Saturday, February 12, 2011

Inflation, Hyperinflation and Real Estate (or, The Lessons of The Great Hernán P.)

“Hyperinflation accompanied by a housing collapse is simply impossible—by definition.”
—None-too-clever financial blogger.
Most people in the advanced economies—including most economists—really don’t have any idea what inflation and hyperinflation is. They don’t have a clue because they haven’t lived through it, or were children when it happened in the States and in Europe during the Seventies.

Wrong metaphor.
They think it’s nothing more complicated than a rise in prices that ripples through the economy—like a spectator in a football stadium who stands up, obliging the people sitting behind him to also stand up, so that they too can see the action on the pitch, which in turn forces the people behind them to stand up too, until finally, the whole stadium is up on its feet.

That’s what these people seem to think: Inflation—and the more severe hyperinflation—affects all goods and services and asset classes equally, in a rippling effect. Sort of like a rising tide.

Because of this very foolish fallacy, many economists and interested observers think that real assets—commodities, land, buildings, factories & machinery—all rise in price equally during an inflationary spell, whereas financial assets—bonds, stocks—uniformly fall.

But this is wrong: It is at best sloppy thinking, at worst dangerously stupid.

Inflation—and hyperinflation—affects two things immediately: Near-term necessities (such as food and fuel), and credit.

The effects on basic necessities is obvious—but the effects on credit are more subtle and complex.

How does inflation and hyperinflation affect credit? By driving up interest rates—obviously. But what is the effects of rising interest rates in an inflationary/hyperinflationary environment?

Real estate price collapse.

Lenders—on seeing prices rising and purchasing power deteriorating in an inflationary economy—naturally raise the interest rate they charge, on the future expectation of inflation during the period of their loan. Obvious: If I lend money for a year, and expect the inflation rate to be 10% for that year, I’ll naturally lend out my money at 15% interest—or more, if I think inflation is accelerating.

Borrowers on the other hand—on seeing interest rates rise, while their wages and salaries are at best playing catch-up to rising prices—curtail their borrowing: They either borrow less, or don’t borrow at all.

Therefore, real estate sellers—who depend on lenders to provide their buyers with credit in order to sell their properties—are forced to lower their prices, in order to attract buyers. Law of supply and demand: They cannot force up the price of their real estate to match the pace of inflation, because if they do, they will simply not have any buyers.

Thus, in an inflationary environment, real estate prices either remain static or indeed fall on a nominal basis, even as inflation is debasing the currency, because real estate sellers will not find buyers willing to take on usurious debt in order to buy the property.

This is how real estate prices fall, even as prices for near-term necessities—food, fuel—rise. This is how you have a real estate collapse, even as you have inflation.

Don’t believe me? Well, I can empirically prove this. During the 1979–‘83 inflationary recession, this is exactly what happened in the United States: Nominal real estate prices were essentially flat, even as inflation peaked at 15%. The same in the UK during the early Seventies, in fact the same in every advanced economy that experienced low-double-digit inflation in the post-War period: Real estate prices remained nominally flat or even fell, as inflation rose and the currency was debased.

What about real estate in a hyperinflationary environment?

The same—only magnified: In a hyperinflationary environment, interest rates are so high that essentially, there is no lending. There’s no point to it: Most lenders will decide not to lend out their excess cash, and instead park that cash in assets which will resist inflation—they will certainly not lend out their cash to a borrower, and watch it become worthless on their books.

Therefore, since real estate buyers cannot get a mortgage loan, real estate sellers are forced to reduce their prices in a hyperinflationary episode—drastically.

Of course, there are fewer sellers in a hyperinflationary period: Many sellers will decide not to put their real estate assets on the market during such a period, precisely because they do not want to receive a lower price for their holdings. They’ll choose to ride out this rough patch, or hold out for the price they want for as long as they can.

But that doesn’t mean that there are no sellers—obviously. The ones who remain in the market during a hyperinflationary period—for whatever reason—will lower their prices in order to attract a buyer. And as buyers dry up, sellers will either exit the market—that is, take their property off the market—or else lower their prices even further.

This is why the windbag blogger above who claimed that “Hyperinflation accompanied by a housing collapse is simply impossible—by definition” simply does not know what he’s talking about.

The exact opposite is in fact the case: When there is severe inflation, real estate prices are either nominally flat or falling, like in the United States during the abovementioned ‘79–‘83 inflationary recession.

And when there is hyperinflation, real estate prices of all sorts—residential, commercial, industrial—go into a free-fall: Their prices crash and burn, completely and utterly.

This situation—crazy though it may sound—is exactly what happened in Argentina, in 2001: The Argentine peso went into a hyperinflationary breakdown, the causes of which are irrelevant to the present discussion. But because of this, no bank would lend money to purchase any real estate.

Thus, real estate prices plunged in Argentina.

I have a family friend here in Chile, an attorney named Hernán P., who made one of the shrewdest investments ever: At the height of the Argentine crisis in 2001, he bought an apartment in one of the most fashionable neighborhoods in Buenos Aires: A lovely and luxurious full-floor apartment, across the street from the Four Seasons.

It’s price before the crisis? $650,000. The price Hernán P. paid at the height of the crisis? Less than $90,000. Here’s the kicker: He was the only buyer. Of course, he had to pay in cash—no mortgage loans were available. In fact, he had to pay in cash cash: He was required by the seller to close the transaction with actual physical dollars.

At the time, I thought he was crazy—and told him so. But he replied, “Back in Chile in ‘73, during the hyperinflation brought about by Allende, I had the same opportunity—and didn’t take it. I’m not going to make the same mistake twice.”

I thought Hernán P. was a fool—then realized that I was the fool, when the Argentine crisis passed, real estate prices rebounded, and the apartment he had purchased was now worth several times what he paid for it.

The Great Hernán P.’s story is far from unique.

In fact, this situation was not unique to Argentina in 2001 either: Every hyperinflationary period in history—Weimar Germany, Chile under Allende, Brazil in the ‘90’s, Zimbabwe—results in the same situation: Rising prices for food and fuel, but collapsed real estate prices.

In other words, in an inflationary/hyperinflationary period, real assets do not all rise in tandem, like a tide lifting all boats. On the contrary, think of it as a pool table sitting on a gimbal: Some pockets rise, while other pockets fall.

The Great Hernán P.’s example is exactly what any sensible investor should do, in an inflationary or hyperinflationary period: Preserve capital at all costs, via commodities, while keeping a sharp eye out for real estate opportunities. As inflation rises and real estate prices collapse, be prepared to trade the commodities you own for real estate assets selling at depressed prices.

Here endeth the lesson of The Great Hernán P.

For further discussions on inflation and hyperinflation, please go here
  

155 comments:

  1. really good info to know

    ReplyDelete
  2. GREAT article GL !!! Thanks so much for your insight. Maybe I can take advantage of this knowledge some time in the future (here in Toronto).

    ReplyDelete
  3. Good analysis and this agrees with what I have read has happened in history. How does the fact that banks own so much real estate today effect the chances of a hyperinflation occuring? Since Bernank is beholden to his banking masters wouldn't those same masters try to limit or prevent that hyper situation from occuring?

    ReplyDelete
  4. Great posting, Gonzalo, thanks. Besides, in hyperinflation, I think, people dump ANYTHING they have on the market, in order to get (money for) food. So prices plummet, real estate too.

    ReplyDelete
  5. Dear GL;

    ...the "apartment Hernán P purchased was now worth several times what he paid for it".

    Was that in real or nominal terms or some combination?

    Also, can Hernán P now actually realize the gain on his apartment by selling? i.e. are there buyers and mortgages? or all cash deal

    At one point I looked carefully at BA prices between 2001 and 2009 (charts were on FOAOA I think) and its as you say, a crash then eventual good returns about a decade later. Less clear to me is effect of taxes, lack credit, and cash buyers when exiting real estate.

    ReplyDelete
  6. Rising interest rates are bad for bonds, stocks, and real estate. And people wonder why commodities, gold, and silver are going up.

    ReplyDelete
  7. "But because of this, no bank would lend money to purchase any real estate."

    Were banks unwilling to lend are money? Or just loans in pesos?

    ReplyDelete
  8. It all depends on the total amount of inflation during the run up. If
    you have Weimar level inflation, that 400K loan on your 500K house
    will simply evaporate . At the end you can pay it back for real money pennies on the dollar. Remember too, that after the high inflation of the early 80s subsided, property prices began to catch up rising higher than
    current inflation for years. Income producing property will rise with inflation more or less along with the income it produces---not to mention rising new construction replacement costs. Real estate will do far better in hyperinflation that cash or bonds.

    ReplyDelete
  9. What is wrong with quoting Mish?
    In any case I appreciate the simple explanation of the coexistence of asset deflation and commodity and consumables inflation. This is exactly what we have now. A continuation and acceleration of the existing state is the most likely thing to happen.

    ReplyDelete
  10. As a person that lived through the post-Soviet hyperinflation I can see a problem in Gonzalo's reasoning. In Argentinan that he uses, the buyer was paying in US dollars and not in Argentinian pesos and that is crucial. I don't know how it was in Argentina, but what happened in Russia is that people switched to a double-currency system during hyperinflationary 90's. The double-currency system worked the following way: everyday small purchases were made with rubles, but any big items including real estate and cars were quoted and purchased either in US dollars or in equivalent amount of rubles at an exchange rate existing at the moment of purchase. This co-existence of two currencies solved many problems. There was "hard" money that people saved their wealth in, and "soft" money to buy food, pay taxes etc. The real estate was indeed incredibly cheap in early 90's but only in "hard" currency. A decent apartment in Moscow could be bought for $5-10k USD. Now the same apartment costs anywhere from $200k to $1 million depending on location. I believe the same situation was in Argentina during their crisis, i.e. a person with relatively small amount of US dollars was able to buy an excellent property really cheap. One problem that I see here is that in local "soft" currency, ruble or peso or whatever else, real estate never got cheaper during the hyperinflation. In 1989 10k rubles would buy a house in most places of USSR. In 1993 the same 10000 rubles would buy a loaf of bread, and a house was a few millions if not billions of hyperinflated rubles (and at the same time just a few thousand US dollars). Believe it or not, what majority of Soviet people did is they trusted the government until it was too late and watched their money turn into toilet paper. Now, is it a good idea to hoard US dollars in anticipation of hyperinflation? What do you think? From my experience I can say that hoarding Soviet ruble in 80's was equivalent to a financial suicide. But those who exchanged Soviet rubles into things that hold value such as hard currency (it was officially illegal to exchange rubles to US dollars in the USSR but all smart people I knew were able to do it on black market before shit finally hit the fan in 1991), or used FIXED rate long-term ruble loans to buy real estate, or at least bought gold jewelery, became kings in hyperinflationary 90's. Most "new rich" Russian millionaires built their wealth during those terrible hyperinflationary years. And many of them were not mafia bosses or anything like this. Simply, they were smart people that were able to ignore mass-media, think independently, and get ready for hyperinflation.

    ReplyDelete
    Replies
    1. Very smart, logical, and thorough explanation.

      Delete
  11. I spoke very briefly to an elderly german lady whose wealthy land owning family was basically made destitute by the Weimar hyperinflation. She told me that they had to sell their property at fire sale prices - 'next to nothing' were her words. I never had the chance to ask her, but I made the assumption that they had to do this as the accelerating cost of living required them to liquidate their assets just to survive.

