The Real Problem With Inflation

inflation riskIt's hard to go a week now without reading something in the news with the worry about inflation. Even guru Warren Buffett said in last week's interview that he believes inflation is a big concern at some point. Everyone seems to recognize it's a problem out there, but that it is distant enough to not have to worry about it, as of now. However, if indeed this villain takes us by surprise, as many believe, we are in for a lot more hurt.

Right now, most of the goods of the economy relate to the extreme low cost of borrowing for those that can still borrow. Record low mortgage rates are allowing our housing markets to hold on by a thread, as well as new business owners to take out a loan. However, as is always the case, it will not last forever.

Many, including myself, believe that inflation is a year or less out. What really shows me just how damaged the housing market is, is how poorly home sales remain, despite the extremely low financing. If rates of this caliber would have been available a few years ago, we would have seen an explosion of buying in the housing market. Even with the extremely large amount of bank owned houses on the market, the sales remain sluggish.

Inflation will also have a big effect on our currency. During our last big inflated time in our economy, we were not nearly as dependent on foreign imports. Our economy has become such a big global economy, that a falling dollar will cause new problems for the government. This will effect the selling of government debt, as well as imports and exports.

At some point, the severe risk of inflation will be upon us, and the Fed will have no other choice but to jack those rates up. At this point, I believe we will see a very rapid jump in borrowing interest rates, which will put a whole new weight on this already beat up economy. It is because of this risk, why I feel very cautious about saying that the worst is over. I believe we will see many different stages to this recession, and inflation is that's a big worry for me.

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PS - I will talk more today about consumer confidence, as well as upcoming economic numbers to look out for this week on tonight's premium podcast (subscribe here)

3 comments:

  1. John Coktostin Says:

    Great post, The economy is hurting right now and it is a great time to purchase a home if you are looking in that market. I don't believe that loan rates are going to sky rocket in the next year or so though. They might go up a little while the economy steadies back out.

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