If the value of the house falls — think 2008 — then the asset is worthless as collateral. The value falling is considered deflationary. The Federal Reserve put on a full court economic press, adding over $3 trillion to its balance sheet and our economy, all in the name of keeping asset prices higher and avoiding deflation. Yes, they want job growth too, but they needed asset prices to move higher. They needed to create inflation and they did.
Inflation is fickle. The Fed acknowledges that its actions can lead to bubbles (irrational asset prices that have to decline eventually), but also note that it can’t completely control where the money goes. Is the bubble in U.S. Treasuries? Is it in farmland or in the stock market? Worse yet, is it in grocery prices? One secret characteristic of a bubble is you aren’t aware it’s a bubble when you are participating in the excitement.
Conversely, you can’t comprehend how distorted prices can become before a crash. Sudden surprises in things like weather can amplify inflation. Rising food costs are part of the economic cycle and the rising population growth.
Unfortunately we must take the good with the bad in order to see appreciation in our portfolios and house values.
Joseph “Big Joe” Clark, whose column is published Saturdays, is a certified financial planner. He can be reached at firstname.lastname@example.org or 640-1524.