What three things have been unsustainably low and are bound togo up?

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The answer: taxes, interest rates and inflation willincrease--it’s just a matter of how soon.

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Let’s take taxes first. One of the big reasons we have suchlarge federal budget deficits is because of the Bush tax cuts—allthose economic gains from reducing federal taxes somehow just didnot pan out. Wealthy Americans did get richer by design, but mostfolks have been treading water or worse as jobs migrate overseasand wage rates for many workers decline. Government budgetsurpluses turned into red ink years before the recent andunfortunately necessary emergency bailout medicine escalated thedebt totals.

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Now everyone wants to reduce these deficits, and the only way todo it will be to raise taxes since the body politic really doesn’twant to do without most of the government services taxes pay for.The big ticket items—defense, Social Security, and Medicare vergeon untouchables, and then of course there is the hundreds ofbillions of dollars in annual debt service we must pay. Sure we canreduce fat and cut some programs, but not enough to avoid taxhikes. And then we have been grossly under funding infrastructurefor decades—by literally trillions of dollars—that gap must beaddressed too. The deficit commission has all sorts of good ideasabout decreasing tax rates and ending loopholes to make the systemmore efficient, but taxes will need to increase overall (federal,state, local) to help reduce the debt and pay our way. Unless thatis you believe in the tooth fairy or its equivalent—the Laffer(laughable) Curve.

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As for interest rates, the Federal Reserve Bank has been pushingthem well below historic norms essentially since the dot.com bust10 years ago, helping disguise the reality that our economy isn’tas vibrant as advertised. At this point, in fact, the Fed’s lendingrate can’t go any lower. We should only hope rates go upsoon—signaling the economy is strengthening. If they don’tincrease, the Fed will be warning we are in for an extended andunwelcome convalescence—more of what we’ve been experiencing, highunemployment and tepid or non-existent wage growth. And thatJapan-style scenario could mean bigger trouble and higher rates, ifT-bill buyers lose confidence in the American economy and demandhigher yields— while not likely, don’t think that can’t happen. Orare we just so exceptional and indispensable?

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Probably our only way out of the big debt hole is inflation—thegovernment resorts to printing more money. More magic dollars outin the system may reduce buying power per buck, but they also makeit easier to pay off existing loans including all those bummortgages and our humongous government debt.

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Our best hope is that demand improves enough to heat up theeconomy, interest rates increase as a healthy sign, and modestinflation and necessary tax increases help overcome our massivedebt problems.

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Real estate and other hard assets can perform well ininflationary environments, but only with adequate levels of demandfor space. Without tenants bidding up rents, landlords and theirlenders won’t benefit. Higher interest rates will pressure up realestate capitalization rates, which can be managed as long as tenantdemand increases too.

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But under our treacherous circumstances, if demand isn’trestored, the U.S. will look more like a banana republic than aneconomic powerhouse.

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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.