Whole Lotta Flation Going On
With apologies to Jerry Lee Lewis
After the Great Financial Tsunami during the fall of 2008, and the Cryogenic Economy of 2009, there seems to be an emerging consensus among a broad range of economists that the worst of the storm has past, the seas are calming, and that some better times may be on the horizon.
However, inquiring minds still want to know…
Did we avoid the big DEflation, or are we just in a lull? During the Great Depression the Roosevelt administration had some initial good results between 1933 and 1935, but employment grew only grudgingly for the next five years. The FDIC continues its steady process of closing banks, and seems to have refined a process to merge operations and assets with healthier institutions, preventing an accelerating spiral.
Can we stimulate this way, run these deficits, and assume that the Federal Reserve can apply the proper timing to gradually work INflationary pressures out of the system? Have we ever had this level of stimulation and not had INflation?
INflation rates had risen steadily during the last decade, eventually topping five per cent in mid 2007, causing alarm in financial circles and around kitchen tables. With the Tsunami of 2008 we did see a sharp reduction in the CPI, as it ticked up barely .1% for the entire year while business activity dropped at unprecedented rates.
How about the most recent results? Surely during the Cryogenic Economy of 2009, the CPI must have remained low? Year end numbers were down from their 97 year historical average of 3%….. The results for 2009 … 2.7%. Hmmmm… a slack year and we are barely below the long term averages. Economists say much can be blamed on the price of oil rising, not to worry, just an aberration….??
There is daily evidence that DEflationary activities continue within the economy. Extensive problems remain in the residential real estate market with foreclosures, while the banking industry is adopting strategies to deal with the commercial property lending issues.
Unemployment remains stubbornly high and will continue to drain family financial resources over the long term. Many businesses of every size are struggling to stay afloat. As some of them cease operations, assets and properties will trade hands at reduced values.
What happened following the fiscal stimulus required to finance WWII? As we made our transition out of the war years from 1946-1948, President Truman faced the dynamic duo of economic issues: high unemployment, and INflation. It almost cost him that famous election to Dewey.
The Vietnam War under Johnson, along with the additional fiscal stimulus of the Great Society during the late 1960’s set off an Inflationary cycle that resulted in Richard Nixon instituting wage and price controls in the early 1970’s leading again to problems with unemployment as the economy had to readjust.
The first decade of this century saw us ramp up spending for a war effort, and allow the lending community to unleash a huge credit expansion to the to the economy, eventually leading to the inflation numbers referenced above that topped out above 5% in mid 2007. This expansion misallocated billions of dollars to unproductive resources, and will take several years to clear the wreckage.
Our conclusion: you’ll continue to see a Whole Lotta both Flations going on over the next several years. The Deflationary forces that will continue to reallocate assets from unproductive back to productive uses are most visible through properties being acquired at low prices. At the same we’ll have running on a tandem track strong INflationary forces unleashed by the government stimulus, not just from the direct spending, but from how that spending influences the allocation of assets across the economy. Remember long term INflation is the reduction of your purchasing power. While it may appear for many months that the CPI remains mixed or even below the historic trend line, you will begin to see consistent signals by mid 2011 that it is reemerging.
A great inflation hedge is properly purchased, smartly financed commercial real estate in communities that have good economic infrastructure and fundamentals. Vancouver and Clark County, while experiencing high unemployment has the type of infrastructure that will eventually spur recovery. A vibrant Port, an International Airport, WSU, Clark College, and three significant medical institutions to name several pieces.