Many people get really confused about what exactly hyper inflation is and how it will affect the housing industry but, hopefully I can make it a bit easier to understand.
First off, hyperinflation is when inflation is very high or just out of control. What this specifically means is, in general prices for goods and services rise to really high levels. When prices rise, then you as a consumer get less and less for the same amount of money. This is known as a loss of purchasing power. A rudimentary way of explaining this is by asking you a question, do you remember when gas was less than a dollar a gallon? Many of us most likely do however, in this example, it’s not so much hyper inflation as it just is inflation. Hyper inflation would be if we went to bed tonight with gas at $2.35 a gallon and tomorrow morning we woke up with it at $5.00 a gallon. The $2.35 you paid yesterday for a gallon now won’t buy that same gallon and you as the consumer have lost out. This is hyperinflation in a nut shell.
Now, how does hyperinflation come about, well….truthfully, we don’t completely know. That may sound a bit strange but, we really don’t have a good understanding that anyone think causes hyperinflation however, we do know that something must happen before hyperinflation becomes certain.
One of the most noticeable fundamental causes of hyperinflation is when governments increase the money supply drastically. Many people don’t realize why a government would do this intentionally but, it’s actually fairly simple to explain. The government is trying to debase the currency. Basically, the government knows if they print more and more money, ultimately, it loses its value and inflation increases. This inflation is used by the government to pay off government bonds. Ok…..I know that got really confusing but, think of it this way. If everyone and their mother has dollars……and it’s not hard to get them, you don’t have to do much for them, then they are worthless and in return, prices will rise because it takes more and more dollars to get that same gallon of gas that you bought yesterday for $2.35 vs. today it will cost $5.00. By the government reducing the power of the dollar, they can make more and more dollars with less and that allows them to pay off government debts however, this process lowers the standard of living for the people by destroying our purchase power.
Now, why is this important to understand now?
Most likely, you haven’t been paying attention to government bonds and our currency standing in the world but, because our government is debt spending, we are ultimately printing and printing and printing more money than we have. In fact, we are doing this at unprecedented rates. It just so happens that in the first term of President Obama, this country has spent more money than all the previous 10 Presidents combined. My point is, our Government has drastically spent money….drastically. This has had a negative impact on our currency’s value and we are seeing this exemplified in our currencies fall in value against foreign currencies.
This will debasement will cause prices to skyrocket very quickly. My example may be a bit drastic but, make no mistake, hyper inflation is a real concern for many economist and now with even more spending coming with the HealthCare reform, along with a lack of job recovery, continued bank failures, ever increasing toxic assets held by Fannie Mae and Freddie Mac, along with stimulus after stimulus, it would not surprise me to see our economy make a correction on its own and we could find ourselves in a very bad situation very quickly.
To explain to you just how serious this is and just how bad this could get, remember when the credit markets froze and people were telling President Bush, towards the end of his term he better act or the banking sector was going to fail……..well, what do you think they were talking about? We are leaning over the edge of an economic catastrophe and our government hasn’t done anything to correct the problem. I heard one government official say something to the effect that the fundamentals of our economy that caused the problems in the first place haven’t been fixed and all we are doing is spending as much as possible to cover it up. He also mentioned that when the proverbial doo-doo hits the fan it will be much worse because we are drastically debase our currency more than we ever have.
How does this affect the housing market?
Well, when a loaf of bread cost you $150.00 dollars, not because it’s packaged in gold but because a dollar isn’t worth anything….imagine what happens to a house.
