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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: glenn_a who wrote (91206)2/4/2008 2:48:46 PM
From: GST  Read Replies (1) of 110194
 
Glenn -- the issue in inflation is what is your money worth? When you buy a house, you turn your money into another asset -- a house -- and for most people you take on a huge loan, i.e. you don't own the house you own the mortgage and the bank owns the house. So long as your house goes up in value, the mortgage is valuable to you. This helps offset rising prices for everything else you require to live. If the house falls in value, then the mortgage you hold is of no use to you in offsetting inflation -- it becomes a lousy hedge. But it does not mean your cost of living is going down -- it only means your assets are going down and you must rely on your income to pay your bills. The assumption -- and it is a weak one at best -- is that since you have less money to spend then surely prices will go down. But they won't because you live in a country that relies on the kindness of strangers to foot the bill for everything from the gas that goes into your car to the cost of having troops in Iraq. They set the prices on international markets (as denominated in dollars) -- not you and me and that crappy house you or I bought with the big mortgage. You are competing with people from all over the world for stuff -- and you are losing.

If you or I own a crappy asset priced in a crappy currency and live in a country with crappy finances (think trillions of dollars in debt and mounting) -- don't expect the rest of the world to come to your rescue with bargains. The gas you want to buy for your car is sought after by hundreds of millions of people around the world --- and they are not broke because they did this weird thing called "saving money" -- 25% of income in Japan and over 40% of income in China. So if you are broke nobody will care that much -- somebody else will be the buyer. The reason they foot the bill to this point is they thought we could make the payments. When we go broke and our houses are worthless shells, they don't want to loan us any more money or sell us any more stuff cheap. In the end it all ends up reflected in the price of the dollar -- and even a glance at where the dollar has gone in recent years says it all.
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