patrick.net

“THEN what?” (Seven years is not a long time.) But admittedly my situation is different that a new buyer thinking about taking the plunge at this point. But long term is still long term, and the name of the game with inflation IS “long term”, no?

True.

…and I noticed on the last thread (two back) that nobody was accounting for the interest and property tax deductability on the monthly payments when they were comparing renting to owning.

Property tax is not deductible under AMT. On the other hand, there is some serious talk about significantly limiting mortgage interest deduction. Until this is clarified, it is prudent to assume that nothing is deductible.

If they turn out to be deductible, free money!

The problem is really about where to park the money should one sell if there is a serious inflation. Anyone in jack's position will end up with a big wad of cash (me too) that is hard to invest in anything as safe as, a house. The reason is we got our house at a price that is unachievable even after the crash, unless the crash means 60%-70% off peak, so you sell, you end up with cash, then what??

From what I see generally, I don't believe for a sec the CPI number. Except for my mortgage which is fixed, and property tax which is going 2% a year, everything else is more than 5%, and plenty of costs substantially more than 10%.

Prudent yes. Probability of being largely eliminated? You’ve got to be kidding!

I believe this combination will get widespread political support (except in a few blue states):

* eliminating AMT
* replacing deduction with a modest tax credit (e.g. 5% of interest paid for loans of up to 300K, many homeowners do not itemize)

Numbers can be optimized for political support.

Does anyone know if changing mortgage deduction to a tax credit (15% of interest paid on loans up to 300K) is enough to pay for the elimination of AMT?

It appears that more people will benefit from this change. Moreover, the politically active old retirees will be unaffected because their mortgages are paid off already.

So yes, excluding those things you need, things look great!

Excluding energy and food from core inflation is not purely voodoo, although it is often used as such by politicians and the media. The reasoning is such: energy & food are both highly demand-inelastic and not price sticky. That is, when supply abruptly changes, demand does not; however, prices change very quickly.

The same is not true for other products, which are much more sticky. Take a random product: Wal-mart cheap plastic thingamajigger (CPT). Wal-mart has signed production contracts, has an existing inventory, and tons of this stuff in transit from China on huge container ships. Therefore, the price of the CPTs will not change in the short run, and may even fall for a while as Wal-mart tries to adjust for new cost-demand optimizing levels. Further, they may need to lay some folks off, which takes time. All this can occur during the early months of rising energy inflation. This is why, by the way, the Fed will tend to inflate the money supply in response to a supply-shock in energy and/or food. Theoretically, the Fed can prevent core inflation from ever occurring so long as supply of food/energy returns to normal levels quickly enough.

The basic notion is that, while energy and food react in the very short term, other prices don't react for a while longer. So, it is much more telling to measure "core inflation" data when determining the general direction of the economy.

Now, all that said, it is perplexing that the extra consumer spending that goes towards energy and food--which is lost spending on other goods--is ignored by this analysis. And, since Fed-inspired inflation has a lagged effect on salaries and wages, I contend that most energy and food inflation eventually gets into the "core economy".

Jack,

We sold our home in April; not primarily for bubble reasons, but for change-of-job and family reasons. However, the bubble helped us to justify the renting inconvenience (my mother lives with us, and she is disabled so not having a stable, customizable place is a real hardship).

We fretted over where to put the equity gains in the interim, while we bubblesit. We ultimately decided that a portfolio of CA Muni bonds (tax exempt federal and state), TIPS, and commercial paper were sufficient. We're slightly beating CPI, but not keeping pace with recent RE appreciation. We've made other life adjustments to try to hedge against "core" inflation; mainly in the form of consumption spending, etc.

As the core inflation is measured by bananas, computers and bras, and is quite low, BA RE will continue to rise as more people have more disposable income. I love how inflation is low if you take out all the things you don't like, shit I'm downright tolerable if you take out all the things you don't like.

C F,

I don't see hyperinflation as a likely possibility. The Fed has a lot of power to halt hyperinflation in its tracks. Remember that hyperinflation is 50% YoY, which is over 1% daily. Such a situation would be so catastrophic for the economy, that the Fed would prefer stagflation to hyperinflation, which would probably be the outcome of halting massive inflation pressures.

Deflation cannot occur unless savings rates in the US suddenly surge; not likely either. Further, deflation can be halted by both the Fed (because consumers spend in low interest environments in the US), and Fiscal policy (the government can run deficits to counteract deflation). In Japan, I don't believe that monetary and fiscal policy were ever well aligned. Japan intervenes in the JPY value, which counteracts much of their monetary policy.

As to gold, opinions differ on this as a store of value during inflation. It is, classicly. But the gold market is a commodity market, and is extremely volatile, suffers from micro-effects, and is speculated heavily against (so much so as to make RE look tame). I fear much exposure to these markets. Take the current situation: gold has perhaps already peaked, having already served as a refuge from inflation. It is looking now like it will correct in the near term. That's the problem with commodities: you're always behind the curve compared to the professionals.

