when home price drops, inflation can not happen

Discussion in 'Economics' started by coolweb, Nov 15, 2008.

  1. Is this theory true or false?

    When home prices are dropping, how can inflation appear, considering your dollar buys more house then before.


    So inflation ,or HYPERINFLATION can only start once home prices stops dropping, and it starts going up,

    What scenarios do you think might play out in the future?


    1)
    a. home prices drop around 40% on average from PEAK
    b. dollar goes up for 2-3 more years
    c. interest rates for home mortgage goes up to 8%

    ->
    then massive home price inflation.


    2) a. interest rate for home mortgage stays @ 7%
    b. home price does not drop
    c. dollar goes down
    -> then home price starts to go back up again for massive inflation.

    3) Everything except home prices go up (commodities etc.).
    Massinve inflation on everything except home prices.


    --------


    inflation can not happen while home prices are dropping considering home/mortgages/rents is the biggest expense of every american family.

    So we are a<b> few years from massive inflation</b>
    ----------

    <b>Unemployment</b> -> Mortgage can't be paid -> Large housing price drops up to 40% in NYC.

    The layoffs are just starting on wall street, its not going to end here, probably will last at least 2 years , (people don't exactly fire a set of people and rehire them in 3 months (quarter) or 9 months (3 quarters) or 12 months (4 quarters)

    resulting in mortgages not being paid. resulting in more foreclosures and price drops.

    So we will be seeing lots more price droppings in nyc in the near future.



    your thoughts?
     
  2. There are both inflationary and deflationary forces at work.

    Whichever is most powerful will be the net "flation" we'll have.

    As of yet, nobody knows which it will be.

    And we could get some of the worst of both... rising cost of food and services with declining asset prices.
     
  3. thanks to 8^3release

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    Some effects of Inflation:
    1. Hardships for poor people and fixed income salaried households
    2. Business Profits tend to go up in times of inflation
    3. Demand for pay hikes and wage increases
    4. Social tensions
    5. Value on money lent out falls in purchasing power - value of money to be repaid falls in terms of purchasing power falls.
    6. Interest may rise.
    7. Exchange rate may fall
    8. Central Bank my try to control money supply growth through hike in cas reservecration, raising discount rates (lending intrest rate) and conduct open market sale of securities.
    The effects of inflation
    Inflation can be very damaging for a number of reasons. First, people may be left worse off if prices rise faster than their incomes. Second, inflation can reduce the value of an investment if the returns prove insufficient to compensate them for inflation. Third, since bouts of inflation often go hand in hand with an overheated economy, they can accentuate boom-bust cycles in the economy.
    Sustained inflation also has longer-term effects. If money is losing its value, businesses and investors are less likely to make long-term contracts. This discourages long-term investment in the nation’s productive capacity.
    The flip-side of inflation is deflation. This occurs when average prices are falling, and can also result in various economic effects. For example, people will put off spending if they expect prices to fall. Sustained deflation can cause a rapid economic slow-down.
    Some effects of Deflation
    1. Company profits may fall
    2. Private domestic capital investment may fall
    3. Unemployment may increase.
    4. Real value of lans to be repaid may rise,
    Deflation is a decrease in the general price level over a period of time. Deflation is the opposite of inflation. For economists especially, the term has been and is sometimes used to refer to a decrease in the size of the money supply (as a proximate cause of the decrease in the general price level). The latter is now more often referred to as a 'contraction' of the money supply. During deflation the demand for liquidity goes up, in preference to goods or interest. During deflation the purchasing power of money increases.
    Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically. In economic theory deflation is a general reduction in the level of prices, or of the prices of an entire kind of asset or commodity. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices. In the IS-LM model this is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. The solution to falling aggregate demand is stimulus either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and borrow at interest rates which are below those available to private entities.
    In more recent economic thinking, deflation is related to risk, where the risk adjusted return of assets drops to negative, investors and buyers will hoard currency rather than invest it, even in the most solid of securities. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap. A central bank cannot, normally, charge negative interest for money, and even charging zero interest often produces less stimulative effect than slightly higher rates of interest. In a closed economy, this is because charging zero interest also means having zero return on government securities, or even negative return on short maturities. In an open economy it creates a carry trade and devalues the currency producing higher prices for imports without necessarily stimulating exports to a like degree. The experience of Japan during its 1988-2004 depression is thought to illustrate both of these problems.
    In monetarist theory deflation is related to a sustained reduction in the velocity of money or number of transactions. This is attributed to a dramatic contraction of the money supply, perhaps in response to a falling exchange rate, or to adhere to a gold standard or other external monetary base requirement.
    Deflation is generally regarded negatively, as it is a tax on borrowers and on holders of illiquid assets, which accrues to the benefit of savers and of holders of liquid assets and currency. In this sense it is the opposite of inflation (or in the extreme, hyperinflation), which is a tax on currency holders and lenders (savers) in favor of borrowers and short term consumption. In modern economies, deflation is caused by a collapse in demand (usually brought on by high interest rates), and is associated with recession and (more rarely) long term economic depressions.
    In modern economies, as loan terms have grown in length and financing is integral to building and general business, the penalties associated with deflation have grown larger. Since deflation discourages investment and spending, because there is no reason to risk on future profits when the expectation of profits may be negative and the expectation of future prices is lower, it generally leads to, or is associated with a collapse in aggregate demand. Without the "hidden risk of inflation", it may become more prudent just to hold onto money, and not to spend or invest it.
     
