Inflation, Home Prices and Speculation

In a September 5, 2008 interview, Yale Economics professor Robert Shiller asserted the following:

There's a lot of misconception about home prices. People think that there is a strong historical up trend to them, and by MY data, there is NOT. In fact, home prices in 1990 - if you correct for inflation - were about the same as they were in 1890. . .So, no big change.

Between 1890 and 1990, there have, of course, been countless individuals who have managed to accumulate wealth through fortuitous real estate investing. Many more have lost everything in the quest. Within the longer term historical context, the real CULPRIT is not inflation, but currency devaluation due to a variety of hidden fees and interest charges embedded within the currency, all of which must of course be paid at some point by all of us. Short term, inflation often occurs on specific assets due to the lure of speculation. Speculation in turn often involves insider manipulation of the money supply.

The manner in which currency devaluation in our current, debt-dominant money creation system occurs - as well as what it means to us and how it can be prevented - is explained in Part II of our book The Two Faces of Money as well as in our slide presentation.

Numbers also tell the tale that it is not "too much money causing inflation" that is the problem - but rather accumulating debt which then devalues the currency and causes prices to rise relative to the declining value of currency. So for example, when comparing figures for debt vs money supply, the U.S. money supply has increased dramatically since 1980, going from less than $2 trillion in 1980 to an estimated $14 trillion in 2008. During the same time period total public and private debt totaled roughly $5 trillion in 1980, with about $1 trillion of that representing public debt. By 2008, public and private debt totaled roughly $50 trillion, with over $14 trillion of that representing public debt.

What these figures clearly show is that total debt has been outstripping the money supply for many decades due to the cumulative effects of unpayable interest, and the resultant devalued currency. It is clearly not too much money that is the problem. Moreover, this fact alone makes it ever more difficult to deny - among all but the most hardened apologists - that the entire money creation system is, as Dick Distelhorst of the American Monetary Institute wrote in a recent newsletter, “an oxymoron - 'the more money we have, the deeper in debt we are.' This is ridiculous on its face, and yet we continue to accept it.”

Using history as teacher, John Kenneth Galbraith provides additional insight into the role that debt-induced currency devaluation (i.e., inflation of prices relative to declining currency values which Galbraith simply refers to as inflation) and the attendant speculation have long played in wealth creation - and the destruction thereof - in his classic book Money: Whence It Came, Where It Went:

Speaking of the economic situation which existed between the years of 1672 - 1682 in England, Spain, France, Northern Europe and the Americas Galbraith writes: Not for the last time - and probably not for the first - inflation had a profound effect on the distribution of income, with a particular tendency to punish those who had the least. The loss of those who received the lagging wages was in turn the gain of those who paid them and received the high and increasing prices. The result was high profits, and the further result was a general quickening of commercial and, in more elementary manifestation, industrial capital. . .From the high profits came high savings and the strong incentive to their investment. Additionally the rising prices made it easy to make money: to the natural rewards of shrewd trading or efficient manufacture was added the gain, with the passage of time, from the ability to sell the same thing for more. inflation does lubricate trade but by rescuing traders from their errors of optimism or stupidity. p11
The history of money reveals two highly reliable tendencies. Having recent experience of inflation, people cherish stable prices, and having long experience of stable prices, they become indifferent to the risk of inflation. p57
The disenchanting character of events described in the last [19th] century as panics and in the early years of the present [20th century] as depressions is not in doubt. They occurred in and after 1819, 1837, 1857, 1873, in a minor way in 1884, with great severity in 1893 and again in 1907. There was a brief but harsh one in 1921 and then the most drastic and enduring of all in - and after - October 1929. So regular had been their recurrence that by the early years of the present [20th] century a systemic, wave-like movement was thought to be characteristic of economic life and development. One could gain an advanced degree in economics by specializing in business cycles, called by the informed just "cycles". It was one of the more arcane, uncertain, disputatious and hence distinguished branches of the subject. . . pp105-106
In all of the panics there were recognizable constraints. First, came an expansion of business activity. This usually centered on some dominant form of investment . . .Then, as time passed, expansion gave way to speculation. . . pp106-107
Speculation occurs when people buy assets, always with the support of some rationalized doctrine, because they expect their prices to rise. That expectation and the resulting action then serve to confirm expectation. Presently the reality is not what the asset in question - the land or commodity or stock or investment company - will earn in the future. Rather, it is only that enough people are expecting the speculative object to advance in price and thus attract yet more people to yet further fulfill expectations of yet further increases. p108
This process has a pristine simplicity; it can last only so long as prices are rising reliably. If anything serious interrupts the price advance, the expectations by which the advance is sustained are lost or anyhow endangered. All who are holding for a further rise - all but the gullible and egregiously optimistic, of which there is invariably a considerable supply - then seek to get out. Whatever the pace of the preceding build-up, whether slow or rapid, the resulting fall is always abrupt. pp108-109

. . . And wealth is yet again redistributed upward - due to the manner in which our money, as a medium of exchange - is - and to a large degree has for centuries - been brought into circulation. Yet, as Robert Shiller plainly explained:

There's a lot of misconception about home prices. People think that there is a strong historical up trend to them, and by MY data, there is NOT. In fact, home prices in 1990 - if you correct for inflation - were about the same as they were in 1890. . .So, no big change.