    ReplyDelete
    Replies
    1. Land is not income-producing and its price will fall in an inflationary economy.
      Income-producing real estate is a much different story. The value of the asset is directly related to the income it generates.

      Delete
  12. My grandfather used to tell me stories about the great depression in Australia. How he used to make wooden toys in his shed for his fellow university graduates to sell for hard cash - he took a position as a shire clerk way below his qualifications just to have a job in the early days because he could see it coming. Boy, was he glad he did, always had a back veranda available though, for his mates to sleep on.
    He also always told me that cash was king - anyone who had cash or gold, silver could buy anything. Houses went for 10 pounds. Way below the cost of building them. He bought a lot of empty shops and houses.

    ReplyDelete
  13. Anonymous from Russia makes a lot of sense. I'd like to hear more from him. I also like G.L. too but the guy from Russia sounds like he could teach us a thing or two about hyperinflation.

    ReplyDelete
  14. Again, you're shooting at a straw man.

    While I don't argue with your conclusions per se, your example is flawed at best.

    Real Estate is dependent on a number of things, including especially interest rates. Even as your 'Hernan P' example showed, the lack of credit and/or exorbitant interest rates is what causes a real estate crash.

    Furthermore your example doesn't track real estate prices through the entire cycle: in fact real estate prices in Argentina have been much more stable than 'Hernan P' let on.

    Why does this matter? Because the United States isn't Argentina. Argentina due to its peg to the US dollar, was forced into accepting US monetary policy - which initially was good but later turned out to be really really bad.

    What we're seeing today is different than the Argentine experience: The US prints its own money, and it has a huge world presence via its military and its economic size.

    While I do think high inflation is guaranteed - defined as a year with over 30% inflation or a month with over 5%, how this gigantic US dollar pyramid scheme ends is far from obvious.

    For that matter, it is far from guaranteed. There are still ways to get out of this situation, however painful, but of course the US leadership is showing zero signs of taking on this responsibility.

    ReplyDelete
  15. I think that real hyperinflation never happened in major industrialized countries with probably one exception of Weimar Germany. Hence lots of confusion. Hyperiflation is also an extraordinary event that happens very rarely. Hyperinflation in late USSR and Russia in 90's was a result of a huge event- complete and sudden crash of Soviet political and economical system. The speed at which these events evolved was exponential and it was unbelievable even for those who watched it closely. Now, what makes it different from the situation in the USA, is that ruble was not a world reserve currency. From that perspective Soviet hyperinflation was the same as Argentinian or Zimbabwean one. No difference, just bigger scale. Hyperinflation in the USA, by which I assume real hyperinflation i.e. loaf of bread at $1000 or $10000, if it ever happens, would be the biggest catastrophy in human history. Remember, what happened in Russia in 90's was not just hyperinflation but also a huge surge of crime, and in addition to that a chain of small religious and ethnic wars (Chechnya being the most known). That was just brutal time for millions of people. Many people lost their savings, homes and some people lost their lives in Russia in 90's. This is the reason why Putin who is commonly associated with bringing law and order and prosperity after crazy 90's was and still is a very popular politician in Russia. Having said that, I can't and don't want to believe in a possibility of American hyperinflation because the results of it would be really scary. With all the mess in Russia in early 90's it was still possible to live there, and for people with good brains it was actually a great place to be. But that was possible because when Russia collapsed the rest of the world was perfectly OK. Russian collapse triggered a few local small wars but that was barely noticeable for people outside Russia. American collapse though will shake the entire world and that may lead to unpredictable implications.
    And, I am still not sure about definitions. If people who never saw hyperinflation think that rise of food prices by 100% in a year is hyperinflation, they are wrong. This is inflation, stagflation, whatever we call it, but it is a totally different beast that has nothing common with hyperinflation. For this kind of inflation, Americans have a lot more experience than Russians and if we believe that this is more likely scenario we should better listen to Americans that lived through the great depression.

    ReplyDelete
  16. GL and everyone

    Thanks for all this info. It is amazing !

    B

    ReplyDelete
  17. I think Anonymous from Russia has a valid point. I recall when Mexico had one of its massive devaluations a couple of decades ago, a friend of mind bought a house near the beach for a fraction of what it would have cost a month earlier -- but as measured in U.S. dollars. In devalued pesos, the price would have been much higher. I think the correct statement would be that in a hyperinflation _real_ real estate values nose dive, but nominal values may well go the other way.
    On another point, regarding the hyperinflation/deflation debate, I tend to agree that inflation is the more likely path, but I read a paper recently posted on mises.org that got me thinking about a counter-argument that I hadn't considered, which is: it's the Fed whose policies will determine the answer, and the Fed is controlled not by political forces but by the banking interests (which includes foreign banks), so even though inflation is obviously what the politicians would prefer (easy solution to the entitlements debacle), the Fed will not go along because it's bad for bankers. He offers this as an explanation also for why Japan didn't inflate when their politicians obviously wanted to. http://mises.org/resources/6071/Why-Credit-Deflation-Is-More-Likely-than-Mass-Inflation-An-Austrian-Overview-of-the-Inflation-Versus-Deflation-Debate.

    ReplyDelete
  18. And, for those who might be interested, here is the story about those who suffered the most from Russian hyperinflation. People who were financially ruined by the hyperinflation were mostly those on fixed incomes, first of all seniors. This happened because as government printed huge amounts of new money, the same government always understated the real price inflation. Thus, although the pensions were indexed from time to time, after couple years of constant government money printing the pensions lost a lot of purchasing power. If before the hyperinflation pensions in Russia provided for relatively poor yet decent living, during the hyperinflation pensions became so small with respect to prices that retired people turned into beggars. It was pretty common in 90's to see decently dressed old people collecting can and bottles and digging garbage bins. Situation with pensions is much better now in Russia and the worst times are over, but if you ask somebody who retired in 80's or early 90's what do they think about that time they will say it was a nightmare. In addition to pensions killed by the hyperinflation, life savings of these people(and many people in the USSR managed to save amounts equivalent to a price of a house to happily live on on retirement)were also turned into nothing. Indexing and re-paying of these savings remains a huge political problem in post-Soviet countries and is used by politicians during every elections. But, the bottom line is, this money is lost. If it will ever be compensated, most owners of this money will probably be dead at that time. This story explains why the communist party still exists in Russia and always gets big percentage of votes during the elections. This big percentage is those retired voters that remember hyperinflation of 90's and associate it with destruction of the USSR. Another important note is that everybody was mortgage-free in Russia in 90'S one way or another. Some people owned their houses outright, some rented cheap apartments provided by the government, and others, such as my family, had fixed rate mortgages that just evaporated during hyperinflation. In 1993 my family paid their mortgage in full using pocket change. However, this time was brutal for those who were forced to sell real estate or anything else. Hard currency was so scarce that it was impossible to sell anything for any reasonable price. And selling for rubles didn't make sense as rubles depreciated really fast. You can hear incredible stories in Russia about great, sometimes historical, properties, antiques, etc bought for ridiculously small amounts (of USD) at that time. On large scale entire Russian industries such as oil & gas, mining, etc were privatized at that time for pennies. Just few years later those pennies turned into billions of dollars. Those who had $1000 US dollars to invest in Russia in 1991 now have assets worth hundreds of thousands of dollars as a minimum.

    ReplyDelete
  19. And the last comment I'd like to add: I have no idea if hyperinflation is possible in the USA. But I clearly remember that in 1988-1989 nobody in their right mind would believe that USSR can collapse. It was like sinking of a big ship. It was going down slowly, year after year, and then suddenly events started speeding up like crazy. Everybody knew that there are fundamental flaws in Soviet economy and the government was incapable to solve them, but nevertheless everybody thought that this can continue forever and probably the problems can somehow be solved in distant future. People were still thinking this way just few months, weeks or even days before the USSR collapsed and its financial system collapsed with it. Those fundamental problems accumulated in the USSR over many years but most major events happened in few last months of 1991. In February of 1991 people still lived in the USSR and it seemed that it will be that way forever, and in December of 1991 USSR no longer existed. After witnessing such an incredible event once I think that everything is possible in this world, even American hyperinflation.

    ReplyDelete
  20. Venezuela must be a really absurd country. Down here we are in a inflationary spiral since many years ago but real estate prices are soaring since then as well.

    ReplyDelete
  21. Gonzalo

    One of the bloggers here mentioned that mortgage debt would evaporate quickly in a hyperinflation. Could you clarify that? Would this occur in the kind of hyperinflation that you are talking about?

    Thanks !

    ReplyDelete
    Replies
    1. Paying back a fixed principle amount with diluted currency in the future. Imagine having a loan for 100,000 units and the currency now has three more zeros after a year or so. You work for that diluted currency or trade some thing for it and pay of your loan.

      In this situation a fixed interest rate is much better than a variable one.

      Delete
  22. The Obama administration says they have not lowered SS payments, when they have done just that by destroying the dollar and lying about inflation so there is no cost of living increase for seniors, they have lowered the SS payments.

    ReplyDelete
  23. For an excellent history of Weimar Germany read When Money Dies. One thing I found interesting was the fact that after the inflation was over, laws were passed attempting to claw back some of the debt re-payments made in inflated currency. I forget the specifics, but certain mortgages, for example, paid off at the end of the inflation sprung back to life in the new currency. Another interesting thing: toward the end of the inflation the government was so desperate for hard currency that it sent agents into bars and restaurants to confiscate all hard currency in the register and on the patrons at the time (it was illegal to possess hard currency).

    ReplyDelete
    Replies
    1. After the monetary reform in Weimar Germany disposing of the worthless Trillion-Reichsmark bundles, and the new "Rentenmark" having been introduced, a new tax was levied called "Hauszinssteuer", literally translated "Home Interest Tax" which took rent income away from landlords. This was thought to compensate for the "unfair" advantage landlords had when they could pay back whole house mortgages for the price of a slice of bread. Unfortunately the landlords rolled over the tax to their renters. These, often middle and lower class people without real eastate property, felt the squeeze and got angry against the government and elected Hitler's NSDAP which promised to stop that tax. The rest is history. After WW II Hitler's Reichsmark again was worthless. Food and everyday commodities were scarce, the shelves were empty, and could only be bought on a black market accepting "cigarette currency". When the new Deutschmark (DM) was introduced the shelves filled with merchandize over night and people could buy goods again. But this monetary reform came at a price. All savings were lost. And all owners of real estate (houses and agricultural land) had to take a "forced mortgage". Say, if you had a house free of any mortgage, worth 100000 DM, over night you had a mortgage of 50000 DM on it and the government had taken that money. Then you had to pay back the mortgage over a span of 30 years. Many people payed until the 1980s. This was called "Lastenausgleich" = "Equalization of burdens", but in fact is just blunt expropriation, up to 50%, despite some of the money was used to provide housing and help for the millions of refugees that had been driven out of the former eastern parts of Germany that had been seized by the victors of WW II.
      With the current EURO crisis ongoing, many people fear that such a "Lastenausgleich" - expropriation of home owners - could come again after an EURO crash and a monetary reform reintroducing national currencies. In 2011 there had been a census, ordered by the EU, asking for key data that could be used to assess the market value of all real estate property.
      Knowing the historic background, some people have sold their houses (at yet very good prices since people fear inflation and want to invest into something "safe") and moved themselves and the money out of the EU. Such as this writer did. When governments are on the brink of bankruptcy, and people are not armed (unlike in the United States), anything goes and it is unwise to invest or hold any assets in such states that have a proven track record of expropriation of home owners, such as Germany.

