Inflation Means your Dollars Buy Less

by Tom Tousignant

in Blog, Mortgage Rates, Refinancing, Wealth Building

William Dudley, President of the NY Fed

Most people think Inflation means that things get more expensive.  They also think “Deflation’ means that prices are dropping.

Peter Schiff, a former US Senate candidate and President of Euro-Pacific Capital, famously called the housing bubble explosion before it happened.  He recently wrote a good article responding to NY Fed President William Dudley’s recent speech. 

By: Peter Schiff
NY Fed President William Dudley’s outrageous statements today closely conform to recent pronouncements from other Fed officials and confirm that a massive round of dollar devaluation is poised to begin.

Seemingly overnight, the Fed appears to have altered its mandate, ditching its former goal of “price stability” in favor of “moderate price inflation.” While no one is under the illusion that the Fed has kept prices stable over the last century, it used to be that the governors would at least pretend to fight inflation. Low inflation used to be the aim, now it’s the enemy.  

Although the inflation being created by the Fed may not be showing up immediately in rising rents or auto prices, it is nevertheless pushing up asset prices in other areas.  

Could it be that the Dow isn’t rising, but the dollar falling?

Dudley says it may take “several years” before inflation returns to levels consistent with the Fed’s mandate. Exactly when did the Fed establish a floor for “acceptable inflation?” Where is that floor, 2%? (The core PCE index is currently up 1.4% for the year) If we are below the floor, where’s the ceiling- 3%? 4%? In 1971, President Nixon imposed price controls when inflation averaged 4%. That rate was considered so high that emergency measures were needed. Is that still the case? How much higher do costs have to go for cash-strapped Americans before the Fed can be expected to take its foot off the gas?

Without better understanding of where these parameters lie for the Fed, the markets will be flying blind through an impenetrable fog.

If the Fed were serious about maintaining long-term price stability, which is its actual mandate, it would need to allow prices to fall after the speculative booms that it helped create. As we saw in the 1980s, unemployment resolves itself when the monetary system is sound, but no one will hire under the uncertainty of a rogue, inflationary Federal Reserve.

Mr. Dudley said, among other things, “Given the outlook that the upturn appears likely to strengthen only gradually, it will likely be several years before employment and inflation return to levels consistent with the Federal Reserve’s dual mandate“.

This tells me that the Fed thinks that we are going to see high unemployment and low inflation, or even deflation for a while. 

What should you expect as a homeowner in this environment?  

  • If inflation is making the dollar buy less, then mortgage debt at low, fixed, rates isn’t too bad – you will pay back the loan with inflated dollars that aren’t worth as much as you borrowed.
  • House prices aren’t likely to increase when other prices are falling – so, if you aren’t living where you want to live, it’s better to sell your house now at today’s prices – it may be harder to sell it in the future.
  • If house prices will decline due to deflation, pay as little principle as possible – store your money in a place where it can grow, or at least maintain it’s value, rather than inside your house.
  • Today’s low inflation is resulting in really low interest rates, so, if you aren’t in the home you want to be in, it’s still a great time to buy a home.
  • Recognize the difference between your house (The physical structure as an asset), and your home (The safe place you raise your family, celebrate holidays, and create memories).  It can be the right time to sell a house, and a great time to buy a home at the same time.

Comments on this entry are closed.

Previous post:

Next post: