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Inflation was there all along in asset prices - why else have home values gone up disproportionately relative to average Joe's income? What the Fed is doing wi

Inflation was there all along in asset prices - why else have home values gone up disproportionately relative to average Joe's income? What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses. The downstream consequence that we didn't see with SVB was the bank starting to call unsecured loans, and pull back on lines of credit etc. Which should in turn have triggered the turning in of the leased Lambos and Audis....

fosk 4y ago
Housing prices were going up because of supply/demand and not necessarily because of systemic high inflation. By the way just with regular <2% YoY inflation, a $1m home in 2005 was worth $1.3m+ in 2019 (before covid and the current inflation spike), and that is with regular inflation. Because homes cost a lot of money to begin with, the compounding effects of “healthy” inflation is going to be noticeable, and that doesn’t even factor in the low supply in the market.
- wesapien 4y ago
  All the people that only saw the city for work/employment now don't have to live there. That was huge. Now we wait what's going to happen to all these office real estate. The office doesn't need to go away but not everyone has to have one these days.
- lazide 4y ago
  Demand was increasing because money was very easy to get.
  - arcticbull 4y ago
    Then why didn't it happen in Japan? Same easy money, no increase in house prices. It's not the interest rates, it's the zoning rules. [1, 2] [1] https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI [2] https://fred.stlouisfed.org/series/INTDSRJPM193N https://fred.stlouisfed.org/series/INTDSRJPM193N
    - lazide 4y ago
      No, Japan has had massively crashing population, which offset the massive inflationary impact. https://www.macrotrends.net/countries/JPN/japan/population-growth-rate https://www.macrotrends.net/countries/JPN/japan/population-g... Despite a massive decrease in population, Japan has been mostly flat, when they should be in a strong deflationary environment due to demand destruction - because, you know, people being dead. So hey, if the US population would decrease .5% a year (doesn’t sound like a lot, but it adds up fast - 1.75 mln/yr if in the US), we could also tame some inflation!
      - arcticbull 4y ago
        That's a funny way of saying that 'supply and demand meet in Japan' which you can do but decreasing demand or increasing supply. It really is that simple. When supply and demand are allowed to meet, prices stabilize. Otherwise please explain to me why you think that this is the one asset on earth not affected by supply and demand. And you could really use a solid citation. Thought exercise. There are 140,000,000 houses in the US. What do you think would happen to the price of each house if there were 280,000,000? If you answered anything other than 'they would still go up for some reason despite many of them being empty and derelict' then we are in agreement that it is a supply and demand issue. Ergo a zoning issue.
        lazide 4y ago
        Have you been to Japan? There is massive excess supply of housing in Japan. They literally demolish entire villages because no one lives there anymore. Everyone who can moves to Tokyo, and prices there are insane. In the US, if we had 288 million homes, the big question would be ‘where?’. We already have millions of acres of land with literally no zoning rules at all. Even Greenlee County Arizona (1500 sq miles) is more than enough. No one would want to though, because it’s not the place people want to live.
        arcticbull 4y ago
        You’re fighting a straw man, nobody is arguing you need to do what Japan did verbatim. The only argument I’m making is when you allow supply and demand to meet prices stop going up. All the rest is narrative. The answer to where is “up.” Also the prices in Tokyo aren’t insane at all they’re super affordable by any standard.
- Maursault 4y ago
  > Housing prices were going up because of supply/demand I don't think that's the case. Development was occurring so quickly, supply exceeded demand, and new houses sat or became entangled in bad mortgages. Property values increase as a function of population, which sounds the same as supply and demand but isn't quite. Housing prices increased because labor, builder and materials rates increased.
tl_donson 4y ago
who leases a lambo
arcticbull 4y ago
An increase in asset prices is not inflation, it's a good investment. AAPL isn't in the CPI basket, Apples are. Homes are up in price because zoning rules preclude development of new houses sufficient to meet demand, creating an imbalance in supply vs. demand. Interest rates only shift that equilibrium. Concretely, Japan's monetary and interest rate policy has been almost the same as the US for decades however they haven't seen an increase in housing prices in nominal terms since 1990. They federalize zoning so councils can't preclude you from building safe and reasonable housing, and this allows supply to meet demand. Housing is driving inflation in the US, not responding to it - remember, inflation is the measured drop in purchasing power calculated from prices. Zoning causes house prices to go up, which in turn means the purchasing power of the dollar is calculated to be lower. Punitive zoning rules are inflationary. [1] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage https://en.wikipedia.org/wiki/San_Francisco_housing_shortage
- nodemaker 4y ago
  Lol so according to you the money supply can increase 10x but as long as the cost of apples (or things in the CPI basket) is same, there is no inflation. Am i right? I think you are trying to say that CPI and Inflation are the same thing.
  - arcticbull 4y ago
    Money in a fractional reserve system operates not on a push model but on a pull model. You do not 'push' money into the system. Money is created when loans (and corresponding obligations to repay said loan) are created. The increase in supply was driven by an increase in demand. Your model is incomplete. You'll have to work a specific example - how would the supply suddenly triple? Who would get that money? What would they do with it? > I think you are trying to say that CPI and Inflation are the same thing. I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.
    - SideQuark 4y ago
      We're not in a fractional reserve system. Banks can borrow arbitrarily from the fed, and routinely do so, and don't have reserve ratios. Many countries have moved to this model over the past few decades, including the US. The Fed has papers on this explaining the how and why of the newer system.
dragonwriter 4y ago
> Inflation was there all along in asset prices “Inflation”, unqualified, means consumer price inflation. Asset price inflation is a completely different thing, with slightly overlapping potential causes, and completely different effects. > What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses. Systemic firesales that drop asset prices aren’t “a deflation”, because, like inflation, unqualified “deflation” refers to consumer price deflation.
- 8note 4y ago
  The distinction is dumb. People's main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index. A 10000x increase in rent makes carrots unaffordable even if the price of carrots hasn't changed
  - dragonwriter 4y ago
    > The distinction is dumb. You would be better positioned to make that argument if you could demonstrate a basic understanding of what the distinction is. > People’s main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index. The cost of housing as a consumer good (rent, actual or, for homeowners, imputed) is included in inflation measures (consumer price index, PCE, etc.) The asset price of residential real estate is not, but that’s a different thing.
    - lillecarl 4y ago
      We've got the same bullshit in Sweden with the housing market boom, free-ish loans have driven prices through the roof. This means we're stuck on low interest rates or everyone and their uncle will default, a better solution must exist! This makes it very difficult to get into the market since our rules require 15% of your loan in up-front capital. For a 1 room apartment that means about one year of salary saved up. Yay boomer economy...!