      Delete
  24. Your reasoning is sound.

    I still hold that until the US cloak of power (i.e. fear of the bomb and our military) dies, we won't go into a hyperinflationary event. The people of the world lift up the dollar in their mind's eye simply because of the fascade of our power and military might.

    But it certainly seems that cloak may be falling in places. In Egypt, fearless people emerged. If the world follows suit, then the dollar will become worthless.

    The power of a nation is what determines the value of money.

    What the masses will eventually realize is that neither people nor nations have any power at all. It's a lie and a fascade. Humility and love as displayed by our Lord Jesus is the only true power and is more powerful than all the atoms of the universe. When we realize this money will die forever.

    ReplyDelete
  25. A valid point Gonzalo. Yes...you can have inflation in a depressionary environment or most combinations depending on the asset class. I think the point most people always lose sight of it "what is value buying". In truth most poeple don't know and when you have rapid price increase and asset flipping this is not inflation necessarily either by definition. Neither is it hyperinflation. Most people look at the rise in certain commodities quite certain that inflation has indeed taken hold. The arguements range from hot money looking for tangibles to maintain the value of worthless dollars to reckless speculation in the markets. Not much weight is given to the ebb and flow of credit supply in the markets....which in essence is still controlling price action. The amount of leverage in the markets measured in hundreds of trillions which for all intensive purposes has never gone away. It has yet to be soaked up and yet to fully correct. Until the markets decouple and stop swinging as one.....it is necessary to give more weight to deflation than inflation. There are those that will say I am crazy....when wheat, cotton, sugar and some other key agricultural commodities have skyrocked how canwe still have a delationary atmosophere. Without elaborating too much ask me the same question in about eight months to a year and a half....there are subtle differences between the great depression and this greater depression but the results will inevitably be the same. Without deleverage these problems will resurface again and again and again, not matter how much hot money is printed and no matter how distorted certain markets become.

    ReplyDelete
  26. Great article.
    I am an old guy and have been in the real estate industry here in the US from the 60s through today, so I was very well aware of the problems and their ultimate solutions for the 70's-80's crash.
    You could also have added in your article that inflation does not necessarily lower unemployment as some pundits claim. It is exactly the opposite because most small businesses continually borrow money just to make payrolls throughout the year. And when that either dries up or becomes excessively pricey, unemployment rises because almost 2/3 of jobs are with small businesses, and they have much more difficulty passing on the extra costs to consumers.
    So, what is the cure? I firmly believe that Laffer and Volcker and Von Mises have the answers...they have been there done that.
    Let the speculators (banks and insurance companies), the losers, and the government(s) go bankrupt like they should...bight the bullet now and the problem will be solved in less than two years. However, it will be a very difficult, if not bloody, two years both here and abroad.
    Joe in Oly

    ReplyDelete
  27. Gonzalo, I can verify personally that while we have inflation, that real estate prices are diving: my house in El Paso, Texas, was worth $174k in April 2010, $158K in Dec 2010, and now $150k in Feb 2011! Thats according to Zillow, and Zillow is the more liberal of the major value estimates on the net. I will go underwater with only another 10K of deflation, yet I had nearly $40k of equity less than a year ago. And we haven't had any local issues to drive down the housing prices here.

    ReplyDelete
  28. Recommend that you read all the books written by Harry S. Dent and you will find that this recession is not like any other. The demographics in the US are such that there aren't enough people to purchase the available housing at ANY price, regardless of their income and financial being.

    ReplyDelete
  29. Some good comments and thought here, but I think you need to examine your own logic a little more closely before vitriolically calling other bloggers "windbag(s."

    You reasonably cite the laws of supply and demand, but then you also say this: "Of course, there are fewer sellers in a hyperinflationary period: Many sellers will decide not to put their real estate assets on the market during such a period, precisely because they do not want to receive a lower price for their holdings. They’ll choose to ride out this rough patch, or hold out for the price they want for as long as they can.

    But that doesn’t mean that there are no sellers—obviously. The ones who remain in the market during a hyperinflationary period—for whatever reason—will lower their prices in order to attract a buyer. And as buyers dry up, sellers will either exit the market—that is, take their property off the market—or else lower their prices even further."

    Hmmm...if more sellers are staying out of the market/taking their property off the market, then doesn't that mean that we'll have less supply. And less supply equals higher demand, right? I think that's the simple thinking and (if I may be so bold as to infer someone else's implication), that's what the "windbag" blogger was talking about.

    Of course, one of the basic problems is--as you have implied in many ways in this piece--that the law of supply and demand may SOUND simple, but there are a LOT of ways that both supply and demand can be influenced.

    Don't mean to be too picky, I do think you've got some great points here. Just lighten up on other folk, eh?

    ReplyDelete
  30. Oops. In the last comment, I said "lower supply equals higher demand." I meant to say "lower supply equals higher prices."

    ReplyDelete
  31. I think that there will be a lot of cash flowing into real estate as price inflation increases.
    That cash may lead to an increase in real estate prices, at least for a while.
    Also, once the masses realize that price inflation is getting out of control they will buy any and all hard assets that they can get their hands on.
    Those that think that hyperinflation can not happen in the US are fooling themselves. It's already happened in the US during the Revolutionary War. Remember the phrase: "It's not worth a Continental". And also in the South during the Civil War.
    In Argentina the store of value was the US dollar. In the US it will be gold and silver.
    Good luck.

    ReplyDelete
  32. Hey Gonzalo,

    I really like your blog and your appearances on Jim Puplava's show.

    I don't think its a good idea to still take shots at Mish Shedlock though. Calling him a windbag, I know you didn't mention his name specifically, isn't all that different from that post last week which you regretted. I don't even disagree, but I thought I'd give my two cents.

    Thanks for your work -- I really enjoy it!

    ReplyDelete
  33. Real estate is not my first choice now either, but I am in the process of buying another home as a rental property. I just like the idea of a 15 year loan at 4.5%. Bad idea? Time will tell.

    ReplyDelete
  34. No serious discussion of hyperinflation is possible without mentioning productivity. Looking at historical instances of hyperinflation (Weimar Germany, Hungary post WWII, Zimbabwe etc) one always sees the collapse of productivity as the enabling event for the collapse of the currency. That was definitely the case in Zimbabwe and in the former Soviet Union in 1991. The productivity of Weimar Germany collapsed as the consequence of a lost war. The same thing happened in Nazi Germany and Japan after WWII. The Japanese Yen was on par with the US Dollar around 1920. In 1945, the Dollar was worth more than 300 Yen. In other words, the Japanese Yen devalued 99.7$ versus the Dollar. This devaluation was necessary due to the lost economic productivity as the result of war time destructions of cities and factories.

    Hyperinflation in the US is highly unlikely simply because the US economy is too productive for this to happen. Let's not forget that the US is still one of the largest (if not the largest) exporting economies on earth. In addition, the US enjoys lots of good will and credit from the rest of the world simply because the world would not like to see their savings evaporate in hyperinflationary Dollar fires.

    Secondly, one must clearly state that not every price increase is the result of inflation. The rising price of oil for instance has more to do with resource depletion (the demand for oil exceeds the ability of oil companies to pump). Similarly, the rising price of food has more to do with a rising world population while the productivity of agricultural land is limited by the lack of additional agricultural land and water.

    TO sum up, hyperinflation is highly unlikely in the US. Our friend Gonzalo is very skilled in presenting his arguments. However, the whole truth is much more complicated than he suggests.

    ReplyDelete
  35. Ebag, you're 100% correct. The US Dollar was the coveted "store of value" during other hyper-inflationary episodes. When the Dollar collapses (and every fiat currency in history has) hard assets will be king, with gold and silver (and possibly food) leading the pack. For those that think the dollar cannot collapse and that hyper-inflation is impossible in the US, think again. The stories above from the USSR are very enlightening, and in fact the US today reminds me very much of the USSR of the 80's, effectively bankrupt with a corrupt government at the helm. The only difference is that the US Dollar is the world's reserve currency, and the US government can create as many as it wants to buy whatever it wants whenever it wants from the global economy. For now. When that privilege is "revoked", inflation will pour back into the US, leading to a loss of confidence in the US Dollar, likely leading to hyper-inflation. Ask yourself this. How many of those little worthless paper IOU's, backed by nothing, will the world allow the US to print and purchase its hard assets, goods and services with?

    So back to the real estate debate. If the US Dollar collapses, gold and real estate will both skyrocket in terms of Dollars, but real estate will drop in real value, as measured against gold and silver (the only true currencies). Fixed mortgages should evaporate, as with the Weimar Rebpublic the eventual conversion rate of old Marks to new Marks was something like a trillion to one. So if you don't have to sell your house, you're better off from a real estate standpoint with no mortgage, but that $100,000 loaf of bread might rain on your party. Plus one other caveat... I'm not sure what real estate taxes would do, but I would think they would likely go parabolic which might make it difficult to hang onto that recently "paid for" house.

    If/When the US Dollar collapses, it will be such uncharted territory, who knows what chain of events will occur. I can promise this though... it will be very scary times throughout the world.

    ReplyDelete
  36. I just bought a house for 200,000 euros... This is awfull.

    J

    ReplyDelete
    Replies
    1. No, that is good, just rent it out, invite foreign students to live with you.

      Delete
  37. I have read that it was possible to buy a block of downtown Berlin property for a handful of gold coins during the Weimer collapse, something to keep in mind for the future.

    ReplyDelete
  38. @fbonzo:

    I think you missed the other side of the equation. Indeed, some people are taking their houses off the market because the price are getting ridiculously cheap. But they can only do that if they have sufficient amount of hard assets. I.e foreign exchange, gold/silver, antiques, commodities, etc...
    HOWEVER, for most people in the U.S. They live on credit cards. A scenario in which interest rates spike up would be catastrophic. Their most immediate response would be to liquidate as much assets they have for cold cash as quickly as possible. This takes away the option of taking houses off the market, since they don't really have a choice. The most desperate ones will keep lowering their demands, and this is how a deflation scenario in housing can play out.
    I don't think you have any idea how deeply poisoned Americans are by decades of cheap credit. There is not a shred of saving left in the cultural, people just spend and spend and spend, with money that they don't even have...

    ReplyDelete
  39. Thanks for those comments Anonymous from Russia, very interesting. And Mickey644 is correct about Harry Dent and American demographics. It should be a long time before housing in America makes a comeback. Demographics say the boomers spending years maxed out prior to 2009. The Catholic tv station EWTN has run an hour long program about world demographics. Dent has appeared on that program. What was interesting about the program was that yes world population will continue to increase for several more decades but it's not because third worlders are having more babies, just the opposite is occuring, instead population is increasing because people are living longer. Major long term implication for housing in that scenario. The program showed villages in Europe that were deserted because of the decline in population.
    I have also read that mortgage and other note payments have been reset after a major bout of inflation or hyperinflation. Some people thinking they can sock away some gold coins and pay off their mortgage after hyperinflation hits the currency may be in for a rude awakening as those mortgage notes will be recalibrated for the inflation. It's also likely that the higher the price of gold goes the more likely it is to be outlawed or confiscated.