So here's a question directly regarding RE and inflation:

Would investing in RE in non (or much less) bubble markets--places like Indiana or Nebraska) be a good hedge against inflation? Perhaps finding the areas with the lowest appreciation for the past few years, but with the least volatility, is the best answer to parking the "wad".

Maybe we should all become absent landlords in Evansville apartment buildings?

CF,

Thanks; sorry about my gold comments. I was reacting more in general because I read a lot of "gold haven" type comments 'round here. I wasn't directly addressing you, so i should have spelled that out better.

I was a bit tongue-in-cheek about IN and NE. I was actually born in Evansville, and there's a reason I haven't stepped foot back there since I was 4. So, we're back to the problem again: where the hell does one run during the next few years? I like your boat idea. Perhaps the best move is just buy something you can enjoy for a long, long time. Unfortunately for me, this would be a house with a wheelchair ramp for my mom and a yard for my son.

"The first wise guy with a wise crack buys the ale. "

LOL, I wasn't going to say a word. I think your non-wise-crack counts as a wise crack. :-P

"I just couldn’t “pull the trigger”!
(So to speak) sheesh…. "

LMAO. Such self-control you have, Jack.

"assuming our wad is liquid enough"

Anybody?

(Apologies to Cindy for my adolescent sense of humor.)

He just said "load."

"The wad is liquid enough indeed"

Could we change the title of the thread to this?

"Jamie said “thread”. “Thread” must mean SOMETHING really lewd if you think about it long enough,"

LOL. Let me think...

"right Mr. Wad?"

I think he's Mr. Load.

"Many people park there wad in a mattress. Some have a doll with a special compartment.
Inflation can not be avoided with this tactic. With inflationary pressure, depositing your wad in the wrong place can cause a mess.."

I'm crying.

You win the award, iceman. Lewdest, crudest, funniest.

"Yes, no FEE mutual funds are pretty much what we have been doing, along with some savings"

Us too.

See there, a serious comment--I'm not a troll.

"I guess we could have just stuck to our original plan and held forever, but our original plan didn’t include each house going up over $100k in a couple years."

It sounds like a smart deviation from your original plan.

"Can one “DO” mutual funds?"

We've turned into Beavis and Butt-head.

I meant that as a compliment.

Hey I just noticed we're doing this on the wrong thread. The one before this says something about Can the Fed Prick the Bubble.

Heh.

"I’d rather gouge myself in the head with a fork"

Now THAT's kinky.

"Deflation can cause diminishing marginal utility. Inflation can cause increasing marginal utility.
This is of course if all other variables are equal and you are depositing your wad in a doll."

Could someone create a graph to illustrate this?

"Perhaps you should prick yourself in the head with Jamies “fork”?"

You did NOT just say that. (visualize buggy-eyed emoticon here)

I'm shocked. Utterly and completely.

You're the artist...

...formerly known as Mr. Prick.

Are we going to be embarrassed to show our faces here in the morning?

Hey, you're the one who decided to take the easy "fork" in the road. I chose the path less traveled by, and that has made all the difference.

But I'm sorry, I should have said "formerly known as Jack." Mr. Prick just sounded better.

"I never said your fork was easy. How dare you say mine is. Art is a hard road."

Especially if you do it in the dark! And I was talking about your fork jokes, not your art. You knew that, right?

:-P

"and what path was that?"

Tonight, apparently, it's the one through the gutter.

Oh good, and that emoticon 4 messages above was meant to evoke silliness, not lewdness. Just so the record shows... I don't want to be accused of any suggestive tongue action on this thread.

My gazillion photos have finished uploading, so I guess I should detach myself from the computer.

'Night, Johnboy--I mean Mr., um, Jack.

He He He

They said "prick" and "wad."
Among many many other things you naughty people. Damn, I missed all the fun.

What was it Prat said on another thread about "core inflation?" I think it would translate well on this thread.

I don't invest in gold as a hedge against inflation, I invest in gold as a hedge against a free fall of USD, which is my ultimate fear. Euro is not going up much because there are a bunch problems in Europe, Yen won't revalue because they simply won't, Yuan won't revalue because they cannot afford to, AUD is already through the roof, if USD has to go come crashing down, who else can bear the up pressure without destroying the economy??? The only logical answer I can reach at is gold, as a store of value.

I know it is a commodity and all that, and I know the biggest fear of all economists is to have people lose confidence in paper money and resort to precious metals or anything that cannot come off the printing machine as fast or reliant on Feds and Central bankers who don't have enough self-discipline.

I hedge inflation with my house, and the free fall of USD (which I am sure will happen at some point) with gold.

Also, both Chinese and Japanese central banks indicated earlier in the year that they would like to diversify part of their portfolio to gold. I don't think they do that for fear of inflation, they just need a better store of value than simply USD and Euro.