"If inflation increases too severely, however, then people resort to a barter economy (all barter economies are "slow" compared to paper-based currency economies) which slows down the speed of money. Since it isn't convenient to carry around a wheelbarrow full of Duetchmarks for your morning cup of coffee, you either don't go to the coffeeshop (slowing down the speed of money) or else you go find something in your house of appropriate value and then you try to barter for it at the coffeeshop (said negotiations again slowing down the speed of money)."
During the depression of the thirties many people resorted to barter because they didn't have any money. This was a deflationary period and the speed of money went down to a snail's pace because it was concentrated in a very few hands. I know inflation because I lived through it and I have a pretty good idea about what to expect from deflation because I grew up listening to people who had lived through it. It is obvious to the most casual observor that someone who has a lot of money and already owns everything that any reasonable person could want is not going to run out and buy something just because it is cheap when he can be reasonably certain that it will be even cheaper tomorrow. Such a person probably has money because he is not stupid and what he is more likely to do during deflation is sell anything he doesn't need and hang on to the cash, thus deflation breeds deflation just as inflation breeds inflation. There has been a boom lately for the home improvement industry because interest rates are low so those who wanted to borrow to do home improvements could do so at low rates and those who had money in interest bearing accounts in many cases have drawn out the money and put it into increasing the size of their home thinking that this was the way to increase their net worth. This is creating a real estate bubble which will soon burst when people realize that their homes are worth less than what they owe and they would have been better off to sell and rent a place to live. You don't have to agree with me, just remember what you are reading and look back in a year or two and see if you still think I am crazy.
"This is creating a real estate bubble which will soon burst when people realize that their homes are worth less than what they owe and they would have been better off to sell and rent a place to live. You don't have to agree with me, just remember what you are reading and look back in a year or two and see if you still think I am crazy."
Not to burst your bubble (so to speak), but every short seller and retired hedge fund "guru" is spouting the same talking point about a "real estate crash" as if he came up with that theory all on his own.
But why look at theories when we have historical facts. We've seen, in just the previous generation, the entire systemic collapse of the American Savings and Loan system. It was the 1980's, and real-estate speculation had created a bubble in commercial real estate. The eventual real estate crash drove localized commercial real down some 50% in the areas hardest hit, while the national average turned out to be something like a 3% whack off of commercial real estate average prices. Presaging this collapse was a spike in unemployment, inflation, and an increase in the percentage of homeowners who were more than 30 days late on their payments up to some 6.5% of the mortgage-paying population.
Now, if you are TRULY worried about a modern real estate collapse, what you should be interested in tracking are the figures for current unemployment as well as the percentage of mortgages that are more than 30 days past due.
If you don't have access to those figures then you aren't in a position to seriously worry about the problem. At best you would merely be repeating speculation from others.
If you do have access to those figures, then you'll quickly see that we are today nowhere near the dismal shape that we were in back in the late 1980's.
But I will admit that the world can always change on a dime. If those figures spike, then owning real estate is historically a bad idea. During that "crash", your investment might be devalued by as much as 50% for as long as a decade (worst case). It's happened before, after all.
The bubble will probably not burst, but self-deflate over 2-3 years. For people who were already homeowners before the precipitious rise, it may not really be an issue, unless they took out big loans against their equity. For those who have not, the game is the same and it doesn't much matter what the market does. For example we bought a 100K house in 94, which is now worth about 200+K, and not taken out any loans against the original mortgage. So now we owe about 60K for a 200K house. Even if the market drops by half, back to what it was, we still gain, because it will be easier to to buy a trade-up house for 130K than for 260K, the situation we are facing now.