    ReplyDelete
  40. The crisis we are in began in 2007 - almost four years ago. Since the beginning of the crisis various experts predicted inflation even hyperinflation. Four years later, there is no sign of any serious inflation. What we have experienced instead is a hyperinflation of doom and gloom amplified by the speed and cheapness of internet communications.

    Those who continue to predict hyperinflation should clearly state at which date at the latest that hyperinflation will set in. There is no point in predicting a hyperinflation in 20 years from today. Nobody can predict events that far into the future. So all those who predict a Dollar collapse, please commit yourself to a date at which you will admit to have been wrong if hyperinflation does not show up by that date.

    I am over 60 years old. Predictions of a collapsing Dollar go back to early 1980 when the last gold breakout occured. During the past 30 years, we had no crash in the Dollar. To the contrary, since 1980 prices barely doubled (first class stamp went from 22 cents in the early 1980's to 45 cents today) - no big deal.

    When everybody predicts hyperinflation, chances are the opposite will happen. The market always tries to fool the greatest number of people.

    ReplyDelete
  41. It looks like my comments about the USSR draw some interest. It might be a good idea for me to create a blog and write about my experience in greater detail.
    Now, few more facts about hyperinflation in the USSR. One important thing to remember is that in a hyperinflationary time in order to enjoy your house paid for at a price of your grocery bill, you actually need to remain in relatively good financial shape, i.e. still be employed, or run a business that brings some money. And that can tricky. Another important thing is not to live in a city badly affected by crime or even worse by a little ethnic war. If these conditions are met, your house will still be way cheaper than you paid for it in real terms such as gallons of gas, pounds of flour, or as some people suggested, in ounces of gold. In devalued paper currency though it will cost a lot more than you paid for it. Think of gallon of gas at $10 thousand, a grocery bill at $100 thousand and a cheap house in your town at $10 million. Now, if your fixed rate mortgage was $100 thousand, you can pay it at a price of your grocery bill.
    And, here is how credit worked in Russia in 90's. I remember that after the hyperinflation started nobody took credits at the banks. Why was that, I'm not sure. I think banks were simply unable to estimate risks as assets that could be used as a collateral were impossible to estimate, and it was impossible to predict the future inflation rate. Probably, some credit existed, but I just can't remember how it worked. However, life is life and business is business so credit in some form always exists. In Russia in early 90's it was possible to get credit either from your good relatives or friends, or from mafia. In both cases it was only in US dollars. Interest rates were from 5% to 15% a MONTH. 5% a month was considered very low and this rate was usually used between relatives and friends. Mafia would charge 15% a month. In case of borrowing from family or friends your credit rating was basically your good name, and trust they had in you, sometimes a car or a house could be used as a collateral. With mafia collateral was quite simple- life and good health of the borrower and his family. Defaults happened of course and were resolved in different ways depending on who was borrowing and who was lending. If a lender was a mafia man, that was too bad for the defaulted borrower. In this environment of course people only borrowed if they had some good business idea that could bring quick and high profit. Probably, some people borrowed to buy real estate, but that happened rarely and I can't remember any examples.

    ReplyDelete
  42. Great discussion! I have to agree with the guy who mentioned productivity though I'll make a slight correction to that -- I think he meant output. Indeed, the common theme in many classical hyperinflationary episodes is a drastic decline in private sector output. Yet it wasn't even the fall in output that resulted in hyperinflation in these cases -- left alone, there would be an economic depression instead -- but rather the attempt by government to supplant the falling output with massive deficit spending. The hyperinflationary formula therefore looks something like this:

    Massive Fall in Private Sector Output --->> Massive Government Deficit Spending --->> Hyperinflation

    I note that production of war material should not be considered private sector output but rather government spending, which means that many war-related hyperinflations actually fit the above model.

    Thus hyperinflation in the U.S. will probably have nothing to do with rising food prices or other extraneous factors. Rather, hyperinflation could occur if we have another massive drop in private sector output (my guess is 20% of GDP decline minimum) followed by massive government deficit spending. The current path of the U.S. economy as well as political realities do not make this threat imminent although the grave structural problems guarantee the risk will continue to be very real in the medium term. The only possible escape is a couple decades of strong growth accompanied by persistent, moderate inflation, which is precisely what Bernanke and Co. are trying to achieve. I wouldn't rule out the possibility of success but one would be a reckless fool not to carry plenty of insurance in the form of physical gold and silver. Hope for the best, plan for the worst.

    ReplyDelete
  43. One more note: even when houses significantly depreciate in real terms (let's say in gold dollars), people will still be unable to afford them. This is because in hyperinflation almost 100% of people's incomes is immediately spent on things like food, utility bills, basic clothing etc. What happened with property taxes in Russia? The answer is simple- they don't exist and didn't exist at that time. But my opinion is that government will not try to kill people with enormous taxes in hyperinflation. Hyperinflation by itself is almost a complete confiscation of wealth. So a government that would add too high taxes too it would be overthrown by people. Government is not that stupid so I think they will keep taxes at reasonable levels- otherwise instead of collecting taxes they would have to fight riots.

    ReplyDelete
    Replies
    1. VERY logical answer.

      Delete
  44. Good argument, yet we are now talking about the USD going into hyperinflation. If the mother of all currencies is faulty, what "actual" currency (or equivalent) would you use to acqire assets on fire sale? The problem is now global and not local.

    ReplyDelete
  45. The analysis seems sound, but my gut instincts tell be the conclusions are wrong. If what he is saying is true, why are the US banks aggressively foreclosing on houses in an effort to accumulate real estate? Because they are about to collapse in value? No, i think they are looking for the opposite. IN fact, real estate has already collapsed in many areas down signficantly off their peaks. You don't see that in his Aregentina analsis. Maybe we are close to the bottom now rather than one coming in the future. If they can keep the rates low in the US d initiate rapid inflation we will see an explosian in real estate value as citizens hoard real estate to put their money into hard assets.

    ReplyDelete
  46. Anonymous from Russia said:
    "It looks like my comments about the USSR draw some interest. It might be a good idea for me to create a blog and write about my experience in greater detail."
    If you do, I'd like to read it -- or maybe Gonzalo would publish a guest piece from you about the hyperinflation in Russia, how about it, GL? In particular, I'd be very interested in whether, looking back, you see anything about the situation immediately prior to the crisis from which someone smart enough could have foreseen what was about to happen. From the standpoint of someone living there at the time, was the hyperinflation just totally unpredictable, like an earthquake, or more like a hurricane, where there were obvious storm clouds on the horizon if someone was observant enough to see them? Did some people predict it and successfully protect themselves? After it was obvious that the inflation was getting out of control, was it still possible to bite the bullet and switch savings into hard assets, or was it too late to do anything once it got started?
    Jack

    ReplyDelete
  47. This has been my plan for several years. When the reserve currency of the world finally disappears, The new reserve currency will revert back to the only real money, Gold and Silver. I have been buying Silver which can never be inflated away like the dollar and will be trading my coins for real estate at some future date.

    ReplyDelete
  48. Awesome Read! Thank you so much!

    ReplyDelete
  49. The term "printing money" needs to be used with caution. During the hyperinflation in Weimar indeed lots of currency was printed and brought into circulation. This is not the case today. Currency constitutes only a tiny fraction of all money in circulation. All the other money is credit money which strictly speaking can be called back by the banking system at any time.

    The present crisis is due to the overissue of credit money. That overissue of credit money did not result in hyperinflation as many people expected. To the contrary, the opposite happened. The economy entered a deflationary episode caused by the withdrawal of credit. The so called "quantitative easing" was invented in order to stop that deflationary spiral. So if we do not have hyperinflation when new credit is offered at 0% interest, why should hyperinflation persist when Bernanke raises interest rates to 20%?

    One more remark. Hyperinflation is caused by the loss of confidence in a currency. In case of Weimar Germany, people could sell the German Mark in order to buy Dollars or British Pounds. That process accelerated the hyperinflation in Germany. This is impossible today simply because no other currency is large enough in order to absorb all the Dollars oustanding. Those who hold Dollars are stuck to these Dollars simply because Dollars are a reserve currency and all other currencies define their value via the Dollars held in reserve. So Dollars can not hyperinflate versus other fiat currencies. What could happen however is that all fiat currencies (including the Dollar) could hyperinflate against gold and silver simultanously. That hyperinflation would not result in a new replacement for the fiat Dollar. The hyperinflation would be stopped by the Fed announcing that it is selling gold at the new hyperinflated price. That announcement would mark the beginning of a new gold standard for the Dollar as the new and old world reserve currency.

    ReplyDelete
  50. Another incompetent BS piece from GL.

    Say, Gonzalo, have YOU lived through hyperinflation? Because I have.

    And, let me tell you, the prices of everything DO rise. Not equal percentages, perhaps, but they do rise. People were buying ANYTHING to get rid of their money, which they knew was headed towards zero. People were buying brooms, would you believe that! (How many brooms can one actually need?!)

    The financial assets don't "collapse". During the Zimbabwean hyperinflation, their stock market was the best performing stock market in the world. It's the *value* of the paper assets (measured against real money, like gold) that collapses - not their prices.

    And real estate DOES help you during hyperinflation. Its prices do not collapse - far from it. In my case, I was able to save a significant part of my family's savings buy using them to buy a second apartment (which we didn't really need and which we sold when the currency stabilized).

    What really happens is that relatively cheap products (like food) disappear (because of hoarding and because the producers don't want paper money for them) and relatively expensive goods (like real estate) are sold only for a stable currency (US dollars in my case, gold in Vietnam, etc.).

    Borrowers do not borrow less because they don't want to do so. They borrow less because they CANNOT. The banks either curtail their lending, or hike their rates to exorbitant heights, or (most common) give only adjustable-rate loans, where the rate is adjusted very often.

    Only a total ignoramus who has never lived through a hyper-inflationary period can claim that "real estate prices fall on a nominal basis because buyrs cannot be found". Not everybody buys real estate on credit. And EVERYBODY tries to get rid of their paper money by exchanging them for something real. Real estate, real food, real brooms - anything! I've seen it. I've lived through it.

    Gonzalo, you seem to be confusing price with value. It is the value of real estate (and many other goods) that falls during hyper-inflationary periods. This is because the buying power of the population decreases (as their savings are being inflated away). Smaller buying power pushes down the value of goods, when measured in something stable (gold or, in your fiend's case, US dollars). Their NOMINAL PRICES do not fall. Just the opposite - they shoot to the moon!

    ReplyDelete
  51. Anonymous at 3:25 am, February 15, says that I wrote "Another incompetent BS piece."

    Fair enough.

    But then this anonymous person writes: "Borrowers do not borrow less because they don't want to do so. They borrow less because they CANNOT. The banks either curtail their lending, or hike their rates to exorbitant heights, or (most common) give only adjustable-rate loans, where the rate is adjusted very often."

    . . . which is exactly what I wrote:

    "Lenders—on seeing prices rising and purchasing power deteriorating in an inflationary economy—naturally raise the interest rate they charge, on the future expectation of inflation during the period of their loan."

    [. . .]

    "Most lenders [in a hyperinflationary period] will decide not to lend out their excess cash, and instead park that cash in assets which will resist inflation—they will certainly not lend out their cash to a borrower, and watch it become worthless on their books."

