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Irrational Exuberance case # 1.096E34

Started by errnum, 07/27/2009 06:05AM
Posted 07/27/2009 06:05AM | Edited 07/27/2009 06:10AM Opening Post
Yet another ignorant quandary.

The talking heads say that the stock market has recently boomed because real estate sales have risen. This is taken as evidence of increased consumer confidence or whatever.

Dunno anything about it. Am a little fish with tiny resources. Me & wife were thinking about maybe buying some real estate because of pessimism, rather than optimism. The reasoning-- If we expect recent irresponsible expansion of the money supply to cause severe inflation-- Maybe not quite hyperinflation-- Sub-sub-hyperinflation or whatever-- Perhaps no worse than 'mild' Carter malaise 10+ percent annual inflation.

In that game, if real estate prices and interest rates are temporarily low, then if you finance real estate it ought to be an incredible bargain and inflation hedge, because the bulk of the payments will be made in the future when money has become relatively worthless.

Dunno. Maybe the specific motivation/strategy doesn't matter as long as people are buying real estate. Gives the same economic result regardless of the individual actors' motivations?

OTOH, if a big percent of folks are buying real estate for the same reason me&wife were thinking-- Expectation that money will be nearly worthless sometime in the future-- If that is whats happening, it would not be a statistic to encourage folks to buy into the stock market, erroneously thinking folks have become more optimistic about the economy?

Posted 07/29/2009 04:02PM #1
That's not particularly bad thinking. Conventional economic thinking says we will get big inflation b/c of all the fed actions + huge govt deficit which possibly could me moneterized (ie, the govt prints money to pay off the debt). However, there is a lot of talk of the Fed being about to suck that liquidity back in, but no one in the public has seen details.

Overall, RE is at worst a neutral bet, since we are at the bottom of the market. The worst thing that could happen is you won't make as much money as you could have, but you probably won't lose any.