Forbidden Lore, Inflation and the Housing Bubble

This guy writes a lot about what he terms Forbidden Lore, or powerful knowledge not readily accessible. The thing about forbidden lore is that once you discover it, it can so radically alter your worldview that you can’t un-see it.

Discovering the truth about inflation was some forbidden lore for me. Understanding precisely how awful inflation is leaves me even more appalled at the housing bubble’s popping.

The thing about inflation is that people generally process half of how it works, but not all of it. When it comes to housing prices, they notice that historically the prices go up. So then it seems like a great idea to buy a house that’s a bit over their income, since ‘housing prices always go up’.

But the other half of inflation is that spending power goes down as prices rise. Historically, you need more and more money to buy the same things you might have bought 20 years earlier. This is where people just…they can’t seem to process it. They basically believe housing prices can go up AND they can somehow retain the CURRENT year’s spending power. That is, they think they can buy a house in 2005 for 500k, have it be worth 1.5 million in 30 years (2035), and that this means they’ll have 2005 spending power with that 1.5 million as home equity. Everyone thinks that housing prices can rise forever, but they can still keep current spending power.

Once you understand what it really means that one dollar now buys far less than it did in 1940, you can’t look at inflation the same way. You can’t look at housing as an investment at all. It’s a depreciating asset. The treating of debt as wealth as a result of this half-knowledge of inflation fills one with a sense of complete horror.

I just can’t un-see the devastation and the problems that come from a situation where rampant inflation is considered ok. Nobody in America seems to be taking seriously the lessons of all the countries where people burnt the money instead of buying wood because it was cheaper. Or have to use calculators for the most simple purchases because the smallest notes are thousands or millions.

I really think inflation is forbidden lore, because if people really followed through the implications, they wouldn’t have made such astronomically crazy decisions in purchasing housing. At least, I have to hope so.