    It's all good and fine to criticize me for what I wrote. But at least have the common courtesy of actually READING what I wrote, before slamming me.

    GL

    ReplyDelete
  52. Gonzalo,

    I'm going to have to respectfully disagree with some of what you say because as an inquisitive child, growing up in California in the 70s, I observed differently —first-hand.

    The house I grew up in was purchased by my parents for $50,000 in 1971 and was sold for $300,000 in 1983. From 1979 to 1983 it gained about $75,000 in price based on comparable sales.

    I vividly remember this as I was fascinated but also concerned by all the changes going on around me. I asked A LOT of questions and was blessed with having parents that respected me and actually took the time to answer my questions, my aunt being a realtor also helped out tremendously and I remember this like it was yesterday.

    I don't doubt that things played out, as you say, in Argentina and your native Chile. Had your article stated how hyperinflationary environments play out I wouldn't have much to disagree as California's 1970s situation was inflationary sans the hyper.

    Since there is so much misinformation out there (not refferring to you on this) I wanted to post this, that it might help someone out.

    That being said, under the right circumstances, what you wrote above might play out this time but it's far from a sure thing as even the 1970s example you cited did not work out that way in the U.S. (at least not in California).

    ReplyDelete
  53. "in Buenos Aires: A lovely and luxurious full-floor apartment, across the street from the Four Seasons.
    It’s price before the crisis? $650,000. The price Hernán P. paid at the height of the crisis? Less than $90,000."

    What were the prices before and after in PESOS?

    ReplyDelete
  54. Concerning the hyperinflation in Germany, 1920-1923...

    1. The story goes that two women were waiting in line, to buy food, outside of the grocery store. One woman had a very large basket full of currency. She put it down for a moment and looked away. A thief had stolen it, after dumping the currency on the ground.

    2. The German government had a 100% TOTAL SUCCESS in one thing because of the hyperinflation. They succeeded in shrinking the war debt to four cents (in US dollars).

    -Dave in MO

    ReplyDelete
  55. It seems irresponsible to take a quote way out of context and then blast that quote without defining terms.

    Inflation and Hyperinflation are different animals, but, to Quote Friedman, Inflation is "always and everywhere a monetary phenomenon". The quote above disputes that hyperinflation can happen based on the monetary conditions present -- which is that money, in spite of the Fed's efforts, is contracting, due to the very fact that lenders are not lending. How the Fed exits from that situation may lead to inflation, but cannot lead to hyperinflation with the money creators -- the banks -- helping. The overall trend right now is for liquidation of malinvestments, which governments and central banks have opposed vigorously, but still needs to occur.

    The situation in 1979-1983 was not hyperinflation, and is the period at the end of the inflationary spiral when money was in fact contracting. Real estate price declines are absolutely consistent with leverage contraction. There was still some "inflation", because inflation is correctly not uniform, but works its way through the economy unevenly. Hyperinflation, though, we'd perceive as when everyone became aware of the inflation and worked diligently to dispose of currency declining in value over a very, very short period of time -- the same day.

    Is there inflation? Coming from China, yes. Coming from the US? That's a bit harder to justify, but the evidence seems to be yes, in asset speculation driven by those few who have access to the cheap credit the Fed offers. But hyperinflation? Not unless and until banks start lending.

    ReplyDelete
  56. GL:

    I have a question about fixed mortgage debt during a high inflation or hyperinflationary period. If you have a fixed mortgage at a very low rate during high or hyperinflationary period, would it not be advisable to keep the mortgage instead of paying it off; and then paying it off later with inflated dollars?

    I am in that very situation. I have the ability to pay off my mortgage (15 year with a 4.5% fixed rate, but in light of what is coming (high-inflation), I'm thinking that it would pay to keep it and let the bank take the loss a few years down the road when I pay it off with my inflated dollars.

    Is my proposition correct?

    ReplyDelete
  57. I found your article to be a very common sense look at the present dilemma. Those who disagree should look at the case studies of others, who, like Hernan P., were able to come out of an inflationary environment unscathed, and with money in their pocket. I believe that while not all will be as lucky as Hernan P., we can at least learn from these historical anecdotes to maintain and preserve current wealth,and at least not lose money. Your reasoning is a clear as day, and I am simply puzzled by those who find some sort of flaw here. If folks don't get a clue soon (to focus on commodities, like metals) and dump their real estate real fast, there's gonna be some real serious financial pain in the forecast.

    ReplyDelete
  58. great comment from Russia! Although this may not happen to the same extent in the US, I would say we are on a similar track and we are not immune from this sort of economic phenomenon.Americans must wise up and preserve their capital or there will be suffering...the years ahead hold the kind of personal financial pain that most Americans can not imagine.

    ReplyDelete
  59. To answer a few questions/comments:

    The anonymous comment at 12:33am February 13 (our Russian friend): Absolutely true, in most countries that suffer high-inflation or hyperinflation, there develops a two currency regime: The "soft" currency, usually the local one, and the "hard" currency, often dollars.

    In many cases but not all cases, properties fall in the soft currency; but sometimes they rise in the soft currency. This is unpredictable, depending as it does on the extent of the fall in value of the local currency.

    However—and what matters—property values always fall in the hard currency, be it dollars or (in the case of dollar hyper-i) ounces of precious metals. In other words, in objective terms, property values always fall in a hyperinflationary environment. This was my point.

    california womanl asked at 8:21am on February 14 about how mortgage debt would "evaporate".

    Very simple: Let's say a mortgage is a fixed payment of, say, $1,000 every month, because the interest is non-adjustable. As high inflation and/or hyperinflation work their way through the economy, that thousand dollar payment will be worth less and less.

    This, of course, assumes that your wages increase over time. If they do not, then that $1,000 a month will still take the same bite out of your paycheck. And in inflationary, high inflationary and hyperinflationary situations, wages always lag consumer prices.

    So taking on debt before a hyperinflationary period is good if you have a hard currency of some sort (dollars in Russia, gold/silver in the US) with which to pay off the debt. If you are relying on a fixed salary or fixed income, then it's not a good idea.

    The anonymous poster at 11:14pm February 14, who wrote the following: "The analysis seems sound, but my gut instincts tell be the conclusions are wrong. If what he is saying is true, why are the US banks aggressively foreclosing on houses in an effort to accumulate real estate? Because they are about to collapse in value? No, i think they are looking for the opposite."

    Two things wrong here: First—and most important of all—this "going by my gut" business is simply an insult to any thinking person. If an analysis seems sound, but you're still suspicious, there are only two possibilities: Either there is indeed a flaw in the logic of the argument, but you have so far failed to spot it, in which case look harder. Or—and much more likely—the argument goes against your predispositions, and you find it difficult to let go of your bias.

    If this is the case—which is likely—then let go of the bias, and embrace the logic.

    But whatever you do, lose this "going by my gut" nonsense. Irrational animals go by their instincts—human beings go by their intellect.

    As to the minor point of why the banks are foreclosing: The banks aren't diabolical geniuses. They're just semi-competent drones going through the motions. A person defaults on a property, the banks go and foreclose—end of story. There's no big conspiracy going on.

    [more in second commnet]

    ReplyDelete
  60. The anonymous poster at 7:10am February 15, who commented on California real estate during the 1970's, and how it rose in price, even as inflation was rising.

    You're right—I know you're right because I grew up in So-Cal in the early '70's too. My old man bought a house in the Valley for $40,000 in 1973, sold it three years later for twice as much. The reason? A real-estate boom in Southern California—which was not the case in the rest of the country. Just because there are specific exceptions to an observation doesn't disprove the observation.

    A general comment: It's weird having lines I wrote be quoted back at me without people realizing it. For instance, I wrote the lines "inflation and hyperinflation are two distinct animals", and "hyperinflation is the loss of faith in the currency". The funny thing is, people who most vehemently disagree with me are precisely the ones who unknowingly quote my lines!

    All the best,

    GL

    ReplyDelete
  61. So he had no line of credit debt, a mattress full of foreign currency after the banks were frozen because his nations currency was on the road to nowhere, and the seller wanted to smuggle "real" cash out. This is a pre-leverage story and a nice fairytale from the old days of standardized sound global currency. Flight to where if the Yuan, dollar, pound, euro are all linked to the same problem? I had a friend to caught a fish this big long ago. The lake was full of big fish back then...

    ReplyDelete
  62. it is danced around in this comments but I think a critical element in any discussion of real estate prices is debt.

    If you have $250k in debt principal, and suddenly $30k is your annual food and gas budget, relatively speaking to the value of those every day consumables, the debt has shrunk,...but if you are a wage earner like most people, the decrease in value of your debt only matters if your wages have gone up. If you are making $40k and your food and gas vill are $30k, you are likely homeless or living with many people and rents are low due to lack of demand.

    So Russian anonymous gets at this, if the type of money your debt is in hyperinflates, your debt shrinks in cost compared to other items, but your economy that depends on that currency is also suffering.

    Steve Keen talks a lot about how debt is not considered properly in economic analysis. Not everyone is in housing debt, but many are...so an analysis of housing as investment in hyper inflation has to consider it as a leveraged investment via debt or a cash investment. The assesment varies depending on what you are using to by the house.

    I don't know the answer, but until there is no mortgages contributing to US housing market, debt matters in these assessments

    ReplyDelete
  63. from experience-what u wrote is not true.living in Israel in the 1970-1985, where inflation was as much as 400% a year, would like to tell u that in hyper inflation, people look for assets that guard their value, they get rid of money asap, and land and real-estate is a very desirable tools to keep the purchasing power of your hard earned money.
    In those inflationary times people used to have 2-3 refrigerators just because refrigerators were holding their value better then paper money, and families filled them with non perishable foods to beat the inflation that was at the pick 11%-12% a month.

    ReplyDelete
  64. it is very true story, I had similar case after Berlin Wall collapse I purchased 2 apartments behind Iron Curtain for total 1200 USD, present value about 450 000 USD, the reality is that prices moved up to the level of Frankfurt, Berlin, Hamburg, Paris all over the region that was depressed during soviet style workers' paradise years of the largest geographical prison on earth

    ReplyDelete
  65. Great post and inciteful comments.
    Lira says inflation, Stoneleigh says deflation, how about both? Biflation - "a rise in the price of commodity/earnings-based assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation)."

    http://en.wikipedia.org/wiki/Biflation

    ReplyDelete
  66. Gonzalo:

    Regarding Your Post of Feb 15, 2011 11:58 AM:

    "You're right—I know you're right because I grew up in So-Cal in the early '70's too. My old man bought a house in the Valley for $40,000 in 1973, sold it three years later for twice as much. The reason? A real-estate boom in Southern California—which was not the case in the rest of the country. Just because there are specific exceptions to an observation doesn't disprove the observation."

    With respect I submit that specific exceptions; however, do weaken all-encompassing statements like:

    "Thus, in an inflationary environment, real estate prices either remain static or indeed fall on a nominal basis, even as inflation is debasing the currency, because real estate sellers will not find buyers willing to take on usurious debt in order to buy the property."

    I am not trying to pick on you —honestly, but if there is one thing I have learned about economics over the years it's that it will never be an exact science and it will humble one more often than not for the simple fact that it has a sizeable human component to it.

