Inflation is just what is needed to get the US back on track

The Canadian economy is largely tied to the US economy and it has been said that when the US gets a sniffle, Canada catches a cold. As the largest trading partner of Canada a healthy US economy is vital to our success. One of the major stumbling blocks in preventing the US economy from recovering is the staggering debt load of the American consumer which depletes public confidence.  

Real Estate values have dropped considerably in the past few years and many Americans are seeing their mortgage higher than the value of their home. Many of these people feel deflated as they are into quite a bit of debt compared to the value of their homes and are defaulting in record numbers- the American dream has disappeared!

One item that can quickly turn this around is a bit of inflation where prices rise and cost of housing and values rise to keep pace. The theory is if prices rise, salaries rise, and home prices rise, this will cause inflation to go up. This is not a bad thing in the short term as debt is not inflationary and remains the same. So if house values and incomes were to rise by 20% in the next 3 to 4 years and debts stay the same, consumers will feel they are ahead of the game as the equity/assets to debt ratio would be reduced.  Home owners are less likely to default on their mortgage as they have equity and this will raise consumer confidence.

This will go a long way in building public confidence. Of course if salaries do not rise to keep pace with inflation then this confidence will be somewhat dampened.  Long term inflation is bad so after a slight increase of say 20% over a 3 to 4 year period the American government needs to then slow inflation to a moderate 2% range.  This can be done by raising interest rates and moderately slowing the economy which will lessen demand and thus allow the principle of supply and demand to take effect.

A little inflation in the US will also help the Canadian economy as our goods will appear cheaper as long as the Canadian Government stay the course of managing inflation and keeping it at a 2% target rate. One item that can really throw this strategy off is if the Canadian Dollar continues to rise against the US dollar, as this will cause our goods to be more expensive.  Never the less, it would be better for Canada if the US has a higher level of inflation than here in Canada vs. not having any inflation.  

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Roy Singh

Roy Singh

CENTURY 21 Heritage House Ltd., Brokerage*
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