fosk 4y ago

Housing prices were going up because of supply/demand and not necessarily because of systemic high inflation. By the way just with regular <2% YoY inflation, a $1m home in 2005 was worth $1.3m+ in 2019 (before covid and the current inflation spike), and that is with regular inflation. Because homes cost a lot of money to begin with, the compounding effects of “healthy” inflation is going to be noticeable, and that doesn’t even factor in the low supply in the market.

wesapien 4y ago
All the people that only saw the city for work/employment now don't have to live there. That was huge. Now we wait what's going to happen to all these office real estate. The office doesn't need to go away but not everyone has to have one these days.
lazide 4y ago
Demand was increasing because money was very easy to get.
- arcticbull 4y ago
  Then why didn't it happen in Japan? Same easy money, no increase in house prices. It's not the interest rates, it's the zoning rules. [1, 2] [1] https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI [2] https://fred.stlouisfed.org/series/INTDSRJPM193N https://fred.stlouisfed.org/series/INTDSRJPM193N
  - lazide 4y ago
    No, Japan has had massively crashing population, which offset the massive inflationary impact. https://www.macrotrends.net/countries/JPN/japan/population-growth-rate https://www.macrotrends.net/countries/JPN/japan/population-g... Despite a massive decrease in population, Japan has been mostly flat, when they should be in a strong deflationary environment due to demand destruction - because, you know, people being dead. So hey, if the US population would decrease .5% a year (doesn’t sound like a lot, but it adds up fast - 1.75 mln/yr if in the US), we could also tame some inflation!
    - arcticbull 4y ago
      That's a funny way of saying that 'supply and demand meet in Japan' which you can do but decreasing demand or increasing supply. It really is that simple. When supply and demand are allowed to meet, prices stabilize. Otherwise please explain to me why you think that this is the one asset on earth not affected by supply and demand. And you could really use a solid citation. Thought exercise. There are 140,000,000 houses in the US. What do you think would happen to the price of each house if there were 280,000,000? If you answered anything other than 'they would still go up for some reason despite many of them being empty and derelict' then we are in agreement that it is a supply and demand issue. Ergo a zoning issue.
      - lazide 4y ago
        Have you been to Japan? There is massive excess supply of housing in Japan. They literally demolish entire villages because no one lives there anymore. Everyone who can moves to Tokyo, and prices there are insane. In the US, if we had 288 million homes, the big question would be ‘where?’. We already have millions of acres of land with literally no zoning rules at all. Even Greenlee County Arizona (1500 sq miles) is more than enough. No one would want to though, because it’s not the place people want to live.
        arcticbull 4y ago
        You’re fighting a straw man, nobody is arguing you need to do what Japan did verbatim. The only argument I’m making is when you allow supply and demand to meet prices stop going up. All the rest is narrative. The answer to where is “up.” Also the prices in Tokyo aren’t insane at all they’re super affordable by any standard.
Maursault 4y ago
> Housing prices were going up because of supply/demand I don't think that's the case. Development was occurring so quickly, supply exceeded demand, and new houses sat or became entangled in bad mortgages. Property values increase as a function of population, which sounds the same as supply and demand but isn't quite. Housing prices increased because labor, builder and materials rates increased.