    What one guy may perceive as an inflationary or deflationary or hyper-inflationary environment can be perceived as the opposite by the next guy. And all this can change in a second by new legislature!

    In the end, most people will do what they perceive to be the easiest thing in their best interests given their resources and all this as perverted by government policies/machinations.

    Good luck trying to decipher how those cards land. There is seldom a black and white outcome in the field of economics. At best you end up with a handful of higher probability outcomes which you hopefully can quickly react to or you can simply get lucky.

    As far as California real-estate being the exception in the inflationary decade of the 1970s that is also not true. Check out this link:

    http://www.census.gov/hhes/www/housing/census/historic/values.htm

    You will see that there were more States with nicely increasing real estate prices than not, even the U.S. as a whole experienced appreciating real estate prices in the 1970s. This is the case both nominally and even when factoring in inflation!

    Having said all this, I say again that the outcome you descibed in your essay can indeed happen under the right circumstances but not because similar things happened in South America, Russia or Europe even. Every culture seems to have it's own "response signature" based on what is perceived to be in their best interests and all this perverted by government policies/machinations so it is difficult to say with certainty which way things will go.

    One bone-headed government policy that the US dollar is now to be backed by real-estate would certainly be a game changer —crazier things have already been done so why not that?

    A good plan might be to

    1. Postulate the highest probability outcomes
    2. Write a plan of action so you don't freeze
    3. Execute!

    In the meantime, accumulating precious metals is not a bad way to go, I've been doing that since late 2000.

    ReplyDelete
  67. Until the QE and Monetization dollar amounts out weigh the dollar amounts of the current debt destruction that is happening, I have serious doubts about ANY inflation occuring... I will start worring about inflation though if employment dramatically increases accompanied by wage increases and ultimately people willing to borrow from banks that are willing to lend.

    Lastly, I continue to see people talking about inflation and deflation and hyperinflation without first telling us how THEY define these terms. I only mention this because by reading the comments, the one thing that is clear is that most have a differing definition of these terms. It seems most people think these three terms are related to prices, while others, like me, believe these terms are related to credit with prices being a symptom of inflation, but not the actual cause....realizing of course that faith in the currency, affected by QE etc is a factor too. I am just saying each article should probably communicate the writers definition of inflation for its readers to minimize the confusing aspects of this topic.

    Thanks for listening. I am currently holding only cash in US dollars...and got out the stock market at 14K, but kicking myself for not jumping back in when it halved...I did but 2 weeks before the bottom and got cold feet, jumped back into treasuries. Now just waiting for the next big leg down in the stock market, and housing. I hope I am right, but just because the math shows I should benefit, doesn't mean human behavior won't disappoint me.

    ReplyDelete
  68. To answer the question about people's anticipation and preparation for hyperinflation in the USSR:
    In late 80's of course nobody could predict hyperinflation. Censorship of TV and newspapers was reduced by Gorbachev already so it is not that it was not allowed to discuss inflation. Simply nobody could imagine what was about to happen. Something was not as usual however. I would call it a gut feeling. Some people had it, some didn't. I think that people able to analyze facts noticed that something goes wrong and that something was probably the fact that our government failed to see and address real problems and instead kept pushing the pedals and levers that no longer worked. An analogy of this would be a retarded guy driving a car with failed engine. As car starts decelerating he would keep pushing gas pedal stronger and stronger because that is all he knows how to do and all he was taught to do. In case of Soviet government that stupid pedal was socialism. They were stuck with the idea that socialism is inherently good and all problems popping up one by one are just some deficiencies that can be fixed and then our beautiful socialist idea will fly. So they tried all kinds of irrelevant ideas such as mild version of alcohol prohibition, reducing censorship of mass media (as if that could resolve the economic problems), etc. One good thing they did was withdrawing the Soviet Army from Afghanistan, but that was rather because they couldn't afford that war anymore. Thus by the end of 80's for people able to think critically it became clear that the government is simply incapable to solve any real problems, just like a retarded guy pushing gas pedal in a car with broken engine. Huge majority of people, including pretty much all seniors and many people of younger age, didn't have a clue. They considered savings accounts in Sberkassa (Soviet Savings Bank) with something like 3% a year interest rate that was fixed at this level forever, the only reasonable way to store money. Of course there was shortage of many goods in the USSR caused by the stupid central planning and price control. But, anything could be bought, if not in a regular store, then at black market with some premium. However, people in mass didn't really rush to spend money. The smart few % of people though started doing something. Some were buying gold in form of jewelery, the others real estate (the RE market in USSR was weird and it deserves its own topic), some people bought cars (yes, in the USSR cars could be a storage of value). Exchange of foreign currencies was strictly regulated in the USSR and was not available for regular people. Exchanging currencies privately was a pretty big violation of law. But I knew people that were buying US dollars and German marks at that time, and the black market rates were growing pretty fast. In 1990 black market rate of USD to Soviet ruble was already 25:1, and the posted exchange rate by the Soviet bank was 0.6:1 (only few small categories of people had access to US dollars at this rate). 25:1 rate seemed insane but in early 1991 it was already 100:1. At that time more and more people woke up to reality. They started hoarding anything they were able to buy- sugar, vodka, cigarettes, TV's, refrigerators, furniture, anything at all. The process was accelerating and those keeping money at the banks divided by two groups. Some of them just dumped money at anything at any prices, others (majority) decided that government will index their money and it is safer to keep the money in the bank. In December of 1991 the government was peacefully overthrown by Boris Yeltsin, the Soviet Sberbank turned into Russian Sberbank, the USSR turned into 15 states, and the real tsunami of hyperinflation started.

    ReplyDelete
  69. I find your article sound. The Chicago School of Economics is going down in flames even as they deny their theories are in any way responsible for the bubble-hubris of the past several years. Unfortunately we have a President who takes counsel from this same group, and blithely forecasts a 10 year deficit nearly double today's level without apparent concern. Because our leaders show no understanding of fire, the only legitimate question at this point is to figure out what rapid inflation means (hyper or accelerated), and the effects on asset classes we have available to trade in and out of as this unfolds.

    ReplyDelete
  70. I believe you need millions of people taking on new debt (velocity of money) in order to create inflation, and I see no near term risk (1-5 years) of that happening. But hyperinflation? We would need some sort of political event for this to happen, and I can't see that happening either. My perspective is deflation is going to ravage many. This isn't the USSR, this is the USA...the reserve currency of the world, and that means power...which they will not want to piss away. They might keep doing some monetization and some stupid QE, but they can get away with this because dollars are vaporizing (via debt destruction) much faster than they are printing...and they know this. I believe they are simply trying to slow down the process of deflation, time will tell what this leads too, but hyperinflation is very doubtful. Get ready for tax increases...which will be deflationary...and then more tax increases.
    Regarding gas prices and food prices, yes they are up some, but gas is still below where it was before the drop so how do you explain that? Food. I personally am hoarding food, so I assume others are as well...so this alone can push up those prices...so hard to draw conclusions with regard to prices.
    Regards,
    Jess in Lincoln CA

    ReplyDelete
  71. Not true for the UK. House prices rose 70% in 1972 and 1973 and continued to rise through the decade. Commercial property fell very heavily.

    ReplyDelete
  72. This argument does not work for the UK - real values of house prices in the UK actually rose during the high inflation 70s.

    This graph shows no correlation between inflation & real house prices:

    www.nationwide.co.uk/.../UK_house_prices_adjusted_for_inflation.xls

    ReplyDelete
  73. The real question is not inflation versus deflation. The real question is how are you going to power the ovens when the final collapse comes and entitlements and military spending are cut to the bone. Since our own congress can't seem to make the appropriate cuts it looks like the market will force the cuts in spending via higher interest rates. Will it be natgas, coal, or solar? My friend suggested solar with lots of mirrors inside so everyone could get crispy critter like. He also mentioned nukes but wasn't sure how that would work out.

    ReplyDelete
  74. Anonymous keep repeating that gold would be a protection against inflation. Gold was confiscated by the US Roosevelt administration. In South Korea about 20 years back (vague memory), the citizens were told to 'volunteer' their gold to the government during a currency crisis. Gold being confiscated during currency crisis and war situations is a constant. Therefore it is an illusion to think of it as a protection.

    ReplyDelete
    Replies
    1. FYI I heard from Jim Puplava, a respected financial news commentator, that very few people actually turned in gold in the 30's.

      Besides, if they do confiscate yours (they can track it better today, admittedly) they hand you dollars that you instantly arrange to convert into some other hard asset, leaving you where you'd have been otherwise, only better off from having ridden gold up.

      Delete
  75. That's a great article, here's another one about hyperinflation that I read the other day.

    http://www.wtffinance.com/2011/01/historic-lessons-of-inflation/

    It's amazing how bloggers provide better news than the newspapers do. Thanks for your work, I'll be back!

    ReplyDelete
  76. Hi Gonzalo - I wanted to give you some feedback on your survey. I completed it yesterday and was disappointed in its egocentric US focus considering that you, yourself, are outside the US.
    Nowhere in the survey was there a question about where in the world I was located. In the earnings question I was trying to decide whether to put it in $US equivalent or in our local currency. Consequently any data you get from it could be skewed.
    Just my ten cents worth!

    ReplyDelete
  77. Shine on, you crazy diamond. Good post, Gonzalo.

    ReplyDelete
  78. I find your insistence that you do not purge any comment except for the stated reasons, "highly disingenuous" to say the least. You purged my comment and it bore no resemblance to your qualifiers. I find that bloggers with no integrity don't last long - no one trusts anything they say, once they've been proven liars.

    ReplyDelete
  79. I disagree with both of you. It IS possible for housing to devalue in a hyperinflation, but not collapse. In nominal terms, once housing prices decline to cash sale levels they will begin to rise, like most everything else in a hyperinflation, and will no longer be viewed as collapsing. In real terms (versus gold and silver, if still allowed) they are likely to decline overall, with exceptions in safer areas.

    As for hyperinflation, if the bankers want it, we will get it, and soon. Then they will sell us their solution to the problem they engineered.

    If the bankers don't want hyperinflation, and it threatens, they will change the currency, and the rules, before it happens. Most banksters are holding lots of digidollars, which points to hyperinflation being unlikely. When the banksters start dumping dollars i'll be more worried about it.

    ReplyDelete
  80. To anonymous comment at 10:16pm February 16: I haven't purged anyone's comment.

    As you can see by the posted comments, lots of people think I'm dead wrong—hell, lots think I'm an idiot. But I haven't purged or suppressed them.

    GL

    ReplyDelete
  81. So let's play this out:

    I am an owner of a small house before the hyperinflation. Now, we are in a hyperinflation and my savings are worthless. I now have to use my labor to exchange for food. I can sell some of that food and I should get paid by a lot of worthless money. I can then pay off my mortgage for relatively nothing. Under this circumstance, I do not have to sell my house or do I want to sell my house. I have to live somewhere. So, if all owners think alike, why would prices drop? To extend this line of thinking, why is it better not to buy now and hold and then let inflation eat away the debt?

    The bottom line is, real estate is always priced according to demand and supply. There will no longer be new supply on the market, because no one will sell. However, there will still be demand. Although one can argue that people will just bunk up, the demand for basic housing should not drop that much. What you are arguing can apply to luxury houses, which will suffer esp because they require other ongoing variable maintenance costs (priced in real money) which will force people to trade down.

