Thursday, July 14, 2011

How Fed Decides to Deal with Inflation will Impact Senior Housing and Healthcare Borrowers, Cambridge Chairman Says

 CHICAGO, IL--Hand-wringing concerns that inflation numbers are starting to spike higher appears to bother some observers more than others.

“The contrarain view is that more robust inflation numbers may not be such a bad thing,” senior housing/healthcare funding expert Jeffrey A. Davis (top right photo) says.

Davis is Chairman of Cambridge Realty Capital Companies, one of the nation’s leading senior housing/healthcare lenders. He points out that those who are suggesting this seemingly heretical idea believe a “healthy” dose of inflation may be needed to set the economy on a more reliable growth path.

Davis said the Federal Reserve Board continues to persist with anti-inflationary monetary policies aimed at supporting recovery by holding interest rates at rock-bottom lows. However, the Fed is also considering inflation targets that would further shape decisions on interest rates or the amount of money that will be pumped into the U.S. economy to spur growth.

Some find this approach worrisome because, at the first whiff of inflation, inflation targets would require the Fed to force interest rates higher, even if the economy is continuing to struggle, he points out.

Another concern is that current fiscal policy fails to consider an important systemic problem. Burdening the economy today is $13.3 trillion in mortgage and revolving credit debt owed by American families, which is almost twice as high as it was as recently as 1999.

“Paying interest and trying to pay down principal on this debt is siphoning off much of the spare cash people have. Which means the ability of consumers to spend their way out of the current predicament is constrained,” he noted.

Davis says the last time debt levels were as far out of whack as they are today was following the Great Depression in the 1930s. What eventually changed the dynamic then was rapidly escalating inflation, which over time enabled consumers to pay off debts with cheaper, inflated dollars.

“Some are suggesting a 5 percent annual rise in the Consumer Price Index (CPI) with a similar bump in wages and asset values would be enough to get things steadily moving forward in the right direction. A 20 percent general rise in home prices without any other changes would also be enough to unfreeze the economy, they say.

“Less clear is the chain of events that will need to happen in order to bring all this to pass,” he said.

At the moment, Davis says central bankers remain focused on what needs to be done to keep inflation in check, remembering how difficult it was to rein it in the last time inflation rampaged out of control.

When then Fed Chairman Paul Volker (lower left photo) declared war on inflation in 1979, short- term interest rates shot up from 9 percent to 22 percent, fell back to 11 percent, then went on to peak at 22 percent. During this extended period, long-term rates fluctuated between 9 percent and 15 percent.

Davis says senior housing/healthcare borrowers should be able to rely on relatively low interest rates for the foreseeable future, but the long-term outlook is less certain. It all depends on how policy makers balance concerns about inflation, indebtedness and sustainable growth scenarios.

Evan Washington
Phone: (312) 521-7604
Fax: (312) 357-1611

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