Why Are Home Prices Are So Expensive?: Asset Inflation
by John Lawrence, January 5, 2021
The government measures inflation based on a basket of consumer items including rent but excluding the price of homes. However, rents are a function of the cost of homes. As home prices go up, so do rents, and rents continue to go up despite people's ability to pay. The Federal Reserve could tackle increased home prices by raising interest rates, but this would discourage home sales and more not fewer homes and apartments are needed. MarketWatch reported: "While the Federal Reserve is busy worrying that wages might be rising too fast, the rest of us have a different concern: The rent’s too damn high. If we have an inflation problem, it’s that the cost of housing is rising faster than our ability to pay." Although there is little wage inflation, it is not hard to understand why there is asset inflation. So much money has been injected into rich peoples' pockets in the last couple of decades by means of tax cuts and the Fed's bailouts of the financial system among other things that the rich have increased their wealth many fold while the financial situations of the poor and lower middle class have stagnated. All this money floating around in the pockets of the rich has to go somewhere, and where it goes is not into consumption so much as into investing. So the financial assets of the rich are increasing while the poor have all they can do to pay increasing rent. One of the main assets that rich investors invest in is real estate which bids up the price of homes and, subsequently, rents.
If the rapid accumulation of wealth by the already wealthy continues to increase (they have accumulated an additional $1.8 trillion dollars just during 2020), asset inflation in terms of home prices and rents will continue to increase. However, the government doesn't seem to be as concerned with this form of inflation as they are with wage inflation. They are concerned with keeping the wages of working people down because this increases profits for business owners and keeps the cost of most consumer items low. If Walmart has to pay a living wage to its employees, it might have to raise prices, and this is the kind of inflation the current government is most concerned about. Perhaps those concerns will be mitigated under a new Biden Democratic administration which is more concerned about the wages and welfare of the poor and lower middle class than it is about the prerogatives of the rich and business owners.
As Stephanie Kelton points out in her book The Deficit Myth, inflation should not be a concern as long as there are resources which are laying idle. If government provided the money to utilize those resources, whether they are human resources or physical resources, this will not contribute to inflation. What does contribute to inflation is putting more money into the economy than can be soaked up by productive efforts. So while the unemployed represent a resource that is laying idle, and there is no lack of physical or material resources, putting people to work would not contribute to inflation whereas all the money that the Federal Reserve has used to bail out Wall Street banks, and also by virtue of low interest rates, there is a great deal of money sloshing around in the economy in the hands of the rich. That's why there is asset inflation (think real estate) and not wage inflation. The Federal Reserve has the capacity to print money and hand it to Wall Street without any other entity authorizing it. However, if the government needs money, for example, for programs to employ the unemployed building infrastructure, for example, Congress has to authorize it. If Congress authorizes it and tax receipts are not sufficient to cover the needed funds, deficit spending takes place automatically which means that the Treasury Department must sell Treasury bonds to cover the expenditures. They will never have a problem selling them because primary dealers (mainly Wall Street banks) are obligated to buy them. And the Fed stands ready to take these Treasury bonds off the Wall Street banks' hands if there is a "liquidity crisis." So by a round about process US deficits end up on the Fed's balance sheet if no one else wants to buy them where they disappear in a black hole although people believe erroneously that taxpayers are still obligated to pay them off at some point. They're not.
Deficit spending is somewhat of a misnomer. The spending could take place just by the Federal Reserve creating the money by a few keystrokes in a computer the way it does for Wall Street. The $4.5 trillion so created to bail out the Too Big To Fail Wall Street banks during the Great Recession did not require deficit spending. Some collateral in the form of mortgage backed securities went onto the Fed's balance sheet, but that collateral need not ever be sold back into the private economy. It can stay of the Fed's balance sheet forever and no entity has the authority to do anything about it. That's because the US dollar is a sovereign fiat currency. The thing to note here is that bailing out the banks did not add to the deficit, but government spending beyond tax receipts must be authorized by Congress and this does add to deficit spending. This is because of legal and political restrictions, but the final result is that the Federal Reserve just creates the money in both cases so that deficit spending is nothing to worry about any more than spending to bail out the banks, which is not deficit spending, is something to worry about.
So while financial deficits are nothing to worry about, Kelton points out that there are some deficits to worry about:
"The real crises that we are facing have nothing to do with the federal deficit or entitlements. The fact that 21 percent of all children in the United States live in poverty - that's a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America's Gilded Age is a crisis. The fact that the typical American worker has seen virtually no wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won't be able to 'afford' anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of them all.
"These are real crises. The national deficit is not a crisis."
As Modern Monetary Theory points out, as long as there are real assets (human and material) not being used, deficit spending will not cause inflation and deficit spending in and of itself is nothing more than an accounting entry on the Federal Reserve's balance sheet. The Federal Reserve will provide whatever money Congress authorizes or is necessary to bail out Wall Street because it, as the Central bank, has the authority to issue money in the US financial system. The Federal government spends whatever monies Congress authorizes before the money is even made available. If some of it is not forthcoming from taxes, the rest of it will be created by the Fed in the form of deficit spending.