    By Holden

    ReplyDelete
  82. Gonzalo- My wife & I were trying to raise a family in New Jersey in 1971. We were saving for a down payment on a home. I watched that entry level home rise from $12K to over $25K in four years, as we kept trying to save, and kept trying to get enough of a down payment to make it work. Until I got a great job in 1978, I was unable to buy my entry level home. By then it cost $48K. I do not know where you get your facts and figures from, but so many things affect housing prices that readers should know that it is NOT as simple as you try to make it.

    ReplyDelete
  83. Anonymous from Russia, thank you for the additional info. You should definitely publish your experiences.
    Jack

    ReplyDelete
  84. If you are a holder of real estate and not looking to sell in the collapse you will be smart to use as much debt as possible....I have a friend who bought a 5000 sf home with a pool and guest house and put a loan on it and was making his payments for years. The bank called one day and asked him to pay off his home. He said NO and wanted to keep his credit growing by making his payments on time every month. The bank asked him to come to their office. They told him they were losing money just keeping the file open and asked him to pay it off. He asked how much his payoff was in American Dollars because that was the only currency he had in his pocket at the time. They did the calculation and told him he owed $4.38 in American dollars. He walked out of the bank stunned looking at his deed. Now this is an example of how Hyperinflation can work in real estate, borrow and pay off with a weaker dollar. His home is in Bullawayo, he, his wife and her parents (who live in the guest house) are quite happy. Yes hyperinflation can work in real estate, yes higher interest rates can kill real estate, but this is QE and our economy is way to weak to handle a dramatic increase in rates, that would kill jobs, businesses, everything....the government can't afford to risk high interest rates so thay will stay low....hyperinflation will kill the elderly on social security and people living on pensions....that is who will get killed in the currency debasement.....

    ReplyDelete
  85. Dines has had so many good calls over the years. He called the 2008 collapse way back in the 70's or 80's as well as internet, uranium, rare earths.
    Anyways he's been saying that we are in a deflation since the 80's. But that this may be interrupted by a hyperinflation. He doesn't go into detail about a hyperinflation because he says it would be so terrible.
    His advise since the 60's and 70's has been the same:
    Core position in precious metals
    NO debt
    Select stocks

    He's a great stock picker btw.

    So although there are many great points I'll go with the experience of making numerous correct calls. You really can't lose with the above especially if you've got a good business as well.

    ReplyDelete
  86. FUN WITH MODELS #1

    Ok one more observation on a golden opportunity with regard real estate in Argentina in the 2000s. 

    I recall during a visit to Buenos Aires in 2005 meeting a young guy who not only survived the currency crisis episode in Argentina but was living like a "relative" (very important emphasis) king.

    Early on in the crisis as the real estate prices got smashed he was able to purchase a number of quaint local 2 bed room apartments in US$. 

    I'm not sure how he came to be in a position to hold enough US$ at the time as he would have been around 20 yrs at the time of purchase. However I can assure you a bargain was had. 

    Even when we visited in 2005 (5 or so years after the darkest period of the crisis) the prices of RE were still incredibly cheap by Australian $ standards, as I was traveling on at the time. 

    Now the legend of this young guys situation was that he rode the mid noughties foreign tourist boom (and probably continues to)

    The apartments were not for locals to rent out in worthless and non-exchangeable pesos but were web advertised as foreign tourist accommodation as they were in gentrified neighborhoods very near central BA. 

    All transaction were made to him in cash on arrival and paid strictly in US$ (no tax I'm unassuming) I recall paying around $200 US per night which seemed reasonable for a "character" filled apartment with full facilities close to it all where we could entertain guests. 

    It wasn't until I ventured out that I realized just how cheap in foreign currency it was to eat drink and be merry! 
    Eg. A steak meal (rivaling the best I've had at Neil Perrys (Sydney Australia) great bottle of malbec and 6 exceptionally made mohitos again rivaling the best cocktail bars in Sydney came to $28 Australian or approx $16 US. 

    I would expect to pay $240 for this back home! 

    So back to our young friend, he was pulling in from me and the wedding party I was with in 3 of his other apartments $4200 US for our 7 night stay. 

    He slept all day and partied all night. I saw him 4 times that trip and never with the same woman.

    I know of the hardship that beset the vast majority of Argentinians during that episode but this guy worked real estate to profit greater I suspect than if the country didn't experience their particular currency crisis scenario. 

    He was just very clever to work the currency relativities.

    Having seen this first hand I do find the above scenario (whilst elegant) difficult to overlay with a hyperinflationary situation with the worlds reserve currency however...

    ReplyDelete
  87. FUN WITH MODELS #2


    Now a little curio for our anonymous friend above who wrote:
    "I still hold that until the US cloak of power (i.e. fear of the bomb and our military) dies, we won't go into a hyperinflationary event. The people of the world lift up the dollar in their mind's eye simply because of the fascade of our power and military might."

    A beautiful scenario came my way recently that suggested one kind of end to the debtor / creditor relationship the US currently enjoys with China. The essence of which painted a picture of the most comprehensive all conventional (ie non-nuclear) war waged by the United States against a foreign foe (enter your fave villain here). 

    In this hyperthetical non-theatre specific conflict and based on the modeling used to construct the ebbs and flows of such events it showed that the US would need to tap the foreign debt markets within 12 days in order to stay solvent (whatever that means these days) and to be in a position to continue the conflict. 

    Now with China's role as primary creditor to the US we'd like to assume that China is not on the receiving end of the above model lest they become fans of self pugilism sometime soon... 

    Assuming no one else is in a position to lend to the US and with the US public unable to buy a potential govt war bonds issue... ( they have no savings remember ) then it's the end of that conflict with war reparation charges to the victor paid with what? Ah super hot off the presses crispy fresh US$ in the hope of hyperinflating away the impossible to repay losers fee. 

    Ah... In what a brittle times we live. 

    ReplyDelete
  88. From Kansas...
    Most importantly - I wish to welcome you back GL. This piece is Hot. Your audience is so smart. I find the comments very rich, and I will be returning to them for a forth time.

    I had a number of thoughts. I will present two. It's long, and I hope I do not come across as too far out.

    Referencing February 14, 2011 2:13 PM "Mickey644 said...The demographics in the US are such that there aren't enough people to purchase the available housing at ANY price, regardless of their income and financial being."

    I think that is the plan. The "people" will then say, "pleez, Government take care of me." Feels like a plan for a modern day slave holding camp - just without fences.

    The nice big govt banking man would simply say, "sign here or be homeless" - you ignorant fool that just handed your boobs and balls on a paperless platter.

    Along the topic of silver that sometimes comes up as one of the safety pills, I also have some ideas brewing. I too am positioning myself to benefit from holding this metal, however, there is a gnawing - like a splinter before it festers up enough to squeeze free.

    Here is my unprofessional thinking (I am not educated in finance or much else). Now for the gnaw! Specifically, much of the big talk/media attention about silver MOVEMENT and ACTIVITY seems tied to paper silver (even though the topic is often presented as coins and bullion).

    I suspect that if the paper silver market could be set up to get twisted shut or functioning with ever limiting access, then the price would tank for a while. Perhaps, an excuse like "the Govt wants to protect money - the banks are better qualified - we need to get this money off the same teams that also trade wheat, soy, sleet, and snow!. You get the idea.

    I suspect the result would slam spot silver in the nearer term (because the formally giant numbers supposingly representing silver activity will suddenly appear very dwarf like). Well, It won't work - and it would not be designed to work for very long. Just long enough to scare most folks out and let the robbers pickup physical silver cheaply.

    The point of my rattling about silver is to be forewarned. Hold tight and perhaps buy more - I know I will if able. I use to buy materials - and one thing I noticed is that manufactures do not like to run out of their raw materials. But raw materials need manufacturers as much as manufacturers need materials. (That was a Wake Up hint).

    Furthermore, the serious manufacturers often have a marriage of such directly tied up with the raw material creator - in one of my former positions it was with companys in Brazil, South Korea, - and often coordinated from our parent company in Japan. Deals were made long ago - its business - and it will cost.

    Thanks again GL and to Russia, and East Germany too. Great article and comments. Where's Doug???

    Tess from Kansas

    ReplyDelete
  89. One thing I haven't seen mentioned is The New World Order which is the agenda in most of the developed (and perhaps all) countries by the bankers and the governments. They want one world without borders, one currency, one government and that is what they are working towards. Not sure how they plan to do it, but destroying the currencies of countries and then "saving" them with the new money seems reasonable. I would list my name but don't know how so - Laura

    ReplyDelete
  90. GL,
    Very thoughtful, keep up the good work!

    Lost in the wilds of West Texas.

    ReplyDelete
  91. Your reasoning is a clear as day, and I am simply puzzled by those who find some sort of flaw here. I know you're right because I grew up in So-Cal in the early '70's too.

    ReplyDelete
  92. Great article Gonzalo Lira although one of the readers from Zimbabwae also has a good point.

    The end of the matter is US will have high inflation, but not hyperinflation as long as USD is the reserve currency of the world and the FED contiues to print so much money. Once USD loses reserve currency status (when Saudi Arabia and OPEC decides to price oil in another currency than USD), then the USD will hyperinflate.

    ReplyDelete
  93. For anyone that would disagree with Gonzalo's prediction as to how real estate would fair during high or hyperinflation I would suggest looking at this chart:

    http://goldsilverrealestate.com/?p=73

    ReplyDelete
  94. This is so great.

    ReplyDelete
  95. I really like this blog that is why I keep visiting it. I always found the posts very informative and have very useful topics.

    ReplyDelete
  96. I do understand the effects of hyperinflation on real Estate and commodities. Yes, the chart you refer to does show the short term effects of inflation on commodities because their investment cycle is generally a very short one and speculators can move in and out of those investments very quickly. Real estate is a very different investment vehicle and reacts differently to inflation and hyperinflation than do commodities. Both are risky and can be dangerous to your wealth if you use excessive amounts of debt and miss time the market. On the other hand if you time it right the more debt you have the better your return will be and the greater your wealth will grow. Right now human emotion has driven prices of commodities through the roof (formed a potential bubble) and driven real estate into the abyss. We live in a world of cycles. Our recent inflation is speculator driven and could be very dangerous to your portfolio. True inflation has difficulty cementing itself without wage inflation (which we have not had yet) or currency debasement (which we haven’t had yet) but both are coming in the future. Bank on it!

    ReplyDelete
  97. In my opinion, hyperinflation only occurs as an active "political decision" by government to maintian revenues to meet expenditures ( debt payments, entitlements, public projects and debt payments etc) in response to a severe contraction in revenue from domestic or foreign sources. In both Weimar Germany and Zimbabwe, both conditions occurred that led to the "political decision" to hyperinflate the currency: 1. A collapse of a significant portion of the productive economy, leading to a dramatic contraction in tax revenues. 2. A heavy dependence on foreign currency borrowing, leading to an unwillingnes by foreign lenders to finance deficits. When these 2 sources of government revenue collapse, the stage is set for the "political decision" to hyperinflate the currency.

    ReplyDelete
  98. This is just one of the best articles I read about real estate. I don't know all those things before. I really learned a lot of amazing things in this article. That is why I am so thankful that you posted this in your blog.

