What three things have been unsustainably low and are bound to go up?
The answer: taxes, interest rates and inflation will increase--it’s just a matter of how soon.
Let’s take taxes first. One of the big reasons we have such large federal budget deficits is because of the Bush tax cuts—all those economic gains from reducing federal taxes somehow just did not pan out. Wealthy Americans did get richer by design, but most folks have been treading water or worse as jobs migrate overseas and wage rates for many workers decline. Government budget surpluses turned into red ink years before the recent and unfortunately necessary emergency bailout medicine escalated the debt totals.
Now everyone wants to reduce these deficits, and the only way to do it will be to raise taxes since the body politic really doesn’t want to do without most of the government services taxes pay for. The big ticket items—defense, Social Security, and Medicare verge on untouchables, and then of course there is the hundreds of billions of dollars in annual debt service we must pay. Sure we can reduce fat and cut some programs, but not enough to avoid tax hikes. And then we have been grossly under funding infrastructure for decades—by literally trillions of dollars—that gap must be addressed too. The deficit commission has all sorts of good ideas about decreasing tax rates and ending loopholes to make the system more efficient, but taxes will need to increase overall (federal, state, local) to help reduce the debt and pay our way. Unless that is you believe in the tooth fairy or its equivalent—the Laffer (laughable) Curve.
As for interest rates, the Federal Reserve Bank has been pushing them well below historic norms essentially since the dot.com bust 10 years ago, helping disguise the reality that our economy isn’t as vibrant as advertised. At this point, in fact, the Fed’s lending rate can’t go any lower. We should only hope rates go up soon—signaling the economy is strengthening. If they don’t increase, the Fed will be warning we are in for an extended and unwelcome convalescence—more of what we’ve been experiencing, high unemployment and tepid or non-existent wage growth. And that Japan-style scenario could mean bigger trouble and higher rates, if T-bill buyers lose confidence in the American economy and demand higher yields— while not likely, don’t think that can’t happen. Or are we just so exceptional and indispensable?
Probably our only way out of the big debt hole is inflation—the government resorts to printing more money. More magic dollars out in the system may reduce buying power per buck, but they also make it easier to pay off existing loans including all those bum mortgages and our humongous government debt.
Our best hope is that demand improves enough to heat up the economy, interest rates increase as a healthy sign, and modest inflation and necessary tax increases help overcome our massive debt problems.
Real estate and other hard assets can perform well in inflationary environments, but only with adequate levels of demand for space. Without tenants bidding up rents, landlords and their lenders won’t benefit. Higher interest rates will pressure up real estate capitalization rates, which can be managed as long as tenant demand increases too.
But under our treacherous circumstances, if demand isn’t restored, the U.S. will look more like a banana republic than an economic powerhouse.
And restoring enough demand is not a sure thing.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
