The Economic Monsters: Inflation and Interest Rates

by Daniel Brouse
Economist

In 2006 and 2007, we forecast the impending “great recession”. Our investment advice was to sell all your real estate. If you could not sell it, leverage it to the hilt (so you had your cash out before failure.)

Turned out to be an accurate forecast.

In 2017 and 2018, we are forecasting inflation and rising interest rates. Buy real estate now and lock-in your 30-year interest rates ASAP. [WARNING: Do not buy real estate on or near floodplain. See disclaimer below.]

WHY?

* Quantitative Easing and the Troubled Asset Relief Program (TARP) was started during the height of the 2008 financial crisis. In essence, it allowed the Treasury to print money.

* In 2017 Donald Trump started enacting policies that mirrored his personal finances — borrow too much money and don’t plan on paying it back. Mr. Trump has been involved in 6 bankruptcies.

* When the government borrows lots of money without a payback plan, they compete with the private sector to borrow money resulting in a rise in interest rates. This phenomena is known as crowding out (economics). (1)

* President Trump bragged about wage inflation during his State Of The Union (SOTU) address. When wages go up without an increase in productivity, the prices of goods and services inflate.(2)

* “Make America Great Again” policies make the American dollar weak. Tariffs and trade protectionism undermine the value of the dollar and contribute to inflation. (3)

* President Trump replaced the Chairwoman of the Federal Reserve with a new chair who is not an economist. A first in U.S. history.

* Tax cuts without spending cuts result in a budget deficit. The nation’s debt is now bigger than its gross domestic product. Net interest payments on the debt are estimated to total $276.2 billion this fiscal year, or 6.8% of all federal outlays. The tax cuts are expected to make this payment explode.

* The Federal Reserves primary weapon for fighting inflation is to raise interest rates. (4)

You could say inflation and rising interest rates are a two-headed monster. When the government creates money, it is “inflationary.” The government fights inflation by raising interest rates. Rising interest rates exponentially increase the national debt. When the government borrows, it competes with consumer borrowing causing interest rates to rise.

The name given to the worst-case scenario is hyper-inflation.

WARNING: Do not buy real estate on or near floodplain.
Do not invest in real estate that is located near floodplain. Make sure your property has land ingress and egress from the closest 1,000-year-floodplain. Do not invest in any property located near a coast. Do not invest in a property that is below sea level. Do not invest in real estate located in Florida.

“Mostly stay away from the coasts because of both wind and rain issues from weather systems spinning inland. Even if you are not in a floodplain, a couple feet of rain in a day will cut off roads and overwhelm your sump pumps. Not to speak of wind taking power and telecom down.” — Sidd Mukerhjee (February 5, 2018)

For more information on Flood Insurance please see “Who Pays For Flood Insurance?

NOTES
(1) “In economics, crowding out is argued by some economists to be a phenomenon that occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market.

One type frequently discussed is when expansionary fiscal policy reduces investment spending by the private sector. The Government is “crowding out” investment because it is demanding more Loanable Funds and it is increasing interest rates from the borrowing, but that was broadened to multiple channels that might leave total output little changed or smaller.” — Olivier Jean Blanchard (2008) “crowding out,” The New Palgrave Dictionary of Economics, 2nd Edition. Abstract and Roger W. Spencer & William P. Yohe, 1970. “The ‘Crowding Out’ of Private Expenditures by Fiscal Policy Actions,” Federal Reserve Bank of St. Louis Review, October, pp. 12-24

(2) “After years of wage stagnation, we are finally seeing rising wages,” Donald Trump (State of the Union 2018)
“The Employment Cost Index, a measure of salary and benefit costs, registered a 2.6 percent gain for the full year, tied for the best since 2007.” — CNBC (January 31, 2018)

(3) “Recently, Trump levied steep tariffs on imported solar panel technology and washing machines, which immediately boosted prices for U.S. consumers.” — The Hill (February 6, 2018)

(4) “Federal Reserve officials followed through on an expected interest-rate increase and raised their forecast for economic growth in 2018, even as they stuck with a projection for three (rate) hikes in the coming year.

“This change highlights that the committee expects the labor market to remain strong, with sustained job creation, ample opportunities for workers and rising wages,” Chair Janet Yellen told reporters Wednesday in Washington following the decision. In her final scheduled press conference, Yellen noted that her nominated successor, Jerome Powell, has been part of the consensus shaping the Fed’s gradual rate-hike strategy.” — “Fed Raises Rates, Eyes Three 2018 Hikes as Yellen Era Nears End” (December 13, 2017)

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