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The Raub Report February 2009 Commercial Real Estate Newsletter for San Antonio

by admin on February 1, 2009

Disclaimer – I am not an economist, but as a Commercial Real Estate Investments professional, I have to be alert to the forces that affect investments.  So here we go! Is Inflation good for me or bad for me? 

Inflation Versus Deflation – Epic Battle?  Prepare for Whiplash!

In December the Consumer Price Index (CPI), a widely accepted measure of inflation, declined for the third month in a row and the CPI was essentially unchanged for 2008 versus 2007.  A decline hasn’t occurred since 1954; in fact, we have experienced a mild stretch of inflation for the past 15 years in the 1 to 4% range.  Remember back in 1981 when inflation climbed to 10%? Gas lines?  15% Mortgage Rates?  

What is inflation really? 

Inflation can be described as 1) a decline or dilution in the real value of money; 2) the loss of purchasing power; or 3) the dilution of the buying power of your money.  That is to say, your dollar buys less goods and services than it once did.  4) Inflation is really the government creating too much money, and this waters down the buying power of the existing money supply. Prices going up are actually a result of inflation, and your dollar just buys less stuff.

 Is inflation a good or bad thing?

Economists agree that a small amount of inflation is healthy for the economy. Our population grows about 1.7% a year, so we need to create about 2 million new jobs yearly; and we need to grow our GDP at about that rate, too.  Generally, the Federal Reserve Board under Allen Greenspan was an inflation hawk, ready to raise interest rates at the slightest hint of excess inflation. They felt that the Feds’ primary purpose is to control inflation and to do this by means of controlling the money supply through interest rates.

 We all remember the shock to our confidence and economy back on September 11, 2001.  Because the Feds lowered interest rates to stimulate economic activity and we had the Bush Tax Cuts, we made it through a tough period with a great deal of dependence on real estate development – residential and commercial.  In 2005 that bubble started losing air, and we all know what happened last Fall. 

 Are we now having deflation? We can’t buy more stuff with our money, but there is a big drop in the value of investments. Now the massive effort to stimulate the economy by huge federal spending programs is intended to restore confidence in the system.  It won’t really. But creating a trillion or more new dollars in the money supply to replace what was lost last year in the decline in the stock and bond markets is the goal.  However, it is widely expected that the government intends to keep creating more money until the economy is clearly in recovery and more stable than today.  Therefore, this period of deflation will undoubtedly be followed by a period of inflation as the government is unlikely to stop the printing presses early.

Richard Lehman, noted investment advisor, puts it this way:  “Think about it, what better way to bail out debtors and clear out an excess housing inventory than through inflating the value of hard assets and at the same time diminishing the value of debt claims?” And all the government entitlement programs are keyed to the rate of inflation, so the politicians look like heroes.

 Hard Assets, like gold and real estate, tend to rise in value in inflationary times.  That is, the price goes up at or more than the rate of inflation.  The real value of the dollar is falling, and asset prices are increasing.  Hard assets can be a store of value — a safer place to protect your wealth from the falling buying power of the dollar.

 Next month – How Inflation affects Commercial Real Estate and is it a Buy now.  If you would like to discuss why you may need to diversify your investments, please give me a call.

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