shit, and sinking deeper.

I strongly resent that statement but should expect it from an idiot like you.

I care deeply about what happens to this country and this economy.

All you want to do is cry and whine about how fucked we are and how hopeless everything is.

[ElNono]

You guys advocating inflation as a good thing

Not advocating it's a good thing. Merely accepting it's just what happens in a shitty economy.

[CosmicCowboy]

Not advocating it's a good thing. Merely accepting it's just what happens in a shitty economy.

Only "has to happen" if you start printing trillions of dollars out of thin air.

[ElNono]

It's not people sitting on their money that is the problem, it's the artificially low fed funds rate (essentially zero) and the spread between that and treasury yields. The mega banks can make money with essentially ZERO risk and the Fed government can keep up their spending crack habit by "borrowing" the money back from the banks that the fed loaned them. Why would the banks want to loan that money to REAL people with REAL risks?

It *is* people sitting on their money. And if you offer an 8% yield on treasuries, that's where the money is going to go anyways, which also means supporting the spending crack habit.

[ElNono]

Only "has to happen" if you start printing trillions of dollars out of thin air.

Well, we owe much of that money. Tell me how we cut spending AND solve the job problem all in one and you'll probably get your Nobel prize too.

[boutons_deux]

Randy Wray: Helicopter Ben – How Modern Money Theory Responds to Hyperinflation Hyperventilators

In this final part of the series I will address the belief that the US (and other countries with large budget deficits in their own floating rate currency) faces hyperinflation. Many fear that “Helicopter Ben” (Chairman Bernanke) has pumped so much “money” into the economy that high inflation, if not hyperinflation, will be the inevitable result. This is one of the reasons for the run into gold—supposedly an inflation hedge.

In reality, there is no surer bet than the wager that the US will not experience significant inflation for many years to come.

http://www.nakedcapitalism.com/2011/09/randy-wray-helicopter-ben-%e2%80%93-how-modern-money-theory-responds-to-hyperinflation-hyperventilators.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capi talism%29

[JoeChalupa]

I know quite a few people who are buying up gold.

[CosmicCowboy]

It *is* people sitting on their money. And if you offer an 8% yield on treasuries, that's where the money is going to go anyways, which also means supporting the spending crack habit.

You aren't getting it. It is the politicization of the fed and the artificially low fed fund rate that is the principal problem. The fed is technically "non government"...they can create dollars, loan it to banks at essentially 0%, who then turn around and loan it to the government at 1.5%. It's totally risk free and starving the market for private job creating capital.

[ElNono]

You aren't getting it. It is the politicization of the fed and the artificially low fed fund rate that is the principal problem. The fed is technically "non government"...they can create dollars, loan it to banks at essentially 0%, who then turn around and loan it to the government at 1.5%. It's totally risk free and starving the market for private job creating capital.

But banks will loan to you too (gladly at an interest rate well above 1.5%) if you're willing to take the risk. Nobody is biting though. Lack of credit isn't the problem. The problem is that the jobs are being created in Asia, not in America.

[Wild Cobra]

Already done by Reagan in '81.
No, that was the left over of the Carter era. Inflation and interest rates lowered once Reagan policies were put in place.

[boutons_deux]

"Inflation and interest rates lowered once Reagan policies were put in place."

St Ronnie the leftist didn't do shit. Volcker managed the interest rates to beat inflation.

[ElNono]

No, that was the left over of the Carter era. Inflation and interest rates lowered once Reagan policies were put in place.

No, that was Reagan's first year as president. He walked in January 20. If you told me it took him 6 months, ok.. but a whole year is a different story.

[Wild Cobra]

No, that was Reagan's first year as president. He walked in January 20. If you told me it took him 6 months, ok.. but a whole year is a different story.
You think a president can direct congress into policy that fast?

First of all, Carters fiscal year budget was in place till the end of September 1981. It still took time to convince congress into his policy ideas. I don't recall anything really started changing till about 1983.

[Nbadan]

It was Paul Volkner's decision to raise first interest rates and then suddenly lower interest rates not Carter or Reagan..

[Wild Cobra]

It was Paul Volkner's decision to raise first interest rates and then suddenly lower interest rates not Carter or Reagan..
I don't recall the details than many years ago, but the president still generally sets policy decisions.

[ElNono]

You think a president can direct congress into policy that fast?

Sure. It only took 5 months for Bush Jr to implement his tax cuts.
Took Barry 1 month to get his stimulus through.

I would argue that the first year is actually when they can more rapidly implement what they want, seeing they have the momentum from winning the election.

You don't need to apologize for Reagan though.


First of all, Carters fiscal year budget was in place till the end of September 1981. It still took time to convince congress into his policy ideas. I don't recall anything really started changing till about 1983.

So? Interest rates and inflation have nothing to do with the budget.
Try again.

[ElNono]

I don't recall the details than many years ago, but the president still generally sets policy decisions.

It really is the Fed that makes monetary policy decisions.

[ElNono]

It was Paul Volkner's decision to raise first interest rates and then suddenly lower interest rates not Carter or Reagan..

Volkner was nominated by Carter too. He was the chairman until 1987.
Reagan reappointed him in 1983.