  4. Deflation is, however, the natural condition of hard currency economies when the rate of increase in the supply of money is not maintained at a rate commensurate to positive population (and general economic) growth. When this happens, the available amount of hard currency per person falls, in effect making money scarcer; and consequently, the purchasing power of each unit of currency increases. The late 19th century provides an example of sustained deflation combined with economic development under these conditions.
    Deflation also occurs when improvements in production efficiency lowers the overall price of goods. Improvements in production efficiency generally happen because economic producers of goods and services are motivated by a promise of increased profit margins, resulting from the production improvements that they make. But despite their profit motive, competition in the marketplace often prompts those producers to apply at least some portion of these cost savings into reducing the asking price for their goods. When this happens, consumers pay less for those goods; and consequently deflation has occurred, since purchasing power has increased.
    While an increase in the purchasing power of one's money sounds beneficial, it can actually cause hardship when the majority of one's net worth is held in illiquid assets such as homes, land, and other forms of private property. It also amplifies the sting of debt, since-- after some period of significant deflation-- the payments one is making in the service of a debt represent a larger amount of purchasing power than they did when the debt was first incurred. Consequently, deflation can be thought of as a phantom amplification of a loan's interest rate. (But, conversely, inflation may be thought of as a regressive, across the board general tax.)
    This lesson about protracted deflationary cycles and their attendant hardships has been felt several times in modern history. During the 19th century, the Industrial Revolution brought about a huge increase in production efficiency, that happened to coincide with a relatively flat money-supply. These two deflationary catalysts led, simultaneously, not only to tremendous capital development, but also to tremendous deprivation for millions of people who were ill-equipped to deal with the dark side of deflation. Business owners-- on average, better educated in economic theory than their unfortunate cohorts (or just better able to withstand the economic stresses) -- recognized the deflation cycle as it unfolded, and positioned themselves to leverage its beneficial aspects. Hard money advocates argue that if there were no "rigidities" in an economy, then deflation should be a welcome effect, as the lowering of prices would allow more of the economy's effort to be moved to other areas of activity, thus increasing the total output of the economy. However, while there have been periods of 'beneficial' deflation (especially in industry segments, such as computers), more often it has led to the more severe form with negative impact to large segments of the populace and economy.
    Since deflationary periods favor those who hold currency over those who do not, they are often matched with periods of rising populist sentiment, as in the late 19th century, when populists in the United States wanted to move off hard money standards and back to a money standard based on the more inflationary (because more abundantly available) metal silver.
    Most economists agree that the effects of modest long-term inflation are less damaging than deflation (which, even at best, is very hard to control). Deflation raises real wages which are both difficult and costly for management to lower. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment.
    Note:
    Actually, deflation itself is neither good nor bad. It depends on the cause of the deflation whether people will suffer or rejoice. As I said, if the cause is increasing supply of goods that would be good. Another example of this is in the late 1800's as the industrial revolution dramatically increased productivity.
    However, if deflation is caused by a decreasing supply of money as in the great depression, that would be bad. The stock market crash sucked all the liquidity out of the market place, the economy contracted, people lost their jobs and then banks stopped loaning money because people were defaulting. The problem compounded as more people lost their jobs and money supply fell further causing more people to lose their jobs, etc. etc.
    During the Depression demand for money was high (but no one could afford it) because supply was low. So deflation can be caused by several different things and thus can be good or bad depending on the cause
     
  5. Thoughts from me + tech analysis on charts that might be psoted if I have time.


    TECH ANALYSIS and scanning


    1) the only thing rising right now is USD , YEN, and inverted etfs (shorts) , From what I've seen, USD has lots more to rise, maybe 1 or 2 months of falling, then more rally for 2-3 more YEARS.

    ---------

    REason: Dollar buys more property, bonds, everything now.

    DOLLAR is KING until property prices rises in 2010+


    ---------------------------

    I believe it will be KING, until property prices stop dropping, which should be 2-3 years from now. Trading USD on the long, (espically after 1 pullback is probably the best trade right now)


    everybody hates the USD right now, but nobody foresaw such a sharp drop in asset prices which propped up the USD.
     
  6. People/types of assets to be KILLED.


    1) businesses and people with debt , which is 80% of american familes with HOME MORTGAGES.
    CREDIT CARD DEBT.


    2) GOLD holders/buggers/crazy people will be KILLED.

    inflation is nonexistent for at least 2-3 years.
    I can proof this with a tech analysis chart.

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    People who will be king and extremely profitable ready to pick at value cost items in 2-3 YEARS.

    1) People with USD liquid cds.
     
  7. STOCK HOLDERs - major decimation.

    --------------
    Anybody holdings stocks as of THIS MOMENT thinking their stocks are cheap, you are in for a surprise.


    There will be bear rallies of course, but realize this

    DIA - current div yield = 3%
    market bottom yields = 6-15%

    We have 50-100% more to go down, thats right, we need to go down 50-100% MORE for a market bottom.

    Here it the graph:
     
  8. Hi Coolweb interesting analysis. I'm interested in being in the King group.

    -People who will be king and extremely profitable ready to pick at value cost items in 2-3 YEARS.

    1) People with USD liquid cds-


    Would you mind elaborating on USD liquid cd options?
     
  9. can you explain how home prices drop and inflation can't occur?
     
  10. Inflation can happen to either specific industries, such as all commodities, or all real estate.

    Deflation usually happens to EVERYTHING except cash USD.


    When you scan over 7000s of symbols, ETFs and countries, you will notice every asset class, may it be foreign assets, etfs, emerging assets, bonds, gold, oil , corn, commodities,
    Everything is going DOWN.

    The only thing making new highs are USD/YEN/and some bio tech companies such as EMS , QCOR, TMTA , MYGN , DLTR (dollartree) , ALO (pharm) and some other biotech companies.
    I am not kidding when I said I scanned 7000s symbols.



    this = 100% deflation.

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    <b>Deflation is the opposite of inflation obbviously.
    </b>

    There can not be inflation when there is deflation in all asset classes.
     
    #10     Nov 15, 2008