Inflation? If it happens, what will it look like?

This morning I am attending a class about disclosure, taught by Bill Gray, the former owner of the Arizona School of Real Estate and Business. He talked about one aspect of the health care bill, which for individuals earning more than $200k or couples earning more than $250k, imposes a 3.8% tax on the profit from selling properties.

And generally the attitude is that it doesn't really apply to anyone. But let's think for a moment what happens if inflation comes. Say prices rise by a factor of 5. (I'll talk about whether this is possible or not in a moment) If this happens, your $200k home you owe $300k on is now worth $1,000,000. When you sell it, the tax for the health care bill will be about $24,000 (depending on down payment and commissions.)

At this point in history, the national debt is larger than it has ever been, at it is at a point where history shows us that the United States might collapse. Historically a nation which has a huge debt compared to gross national product is in danger of collapse. However, in the 1930's, due to a shrinking of GNP, debt reached as much as 128%. So it doesn't always happen. And even in that time in history, inflation did not occur. Instead we had deflation.

Two things helped in the recovery at that time. First, home ownership became a priority. Prices were low, and in 1934 the FHA was created. Home ownership was seen as a way to get the nation back to work. The government subsidized loans to promote home ownership. People who buy homes also buy furnishings, refrigerators, radios, curtains, etc. and this drives manufacturing. The other thing that helped lift us out of depression was the onset of war, which also drove manufacturing.

And if you look at history, the path for many nations out of depression is war. Not that the wars help, but rather the people are so miserable and distrustful of the government that war becomes inevitable.

So what is our government trying to do now? They are trying to cause inflation, because deflation is just too scary. In a deflationary environment, asset prices fall and the banks (who now bear most of the risk) have little hope of recouping their investments. But if we are in an inflationary environment, asset prices rise (in terms of our fiat currency) and the banks can recoup their investments, as in the example at the beginning of this post. It is vitally important to the banks, particularly to the Federal Reserve, to cause inflation -- and lots of it.

It hasn't been able to do it. The Fed tried quantitative easing, pumping more than a trillion into the economy and nothing happened. QE2 is another $600 billion. The only thing they haven't done is to give money away on the street corners. There are some signs of inflation, though, as we see commodity prices and food prices rising, even as housing prices continue to fall. Prices today are the lowest they have been in 10 years, for resale homes in the Phoenix area. The least hard hit areas are in Texas, especially in oil related areas.

Parts of Arizona are also doing better -- due to rising commodity prices, such as copper. I don't understand why, but this is likely exactly the opposite effect desired by the Fed. They want to inflate real estate prices and not harm commodity prices; that would be the best answer. Unfortunately, foreign trade does not often invest in single family homes, rather, they buy goods ... and commodities. So a weak dollar does not help the housing market, and increases prices in things we need to buy.

I wish I had better news.

--PLH

PLANNING TRAFFIC SPEED & RESIDENTIAL APPEAL IN A ROUND-ABOUT WAY

                  In some of Phoenix’s older neighborhoods (e.g., Willo, Encanto, Arcadia), so-called traffic-calmers – meaning any apparatus or device, frankly, that compels rambling traffic headways to slow down – have been installed along major streets in the last several years.  Aside from their functionality, Phoenix’s traffic-calmers are wretched pieces of hardscape for the most part.  They do cause traffic to decelerate instead of smashing against bollards, raised curbs or what have you.  Slowing traffic, however, appears to be their only purpose; there certainly is no focus on aesthetics or public assistance.  (Okay, I’ve seen one traffic-calmer at Central Avenue and Mountain View that has some lantana and a palo verde tree planted in the median; otherwise, they are all ugly inventions.) Therein lays a missed opportunity.  Compare the multipurpose functions of France’s “circulations,” or roundabouts or “traffic circles,” as we may call them here.  Circulations are used across France to beautify the intersections of roads, to prevent chaos in the handling of traffic movements in multiple opposing directions, to celebrate local history and traditions, to provide useful guidance on directions to nearby and distant towns and thoroughfares, and to afford directions to local businesses and attractions.

            Of course, one anticipates the argument that Phoenix’s weather is too hostile to plant life for vegetation to be included in such a device on our city’s streets.  I doubt the truth of that proposition, given the development of xeriscape plant palettes by the city to be used in common areas and parks (and there’s the one at Central and Mountain View).  It’s just a bit more pricey to install plant groupings than to cover any raised portion of the calmer devices with gravel or concrete.  And I suspect that imagination is not the bailiwick of the traffic engineering staff when it comes to the beautification of traffic calmers.  Imagination need not be an issue.  There are landscape architecture students and general architecture students at ASU who could be engaged to re-envision traffic calmers, and their input could be “juried” by city staff and the members of the Village Planning Committees who live in the area of the devices.  These diverters, encountered by hundreds of drivers a day, could become points of pride or expressions of local tradition or local culture for the neighborhoods they occupy and serve.

How about using public art in some of these diverters?  Our city’s Arts Commission has a Public Art program that would be well suited for recommending treatment of calmers and the decoration of the vertical elements of those devices.  Look, for instance, at the Seventh Avenue & Melrose project, described at this URL: http://phoenix.gov/ARTS/seventhave.html; the scope of what I’m proposing here is far less ambitious (and, therefore, less costly).  That Commission should be able to advise the Village Planning Committee members and the traffic engineers so that together, they can devise something pleasing to the eye as well as serviceable.

Let’s face it, though – the issue is who pays to maintain “vertical objects” of substance against the onslaught of taggers and “bashers” who stupidly decide on a close encounter with elements of the the traffic calmer.  It’s surely not in the city’s budget.  But there are a variety of forms of urban commons management undertaken by private actors to steward a local resource.  First of all, we should not assume that there would be no momentum to forming a neighborhood foot-patrol to keep watch out over and maintain a roundabout, if it was established as a point of local pride adopted by a Village Planning Committee.  Alternatively, there could be an improvement district “ownership” of a roundabout that may lead to management of the asset once it has been upgraded to something of perceived value to a neighborhood.  Sheila Foster at Fordham University has written lately on the collective management of certain “Urban Commons,” and some of her work is at www.ssrn.com (put her name into the little search engine and her article, called “Privatizing the City,” will pop up).

One rudimentary example of how such a resource is manageable is to hire a person like the Salt River Project coordinates with neighborhoods to employ Zanjeros.  (A Zanjero is an SRP employee whose principal responsibilities involve the manipulation of irrigation gates for the orderly delivery of water to fill irrigation requests to homeowner subscribers to the irrigation system.)  A group of nearby neighborhoods could cooperate to hire a person charged to keep the traffic calmer in good condition and repair, such as maintaining a drip irrigation system for the watering of plant material or to cover up or eradicate graffiti.  If neighborhoods will address this issue with their respective Village Planning Committees, perhaps something positive will develop to improve resources that currently are useful but dismally disappointing to behold and that diminish the beauty of some otherwise - classy neighborhoods.  

--MNW