Inflation During the 1970s-80s

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I can remember my mother telling me about monetary inflation during the 1970s and 1980s. My parents purchased their first home in 1964 for $16,000. By 1975, it was appraised for more than $50,000 and then later on again in the mid to late 80s for over $150,000. They eventually sold it in 1998 for just over $200,000. I always wondered what caused prices to climb so high so quickly. It seemed as though those who had homes and who were willing to sell them made out like crazy, while those who were looking to buy had to pay a lot more every year they waited. Apparently, the price increases in the late 80s were cause by the Fed injection of currency into the economy due to a stock market collapse of 1987. Every time the Federal Reserve creates more money, prices climb. Sometimes, they climb very quickly, as they did in the 70s and 80s.

Whenever there's a large stimulus from the Fed, there's usually a large boom in some part of the economy afterward. In 1988 and 1989, because of the money that was printed, housing prices went nuts. And because there was a new bubble forming in real estate, the Fed was forced to react by increasing interest rates. They do this in an attempt to cool the economy off. So those who were looking for a new home to buy, not only had to pay higher prices for the home itself, but higher prices for mortgage interest. Everything was higher all around.

Unfortunately, because of the dramatic increase in interest rates from the Fed, the housing bubble burst, which caused a nationwide recession. I remember this well. All I we heard about back in the early 90s was that there was a recession and what we needed to do about it. Politicians were talking about their "plans" to deal with unemployment, wages, housing, and everything else. I remember walking around near my grandmother's house during that time thinking to myself. I said, "If every citizen of the United States just spent $1 on something, we could pull ourselves out of this terrible recession!" How foolish I was in those days. To think that we the people had anything to do with our very own economy. All the ups and downs we experienced our entire lives were caused my monetary policy. And monetary policy is controlled by the Federal Reserve.

Because of the recession during the early 1990s, home prices fell. The Fed deemed the fall in prices too drastic, so they began cutting interest rates in an attempt at stimulating the economy out of the downturn. They chopped 8% rates down to 3% and even further. Nothing seemed to have an effect and home prices continued to fall. Builders stopped building and banks began foreclosing on those builders for the half-built homes. They also foreclosed on those who bought homes at the peak and who could no longer afford them. By the time the economy evened out, home prices had dropped to about one third of their peak prices. The frenzy was certainly over and there were a lot of pieces to pick up.

If you've never heard of the term "underwater," this is what it means. It's basically when someone mortgages a house that was once worth $100,000, but who paid $1,000,000 for it at a high interest rate. When a downturn in the economy hits, the price of the home drops to a fraction of what they bought it for and they owe the bank more than the house is worth. The problem with this scenario is that because the buyer paid way too much for the house at such a high interest rate, when they go to the bank and try to refinance their mortgage, the bank won't touch them with a ten foot pole. What bank would refinance a $1,000,000 mortgage for a house that's only worth $300,000? That's a losing proposition for any bank and during these types of situations, homeowners are either forced into foreclosure or have to eat those high payments until housing prices rise again. This is what happened to millions of people back in the 90s. Luckily for them, there was another bubble just a short decade later. If they stuck with their homes and didn't foreclose, they were able to sell at a later date.

Between the years of 1995 and 2005, more currency was created in the United States than the 90 years preceding this time - combined. There was an enormous currency creation during these years, and if you lived through them, you remember the result. A housing bubble that put all other bubbles to shame as well as the introduction to a word we all became very familiar with - derivatives. Everything in the U.S. went up, from stocks and bonds to house prices and derivatives. Not to mention, consumption and debt as well. That went up big time.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
Inflation During the 1970s-80s was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.
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