tag:blogger.com,1999:blog-11110174.post5184379602956584957..comments2024-02-26T23:17:11.132+13:00Comments on Blessed Economist: Falling Prices (2) - Borrowers Punished?Ron McKhttp://www.blogger.com/profile/03989126812730583009noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-11110174.post-11965271675134009832008-12-20T19:59:00.000+13:002008-12-20T19:59:00.000+13:00Thanks SteveWe do not know the future, so every de...Thanks Steve<BR/><BR/>We do not know the future, so every decision carries risk. Inflation shifts that risk to other people. At least, the man who buys an asset for cash that then sells it later for a lower price harms no one but himself. <BR/><BR/>Businessmen are happy to buy plant and equipment that declines in price over time, because they produce something that can be sold to compensate for the depreciation in value. The problem with a house is that, it does not produce anything that can be sold to compensate for a decline in price, unless it is rented out. We should stop thinking about the house we buy to live in as an asset that will just increase in value over time. The reality is that houses wear and tear over time, so to be useful for economic decision making, their prices should reflect that reality. <BR/><BR/>If inflation stopped completely, we would also have to change our investment strategies. Buying an asset and just waiting for the capital gain would no longer be a viable strategy. That would be a good thing for the economy, as investors would shift to assets that are actually productive.Ron McKhttps://www.blogger.com/profile/03989126812730583009noreply@blogger.comtag:blogger.com,1999:blog-11110174.post-60506106680164613612008-12-20T19:16:00.000+13:002008-12-20T19:16:00.000+13:00Ron,Falling prices also affect somebody who paid c...Ron,<BR/><BR/>Falling prices also affect somebody who paid cash for his house. He might have bought it for $100k, and had the price fall to $80k when he had to sell. On the other foot, deflation has caused many mortgage payments to go <I>down</I> because some interest rates are contractually tied to deflating market funds.<BR/><BR/>Deflation has also benefitted many borrowers because lenders in many cases realize that if a default occurs, the lender will be left with something less than its original price if there is little equity. Lenders have in many cases been willing to negotiate downward to save their own derriers. I'm not arguing against your case in general, I'm simply pointing out problems with the columnists' claims.Steve Scotthttps://www.blogger.com/profile/10297044571819912511noreply@blogger.com