As some in the housing industry begin to dust themselves off from one of the worst recessions on record, others cautiously wait for signs of a full recovery. Though it is always wise to minimize risk, don’t wait for an all-clear signal, because by then you may have missed the opportunity of a lifetime.

I propose that home builders snap up land at deflated prices so that they can ride the inflationary wave mounting in the U.S and throughout the world.

Contrarily, mainstream economists believe we are in the middle of one of the greatest deflationary periods on record. They point out that this cycle has been building since the 1950s post-WWII era, and state that the United States has too much debt to sustain a full recovery. I emphatically agree with each of these points in the long run, but there exists compelling evidence to suggest it won’t play out for many years — perhaps a decade or two.

While this may bring you comfort during these uncertain times, we must take pause at the gargantuan amount of money that has been enthusiastically printed, then poured into the U.S. economy by our government to avert economic meltdown. Simply put, the strategy of the Fed and the current administration has been to create inflation to counter the unprecedented credit unwinding that has been deflating the world economies. I describe the situation as the equivalent of starting a wet fire with airplane fuel — once it is lit, watch out; it’s going to be a bonfire.

As a home builder, this means you need to watch the prices of commodities like the precious metal gold. Like the little hand following the big hand on a Swiss clock, gold is your indicator that inflation is forecasted. It has already run up from about $850 per ounce in 2009 to $1,177 as of April 29, 2010 (date of publication). And the price of gold has been predicted by many analysts to go as high as $3,000-$5,000 per ounce. Yes, that’s right — three to five times in value.

If gold creeps up that high, I hope you picked up lots of land at today’s relatively cheap prices, because I believe this time period represents one of the greatest opportunities for wealth creation in our lifetimes. It depends on whether inflation has been unleashed or we are just keeping the economy afloat. One fact that is undeniable, convincing, and downright scary is that Americans have never flooded the market with the magnitude of cash that we have in the past two years.

While we may be on the cusp of high inflation, this won’t be the first time. Let’s flashback to 1980. Paul Volker was the Fed chairman, and he forced rates up to unbelievable double digits (20.5 percent on Dec. 19, 1980) to slow down raging inflation that gripped the economy. As inflation was building in the years leading up to these peaks in the federal prime lending rates, new home sales soared as homeowners gained perceived wealth through the price increases of their homes. Like in 2005, the average buyer cashed in inflated homes only to buy new homes. This happened during two time periods as shown in the graph below. Home starts plummeted in 1980 when interest rates soared due to the Volker adjustments, but were followed by a third great sales run in 1983-84 as the federal rate approached the relatively low level of 10 percent. Welcome to the cyclical nature of housing.

The graph above shows the annual Rate of Inflation (Consumer Price Index for All Urban Consumers: All Items), not seasonally adjusted. In the early 1970s inflation began an ascent to its highest levels since 1947, until 1980 when Paul Volker, then-chairman of the Fed, took drastic measures to increase interest rates.

This historical graph shows monthly New U.S. Privately Owned Housing Starts. Measurement is in Thousands of Units (seasonally adjusted annual rate) (a) First and (b) second boom: while inflation was mounting, housing doubled to over 2 million housing starts. (c) Third boom post interest rate declines

The charts on the right show the U.S. inflation rate measured by the Consumer Price Index and annualized housing starts.

Look around and you’ll see signs that we are getting back to the new normal. Restaurants are full again, big-box shopping store parking lots are packed, and the malls are teaming with good-hearted folks living the American Dream.

This is exactly what the Obama administration and the Fed want us to do — namely, get back to our old habits of borrow and spend. Economists call it the “velocity of money,” and consumer spending is critical to jump start it.

Think of the economy as a game of musical chairs. As long as everyone is moving, there is no problem and everyone is smiling. However, if the music pauses just for a second, like it did when Wall St. crashed Oct. 9, 2008, everyone tries to grab a chair. Unfortunately, there were not enough chairs to go around on that fateful day, and our government was summoned to the rescue. As of late, I hear music playing, and I don’t think it’s the deck band on the Titanic.

What About Deflation?

The alternative possibility is that we fail to generate inflation and the economy continues to deflate miserably, creating very tough times felt by all. While entirely possible, I argue that we have an advantage that makes this outcome very unlikely — namely, the printing presses at the U.S. Treasury.

Today, the dollar is the currency of the world. It may not stay that way, but it remains dominant at this time. Because, and only because, we hold that position, we can command a bit more tolerance in the bond market, unlike other countries such as Greece, Portugal and Iceland. Rest assured that our government will do everything in its power, with the support of our Chinese friends, to keep our bonds selling while we re-inflate our economy.

This description is terribly crass, but it’s the reality of the situation created by this administration. As they say, all is fair in love and war … and the bond market! Hence, rest assured the Fed will be pouring more fuel on the economic fire, without fear of debasing our currency, until inflation is here and the threat of “Armageddon” has been pushed as far out as possible.

Nassim Nicholas Taleb, author of The Black Swan, a respected book on economic markets, has said, “We are facing an environment with a huge amount of debt. The next mistake is going to be overprint, which is going to be the way out for them, which is why I fear hyperinflation.”

All Things Considered

Today, there are fewer places to sit in our hypothetical game of musical chairs than in any time past. Long term, this needs to be corrected. A sound fiscal plan of wealth creation must be put forth to correct our level of debt to GDP (which stands at 40 percent today and is projected to reach 80 percent in 2012).

In all fairness, the Obama administration’s plan is to get the economy running again and to work down debt over time. I hope for the grace of God and the future of our children that the plan works. Everything we know is at risk; therefore failure is just not an option. The administration knows this, and psychologically speaking it appears that we have “mission accomplished.” Most Americans have already forgotten about that fateful day when the music stopped and the economic world almost collapsed. The American people now have the confidence to get up and start running around the chairs again.

Effectively this has caused people to borrow and spend to maintain the lifestyle they are accustomed to for the next three to seven years. It means we have a strong chance for one of the greatest inflationary runs of our lifetime, which represents a golden opportunity for those in housing. The real excitement, however, comes from the impact housing will have on the economy itself, adding another leg to this bullish argument.

According to Zach Investment Research, “construction alone is responsible for 31.8 percent of all jobs lost since “the peak in 2005” [sic]. In the process, construction has fallen back to being just 4.3 percent of all jobs in the country. Those numbers do not count the auxiliary jobs that are created by housing construction. The carpenter working for D.R. Horton (DHI) is counted, but not the guy in the factory making faucets at Masco (MAS) or the gal making kitchen cabinets at Fortune Brands (FO).”

I cheer those in housing that will directly employ an estimated 4 million to 5 million people if we get back to 2 million housing starts per year. Factor in some innovative green technology, which makes new houses better than older ones in terms of saving homeowners’ money on utilities, and we just might have a sustainable wealth-building recovery.

Humbly peeking through my foggy crystal ball, I recommend a careful balance of risk and opportunity. High inflation will bring an equally damaging effect to the industry through high interest rates. But before it reaches its tipping point, there will be significant opportunities. Also, the Fed could prematurely raise interest rates in an attempt to stall inflation before it sets in. Raising rates is tough to execute when a relapse into deflation is very real possibility. Inflation is a-comin’ by and for our government.

If you have the guts to take smart, calculated risks and use interest rates, consumer price index, commodity prices and opportunistic buying as your strategy to buying land over time, you will amass an impressive pot of gold.

Paul Cardis is founder and CEO AVID Ratings, the leading provider of customer loyalty research and consulting to the home-building industry. Through the AVID system, home builders improve referrals, reduce warranty costs, and strengthen their brands. He can be reached at paul.cardis@avidratings.com.