tl_donson 4y ago

who leases a lambo

arcticbull 4y ago

An increase in asset prices is not inflation, it's a good investment. AAPL isn't in the CPI basket, Apples are. Homes are up in price because zoning rules preclude development of new houses sufficient to meet demand, creating an imbalance in supply vs. demand. Interest rates only shift that equilibrium. Concretely, Japan's monetary and interest rate policy has been almost the same as the US for decades however they haven't seen an increase in housing prices in nominal terms since 1990. They federalize zoning so councils can't preclude you from building safe and reasonable housing, and this allows supply to meet demand. Housing is driving inflation in the US, not responding to it - remember, inflation is the measured drop in purchasing power calculated from prices. Zoning causes house prices to go up, which in turn means the purchasing power of the dollar is calculated to be lower. Punitive zoning rules are inflationary. [1] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage https://en.wikipedia.org/wiki/San_Francisco_housing_shortage

nodemaker 4y ago
Lol so according to you the money supply can increase 10x but as long as the cost of apples (or things in the CPI basket) is same, there is no inflation. Am i right? I think you are trying to say that CPI and Inflation are the same thing.
- arcticbull 4y ago
  Money in a fractional reserve system operates not on a push model but on a pull model. You do not 'push' money into the system. Money is created when loans (and corresponding obligations to repay said loan) are created. The increase in supply was driven by an increase in demand. Your model is incomplete. You'll have to work a specific example - how would the supply suddenly triple? Who would get that money? What would they do with it? > I think you are trying to say that CPI and Inflation are the same thing. I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.
  - SideQuark 4y ago
    We're not in a fractional reserve system. Banks can borrow arbitrarily from the fed, and routinely do so, and don't have reserve ratios. Many countries have moved to this model over the past few decades, including the US. The Fed has papers on this explaining the how and why of the newer system.

dragonwriter 4y ago

> Inflation was there all along in asset prices “Inflation”, unqualified, means consumer price inflation. Asset price inflation is a completely different thing, with slightly overlapping potential causes, and completely different effects. > What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses. Systemic firesales that drop asset prices aren’t “a deflation”, because, like inflation, unqualified “deflation” refers to consumer price deflation.

8note 4y ago
The distinction is dumb. People's main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index. A 10000x increase in rent makes carrots unaffordable even if the price of carrots hasn't changed
- dragonwriter 4y ago
  > The distinction is dumb. You would be better positioned to make that argument if you could demonstrate a basic understanding of what the distinction is. > People’s main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index. The cost of housing as a consumer good (rent, actual or, for homeowners, imputed) is included in inflation measures (consumer price index, PCE, etc.) The asset price of residential real estate is not, but that’s a different thing.
  - lillecarl 4y ago
    We've got the same bullshit in Sweden with the housing market boom, free-ish loans have driven prices through the roof. This means we're stuck on low interest rates or everyone and their uncle will default, a better solution must exist! This makes it very difficult to get into the market since our rules require 15% of your loan in up-front capital. For a 1 room apartment that means about one year of salary saved up. Yay boomer economy...!