- Today's Observation -
Disinflation is Dead. Long Live Inflation!
The United States has enjoyed disinflation since 1980, shortly after Japan’s debt bubble popped. Since 1980, the U.S. and European inflation rate has been steadily falling. Disinflation is different from outright deflation. Deflation means that prices are actually falling. Disinflation merely means that rate of the inflation is falling.
The COVID pandemic was the final nail in the coffin. Absent the well-conceived PPP loans (I have heard of few abuses), the United States might have lost 300,000+ otherwise-profitable businesses. Congress and the President helped these American businesses when they needed it most. In my opinion, the PPP Loan Program was amazingly successful.
The PPP Loan Program eventually cost the Federal government, however, over $525 billion. To make matters worse, the huge increase in the deficit just followed a $1.9 trillion tax cut by President Trump. Between the two stimulus programs, we broke the budget. The only solution was to have the Fed buy up our own debt.
Unfortunately the actions of the Fed worked too well. The U.S. economy soared. The unemployment rate plunged. Real average wages started to increase for the first time in several decades. The stock market soared. Despite COVID, the U.S. unemployment rate is still less than 6.9%. Deficits apparently no longer matter, at least in the eyes of Congress.
This is why you can bet that inflation will soon come roaring back. Have you noticed that home prices are soaring? No poop, Sherlock! Haha. Go get a huge mortgage at today’s ridiculously low interest rates and buy the biggest home you can afford. By keeping interest rates ridiculously low, the Fed is subsidizing home purchases.
If you can even find a home to buy… The big problem is inventory. Investors are snatching up homes without even seeing them. They are relying entirely on online videos. Investors are also paying all cash. Home prices were held in check for most of the past year by the fact that the homes were not appraising for their purchase price. Sellers were forced to reduce their asking prices so that their buyers could get mortgage loans.
No longer. Now more and more investors are simply paying all cash for these homes, thereby going around the whole appraisal issue. Folks, home prices today are an absolute steal. Buy a big home right away, if you need the extra space.