Inflation Harms the Economy

In recent years, the US Federal Reserve had criminally neglected the political principle that “inflation harms the economy” and allowed bubbles to form when the banks loaned money at low interest rates. Was the real estate bubble created in this way a clear example of government failure? Many experts hold the Federal Reserve responsible for the real estate crisis: through their easy money policy at the turn of the century, they triggered the boom in the markets, which ended abruptly in 2008.

Alan Greenspan, chairman of the Fed from 1987 to 2006, does not feel guilty. In an interview with the Zeit newspaper, he denied a connection between low interest rates and the fall in real estate prices: “There is no mechanism suggesting that US monetary policy with its rates for one-day money affects global long-term real interest rates.” However, various studies suggest that there is in fact a connection between real estate prices, inflation and the economy as a whole.

In a study entitled “Real Estate Prices in Rising and Falling Economies,” the Institute of the German Economy (IW) in Cologne found that a rise in overall price levels in eight of ten European countries led to a fall in real estate prices. Central banks could be responsible for this development, which seems paradoxical at first glance: When inflation rises, they tighten the reins. This increases financing costs, according to IW, so demand for real estate falls, along with its price. But if interest rates, the state of the economy, and inflation influence real estate prices, the fluctuations in real estate prices can, in turn, have consequences for the economy—specifically through the property effect.

Price Stability Ensures Social Peace