February 22, 2008
More news on inflation and its potential impact on the US economy and the impacts this may have on the Costa del Sol's housing market.
I just read a really good article on future scenarios that may play out in the US economy and the whether we are in for an inflationary or deflationary period.
The article puts strong emphasis on the inflationary outcome: as "For a sufficiently motivated government, inflation breaks deflation. Always and without exception, period, end of debate". It points to the US governments continual efforts to print money "out of nothing" and redistribute this money as a tax rebate stimulus. The key economic concepts behind the article's promotion of the inflation hypothesis is
- The potential supply of money is infinite for a nation that issues its own currency.
- The supply of resources to purchase with money is always limited at any one point in time.
- By sufficiently raising the supply of money relative to the finite amount of desirable goods and services, there will necessarily be more dollars competing to buy each asset, and the dollar denominated price will always rise for the asset.
- The meaning of inflation is an increase in the dollar prices of goods and services, which is the same thing as a decrease in the purchasing power of every dollar.
- So long as a government is willing to sufficiently increase the supply of money, it has an absolute power to destroy the value of its own currency through the oversupply of money relative to assets, which is an absolute power to break deflation with inflation.
(Taken from the article by Daniel R. Amerman, CFA)
With the potential supply of money being unlimited and tangible resource being limited the stimulus package will have a quite real and direct effect: that of diluting the value of the dollars held by savers, through increasing the number of dollars in circulation, with no corresponding increase in the amount of real resources.
The article pushes for inflation planning scenarios for investors and points to portfolios consisting of tangible limited resources such as houses, commodities, metals, etc. There does seem to be some silver lining for all the people holding investment properties on the Costa del Sol. Property is a time proven instrument for withstanding the devaluing effect of inflation provided the investor can meet the costs of finance. IMO its time for everyone to start fixing those mortgages as I did with mine one and a half years ago.
Category: The Costa del Sol Property Market.
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