There are lots of things to learn about as we begin our lives as investors. Whether we want to really be an active investor and make a fortune or we just want to build a solid IRA for our retirement, there are some things we just need to know.
These terms: inflation, stagflation and deflation are among them. Probably the most important on that list is the idea of inflation. Inflation is simply the rate at which prices are rising over time. Among our favorite economists here at RealyInvest is the venerable Milton Friedman. Professor Friedman stated succintly that inflation is always and everywhere a monetary phenomenon. What this means is that inflation is too much money chasing too few goods.
What happens is that the world’s central banks, including the U.S. Federal Reserve, print and circulate a lot of money to stimulate economic activity. They have to be careful doing this because when the economy picks up there tends to be a period of increased inflation and higher prices. Prices tend to rise as more people have more money to spend. Our own Fed, as it’s known, wants to see about a 2% increase in prices year over year-but not much more than that. Too much inflation isn’t good-unless you own premier commercial real estate or other assets.
Inflation is actually really good for real estate. Real property tends to do best in inflationary environments. As the world is awash in money from all the central bank stimulus from the last ten years (cash printed and circulated) this can be a good time to own good real estate.
As far as stagflation is concerned, this is simply where all this money printed by central banks does not get used in productive ways. It is a condition where properties and assets rise in value but the economy does not grow in a like manner.
In terms of deflation, this is a condition where assets actually decrease in value over time. The economy works best when assets and properties increase in value over time-as they usually do. When a broad array of assets decrease in value over time it indicates slow or negative economic growth. The U.S. has never experienced a true deflationary period apart from the Great Depression of the 1920’s.
We currently live in a world awash in money from years of central bank stimulus (printing and circulating money). As the economies of the world get back on their feet this should produce inflationary pressure along the lines that our Federal Reserve would like to see.
This can be a great environment to own premier commercial real estate.