    Investment property Baltimore MD

    ReplyDelete
  99. It would be interesting to hear how this also happened during the Stock Market crash of 2008 and that impact on real estate prices. Although there was no impaction, in fact the fear was deflation if I am not mistake. I apologize if one of the comments already covered this, I haven't read them all yet.

    ReplyDelete
  100. This things will be happen because the implications of the basic necessities is clear but the implications of the credit is more precise and complex.it is diificult to buy the a house for the average person .

    Rental Choice

    ReplyDelete
  101. Nowadays, people are given certain options in order to acquire a real estate property. You will be amazed that even average people can afford it.

    ReplyDelete
  102. day consumables, the debt has shrunk,...but if you are a wage earner like most people, the decrease in value of your debt only matters if your wages have gone up. If you are making $40k and your food and gas vill are $30k, you are likely homeless or living with many people and rents are low due to lack of demand.

    So Russian anonymous gets at this, if the type of money your debt is in hyperinflates, your debt shrinks in cost compared to other items, but your economy that depends on that currency is also suffering.

    ReplyDelete
  103. One of the bloggers here to mention that the mortgage debt evaporate quickly into hyperinflation. Could you clarify? Could this happen in the kind of hyperinflation that you speak?

    jesmond student house

    ReplyDelete
  104. I also feels that the rising interest rates are bad for bonds, equities and real estate. And people wonder why the goods, gold and silver are rising.

    ReplyDelete
  105. Thanks for the insightful post Gonzalo!

    Question, during inflation, wouldn't the property value go up?
    If so, there will be less of a difference between asking price and valuation, and less money (and easier) for buyer to put down for payment?

    I am currently thinking whether to sell my tenanted property in Singapore as prices are high or keep it as a long term investment. I am leaning towards the latter as property prices will eventually rise in tandem with inflation. Thanks!

    ReplyDelete
  106. Many sellers will adjudge not to put their real estate assets on the bazaar during such a period, absolutely because they do not wish to accept a lower amount for their holdings.

    Property Management

    ReplyDelete
  107. Good analysis and this agrees with history. How does the fact that banks own so much real estate today effect the chances of a hyperinflation occuring?

    ReplyDelete
  108. Your agent can help you narrow your search by going through a home with you and noting what you like and dislike. The agent is also a source of information about the home itself: how long it’s been on the market, the neighborhood and school system, the home’s best features and so on.

    ReplyDelete
  109. This one is really one of the most essential contented post about real estate. And I have really got the excellent information about the relation of inflation and real estate from this post. This one is truly one of the unique experienced post. Thanks for sharing.

    ReplyDelete
  110. It’s traveling to appear as a shock and with it, there’s traveling to be a lot of crime. And the abomination is traveling to be a lot worse than it was afore because in the endure 1929 Depression, people’s minds weren’t

    Charlotte Property Management

    ReplyDelete
  111. I am actually one of those 67% who still pays for rent but I am saving up to have a home of my own soon too. I definitely would agree that it would be one of the best long term investments out there. Although cars are more fun, I'd still like to have a house of my own first.

    ReplyDelete
  112. The outcome of the real estate price vs inflation depends of many variables. I believe that real estate price will in large depend on these 3. Mortgage requirements/Mortgage availability, the rate of inflation and supply and demand forces the latter 2 will produce. Once the mortgage requirements become more stringent as banks will try to hedge inflation risk by demanding higher down-payments and demanding higher interest as well faster payoff time - this will turn off some buyer thus putting the downward pressure on the real estate. With inflation on the rise the housing market should get a little boost since real estate is a commodity that can produce return which will attract some, but only the ones who are sitting on piles of cash will jump into it since their dollar will devaluate faster when housing prices fall. But since we are the nation of debtors and not savors the outcome is somewhat obvious. In conclusion - no one knows how much devastation this recession will bring into US dwindling real estate. If you are in the house I would strongly advise to stay in it since inflation might turn your fixed mortgage payment into smaller sum since everything around will become more expensive - hoping your boss will start paying more to keep up with it. If you are not in the real estate now, but have some cash saved on the side dump it in gold and silver since the dollar will soon be obsolete. Alex

    ReplyDelete
  113. Glad I stumbled upon this...so much useful information! I have just red every post above (which took about two hours) and come away with a mixed consensus on weather real estate appreciates or depreciates during inflationary times. As other's have commented,there are so many other variables in play that it is impossible to accurately predict an outcome. But: Real estate is a tangible commodity, much like gold and silver, although less liquid and more locally influenced. None the less, it is a real commodity and should respond to inflation much like other commodities, that is, rise in price.
    Is it wise to hold real estate (beyond your home) in inflationary times?
    I say yes, within reason and along with metals. Hedge your bets, right? People got to live somewhere, that is for sure and not speculation.
    If the U.S. greenback becomes unhinged from the reserve currency status that it enjoys, we are all toast. There is really nowhere to hide. You can hold metals, build bunkers,barter and live like cavemen. Mostly, just pray.
    ~ MikeHgl

    ReplyDelete
  114. I recall back in the 90s in Russia real estate prices went up with inflation simply because non of it was financed. When prices started to swell, people looked into buying real assets like real estate, cars or anything tangible to hedge against inflation. Perhaps I should not say that the prices for real estate went up but merely reflected the real rate of inflation. Since most of the real estate in US is heavily leveraged the prices for real estate will surely go down if not collapse since there will be no buyers and sellers will be forced to dump their real estate at discount to recoup their losses. As the article mentions "Preserve capital at all costs, via commodities, while keeping a sharp eye out for real estate opportunities. As inflation rises and real estate prices collapse, be prepared to trade the commodities you own for real estate assets selling at depressed prices." But it might not be as straight forward as you think since our corporate bought government will try to interfere and manipulate as much as possible to soften the blow. Follow the government - buy gold and silver while its suppressed, sit back and relax. The perfect storm is in the making....Alex

    ReplyDelete
  115. Low turnkey rental home prices and low rental properties interest rates make this a great time to become an investor.

    ReplyDelete
  116. "Most people in the advanced economies—including most economists—really don’t have any idea what inflation and hyperinflation is." ... ?!?

    ... since decades there exist tons of economic books, which describe the effects of inflation and hyperinflation. and by far more advanced than this blog. so, whats the news??? maybe economists didnt experience times of significant inflation, but still they re able to describe the outcomes of inflation. if you dont have a clue about inflation at all, maybe this blog is useful. if you need useful information you should read one of those economists books ...

    p.s. the statement about depressing prices in Germany (post WWI) is wrong. the currency collapsed. but if you translate the prices, the prices rose ... but owners has been subjected to a special (quite high) real estate tax in the aftermath, so they ve been dispossessed to a substantial amount.

    ReplyDelete
  117. Great Post! It's very nice to read this info from someone that actually knows what they are talking about.REO Notes Properties Florida

    ReplyDelete
  118. For most of us a home is the most expensive thing we ever buy and that's why we want to make sure that we've bought the right and desired property.

    philippine real estate

    ReplyDelete
  119. Wrong again Gonzalo! During a hyperinflation home prices fall on a REAL basis, but NOMINALLY they still increase. Just not as much as food, energy, etc. Buying a home with credit will becoming impossible. However, if you have a fixed rate mortgage on a house you already own, hyperinflation may help you pay it off rapidly with a few paychecks (or rent payments from tenants). At this point you care little whether or not it temporarily falls in relative value. Because you just got your mortgage paid off. Owning 5% of something is not as good as owning 100% of it, even if the asset is worth half as much in relative terms as before.

    After the monetary system is reset, the asset will return to something approaching its prior value, and with no mortgage you turn a tidy profit.

    The downside to all this is keeping paying tenants in it during the period of disruption and the runup to hyperinflation where your rent or wages do not keep pace with other costs of living, squeezing your ability to service debt if you do not have sufficient liquid assets.

    ReplyDelete
  120. The post contains good information about real estate. I have appreciated your post very much. I came to know the site while searching about social security benefits. Thanks for notifying us about the issue.

    ReplyDelete
  121. I love checkin out the homes for sale! I do agree that lately there has been an unnecessary inflation.

    ReplyDelete
  122. Obvious: If I lend money for a year, and expect the inflation rate to be 10% for that year

    viagra prescription online

    ReplyDelete
  123. Congratulations Admin! Thank you so much for taking the time to share this exciting information.
    home builder sales software

    ReplyDelete
  124. Hi there! this is a very helpful information to those who are into commercial real estate. Looking forward to hear another thing like this in the future. With an extensive background and strong local contacts, that able to assist individual corporations in negotiating leases, sales, business brokerage, investments, relocation, site selection and development. commercial real estate nh

    ReplyDelete
  125. This stuff is down t earth, hats off buds out there.
    Boulder Real Estate

    ReplyDelete
  126. This is definitely a topic that's close to me so Im happy that you wrote about it. I'm also happy that you did the subject some justice. Not only do you know a great deal about it, you know how to present in a way that people will want to read more. I'm so happy to know someone like you exists on the web.Seven Hills NSW

    ReplyDelete
  127. I am surely coming again for more contents of yours.
    Cou

    ReplyDelete
  128. real estate prices either remain static or indeed fall on a nominal basis, even as inflation is debasing the currency, because real estate sellers will not find buyers willing to take on usurious debt in order to buy the Commercial Property in Delhi.

    ReplyDelete
  129. I am very surprised that before the crisis and after the crisis price is very high.......and then your blog is very nice.Real Estate Gurgaon

    ReplyDelete
  130. I thought Hernán P. was a fool—then realized that I was the fool, when the Argentine crisis passed, real estate prices rebounded, and the apartment he had purchased was now worth several times what he paid for it.Delhi Property

    ReplyDelete
  131. Find your dream home at the new arjunkkrdevelopers.com.Invites you to be the part of best real estate deals available in the real estate market in Delhi. - Arjun City, Roorkee.Arjun KKR Developers is one of the most trustworthy builders in New Delhi..contact us-Delhi Real Estate

    ReplyDelete
  132. Real Estate subject to various things, incorporating in particular engage rates. Indeed as your 'Hernan P' illustration indicated, the absence of credit or alternately extravagant investment rates is what causes a real estate accident.

    turn key rentals

    ReplyDelete
  133. I would state that you possess lots of understanding on this subject.This is an elegant blog post.

    ReplyDelete
  134. You guys out there are performing a great job.
    Kent Swig

    ReplyDelete
  135. Extremely beneficial posting and house interior looking very beautiful. I will be definitely going for this option which you are providing about Quick House Sale London!

    ReplyDelete
  136. Very Informative! This blog is great source of information which is very useful for me. Thank you very much for sharing this!

    live chat for real estate

    ReplyDelete
  137. Thank you very much. I agree with your article, this really helped me. I appreciate your help. Thanks a lot. Good website.

    real estate lead generation

    ReplyDelete
  138. Thanks on behalf of sharing superb in order. Your web-site is same cool. I am impressed by the info that you have proceeding this situate. It reveals how nicely you perceive this subject. Bookmarked this web side, will be as long as in exchange on behalf of more articles.

    Seven Hills NSW

    ReplyDelete
  139. This comment has been removed by a blog administrator.

    ReplyDelete

Whether you agree with me or not, thank you for your comment.

If you liked what I wrote—or if it at least made you think—don’t be shy about making a payment. The PayPal button is there for your convenience.

If you have a question or a private comment, do feel free to e-mail me at my address expat229@gmail.com.

GL