Archive for December, 2009

What to do for potential first home-owner?

Tuesday, December 1st, 2009

Recently, we had a conversation with a young bloke who is currently renting. He has a strong desire to buy a house that he can call it his own home. In other words, he is a potential first home-buyer.

But seeing that house prices are very expensive in Australia and that they are artificially inflated by easy credit and favourable tax laws for property ‘investments.’ Furthermore, he sees the corrupt State Governments’ land release policy as the cause of land ‘shortages’ in Australia. Furthermore, he believes that politicians, with all the powers and capabilities that they have, never allow property prices to crash, perhaps even encouraging further property price inflation (see What goes in the mind of the Rudd government as it extends FHOG?). With governments all over the world resorting to stimulus, bailouts and money printing, he can see that they are all hell-bent on the policy of monetary inflation.

In other words, he distrustfully and cynically sees that the property market is rigged against him. But what can he do? Should he just take the plunge and buy a property, be a debt slave and should he lose his job, hope that the government will engage in moral hazard to bail him out? Or should he wait for the house price crash that may not happen? In any case, he sees that his wages is not going up any time soon, which means he greatly fears missing out.

What should he do? It’s da*n if he do, da*n if he don’t situation.

This is an example of the harmful effects of inflation on society. The beauty of inflation for politicians is that it is a kind of invisible tax on workers. Instead of increasing tax on your salary (which is exceedingly obviously), inflation erodes the purchasing power of your wages and you degrade your standard of living through higher debt burdens and prices. As we wrote in How to secretly rob the people with monetary inflation?,

The common people on fixed salaries and who do not own any ?assets? will have to bear the brunt of price inflation. … A redistribution of wealth from the last ones in the queue to the first one in the queue! Usually, the latecomers are the most vulnerable members of society.

Unfortunately, our friend is one of the latecomers. Generation Z will be the laggards too.

The problem with inflation is that it penalise those who work hard and save. In the US, with interest rates below the rate of price inflation, the government is forcing people to speculate (and risk their savings) in order to merely stand still. As we wrote in Harmful effects of inflation,

With inflation, there is less incentive to be productive and more incentive to hoard, speculate and gamble. This in turn will reduce productivity and increase price inflation, which further increase the incentive to be less productive.

This is what one of our readers has to say,

I lived in Russia during the hyperinflation of late 80s-early90s. It was exactly as you say: people and businesses were not interested in producing goods. The only path to success was speculating. God save Australia from such times!

If property prices are going to be more bubbly in future, the only way for young people to have any chance to own a property is to speculate. If the government is committed to inflation and moral hazard to solve economic problems, young people will see that there is no point in working insanely hard to save up to buy a house. They will see that the only way will be to speculate in stocks, commodities, gold, silver, foreign currencies, CFDs, options, etc than to work hard. They will chase whatever that is liquid and goes up in price and if they are more aggressive, short whatever that is coming down in price. Some may even turn to speculating in property itself with leverage.

Monetary inflation makes it far more profitable to speculate than to work hard. That’s why our friend is saying, “I’m learning to speculate.”