Inflation as tool to combat the Real Estate Crisis

Today I came across a Harvard Professor of Economics and Public Policy, Kenneth Rogoff, and his take on how to solve the financial crisis by “Embracing Inflation”. I have always thought that inflation is the way out of the current real estate mess.

Let inflation rise and price of hard assets go up, this will prevent the housing market from collapsing and further going down. As most of us have home mortgages, and we seeing the value of our homes decline while our debt remains the same. By raising inflation, the price of our homes will go up or stabilize while the debt remains the same.

So how do we raise inflation? I am no economist but from my Harvard Business School economics class: Inflation increases as interest rates are lowered and by increasing the money supply. How is money supply increased? It is by central banks printing more money or by buying up government debt.

I was very glad to read what Kenneth Rogoff had to say “a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilize. Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK and many other countries. If inflation rises, nominal house prices don't need to fall as much”. He also says “inflation is an unfair way of effectively writing down all non-indexed debts in the economy. Price inflation forces creditors to accept repayment in debased currency”.

However the problem with inflation is that once it gets out of hand it is hard to curb, but as Rogoff says that it is a risk worth taking as we risk a severe worldwide downturn unlike any we have seen. For his entire article go to News Story Tab above.