Deflation of Wants – Inflation of Needs – Hyperinflation of Both
What does the future hold for dollar denominated Americans? The US Dollar is just topping out right now as the foreign flight to the best of bad fiat currencies comes to a conclusion. Next up, the collapse of the US Dollar and the flight to gold, silver, rice, beans, wine and ammo.
Is real estate a hedge against hyperinflation?
In the extreme example of the Weimar Republic, this occurred:
Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.
Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold,german gold coin saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.
Personal Property: Capital was preserved by those who early changed it into objects of lasting value–rare coins, stamps, jewelry, works of art, antiques–or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.
In general, real assets hedge better than paper assets. By definition, real assets have a value of their own. Inflation does not erode their value. Thus, any real asset can be an inflation hedge. It follows that real estate is also a hedge, but it’s not the best.
Good hedges have a few key properties. We mention here only four. One key property of a hedge is that it holds its value. It should lose little value over time. Cars and eggs lose value over time. Land, silver and wine do not.
Another key property is marketability. This means that it is easy to sell. Other people will easily take it for payment. Hence, it is good for barter. Chairs and clothes do not sell. Corn and gold do.
A third key property is divisibility. This means that the asset splits into smaller parts without a loss of value. Houses, cars and cows are not divisible. Rice, wine, gas and gold are.
The last key property is financing. It is vital. Experts prefer to fully ignore it. Investors buy assets with either cash or credit. Cash-based hedges are good. Credit-based hedges are bad. History repeatedly shows that assets bought on credit are prone to speculation and bubbles. The hedge might be already overvalued. In this case, investors should avoid it. Credit clearly drives real estate. Moreover, real estate recently went through a wild bubble. It is grossly expensive, so a poor hedge.
The verdict is clear. Real estate is a hedge, but a poor one. It fails all of the above four tests. On the other hand, gold is a far superior hedge. Gold aces all the tests of a good hedge. That is why it is the ultimate inflation hedge. Better yet, now gold is cheap, while real estate is dear. Thus, as a hedge, gold handily beats real estate.
Real estate bought with cash, free and clear of any debt, might be a poor hedge, but it is nevertheless a hedge. It will protect the value of your money. It is not as good a hedge as gold, but it will do the job. However, we emphasize that real estate bought on credit (with a mortgage) creates substantial new risks to the investor. It’s possible to hedge one risk by assuming another, but not recommended.
There is no question that currently the US is experiencing a deflationary period in the credit markets, real estate, and some sectors of nonessential consumer goods. The contraction of credit has pushed the US into a recession. But even as this happens consumer inflation is running uncomfortably high, creating conditions called ‘stagflation‘. As the recession deepens, its impact on consumer spending and employment levels will force investors to reevaluate holding US government bonds. The continual losses incurred from deflating asset backed securities will force the Federal Reserve to bail out financial institutions to enhance systemic stability. Eventually, a point will be reached where the Federal Reserve has no assets of its own left to assist beleaguered institutions and it will have to resort to printing money. When this occurs, investors may have to liquidate their debt positions or else suffer the effects of debt devaluation by the Federal Reserve. This sudden liquidation of US government debt will put further downward pressure on the dollar.
The US economy is facing economic pressures due to fiscal mismanagement, currency devaluation and poor economic infrastructure. The US economic model based off debt and consumption was unsustainable and a point of no return has been reached. The entire landscape of the US will undergo massive changes as segments of the consumer economy cease to exist. The US is already experiencing deflation, but ironically, the deflation is causing inflation. Assets that have long been overvalued due to excess credit circulating in the financial system, such as houses, automobiles, electronics will plummet in value. Commodities will increase dramatically in value as the dollar depreciates. Eventually, hyperinflation will occur because the US does not have the basic economic strength to attract investors without completely revitalizing its manufacturing base.
This hyperinflationary period will see the reverse of current consumer values where superfluous nonessential such as MP3 players, televisions, computers are worth more than basic necessities such as rent, food and water. The standard of living in America will drop temporarily to a level not seen since the Great Depression. It is questionable as to whether living standards will ever return to current levels. This reversal in fortunes will not be limited to the US but will take place across the developed world. Eventual hyperinflation and the fall of the American economy will change the world massively and could very well mean the end of the modern middle class.