Inflation Will Bring Part of the American Dream Back

Inflation is bad for the economy, but the return of inflation will signal that long-term economic trends will reverse. This article from Macrobusiness: Higher wage growth could crash the property market discusses this situation.

In a nutshell, over the past 40 years wealth transferred from labor to capital. Falling interest rates increase the value of existing capital assets and investments made at higher interest rates. Globalization was a separate force, but it exacerbated the this trend. Globalization is now reversing. For the American retiree and the corporate class, falling interest rates made housing more expensive and it made financial assets more expensive. Saving was difficult because low rates of interest delivered a lower return than investment assets. If inflation, interest rates and wages reverse trend, financial assets and homes will fall in price because interest costs will rise. Hard working labor will be able to save up and buy a house with cash. The 20-percent down payment could make a comeback and not kill the housing market, because the housing market will already have been killed by risig interest rates.

Wealth will start flowing out of housing and financial assets that are not productive, and into labor and capital goods (mines, oil wells, factories, etc.) that are productive. There may be a brief political battle over immigration (wage suppression) and my forecast is that domestic labor will win in most places.