4 votes

Go Buy a House That You Can't Afford.

It may directly oppose our fiercely self-reliant sensibilities to suggest that it would be wise to put ourselves into debt. But we may be staring directly into an opportunity today to obtain present assets with real capital value in exchange for future assets that are most certainly going to be worthless before the contractual obligations are fulfilled. In other words, inflation is going to erase all of our debts.

Our central economic indicators are interest rates. We can all look back and remember a time when six, seven, eight or even nine percent mortgage rates were the norm, but do we ever ask ourselves why the rates today are at all-time lows? What causes the fluctuation in interest rates and when will it go back up to historically normal levels? The rate that you might get for a thirty year mortgage is not the real focus of this discussion however. That rate is part of a larger market based on current time preference for capital. The rate that we will be focusing on is the rate at which banks lend to each other and the rate that banks and investors lend money to our government. The truth is that the government cannot afford to pay an interest rate higher than the near zero number that they pay right now. However, the rates must come up to clear the market of the malinvestment that has added up as a result of the artificially low lending rates and the continued influx of new liquidity into the market.

It is not hard to understand how the problem is compounded by the continuation of government stimulus and credit expansion. The longer the government continues to amass debt beyond what it can possibly afford to pay back, the higher the rate must go to draw real, healthy investment into the US bond market after the Fed can no longer afford to support the high premium being paid today for US debt. In a miss-guided effort to keep rates low, driven by Keynesian economic philosophy, the Federal Reserve continues to purchase eighty five billion dollars of US treasury bonds a month; tricking the market to make it appear as though there is legitimate demand for United States debt at the current high price.

Hyper-inflation is not what will cause the market correction that is coming, nor is it a necessary companion to a depression following the model of what is known as the Austrian Business Cycle Theory. In a normal depression, interest rates swing up after the malinvestment is realized and investors tighten their spending and save for sound, new investments and prices will tend to go down. Such a deflation is part of a natural healing process for the market. But in today’s market, with the staggering growth of the US monetary base and the obvious inflation of a bubble in the bond market, any market correction which may shed light on this obvious malinvestment can set in motion a hyper-inflationary situation.

The Federal Reserve and the US government have taken the position that they will not allow their banker friends to fail; no matter how poorly they have invested. This partnership is precisely what would lead to a situation in which we pay for new bailouts through a loss of value to the currency in our bank accounts. The banks that were bailed out in 2008 are still not solvent and the only reason that their investments appear to be growing is because the Federal Reserve is keeping them afloat with money that they are creating. When the market takes a downturn and investors are forced to sell their treasury bonds back to the government it does not seem likely that the government will simply turn their back on their buddies and default right away. I would think that before they defaulted and screwed Joe-401k-owner they will print enough money to bail out their friends. The recipients of the bailouts will take the massive amount of freshly created money and buy other assets before inflation sets in. Basically, the banks will cut their losses by dumping them onto our front lawns.

A sharp rise in the rate of interest will not be enough to save the dollar; investors will have to turn elsewhere to save and restructure their portfolios. This is why gold and other physical assets are so appealing to anyone that understands true economics. And why the debt that we accumulate now will be erased by inflation. In such a situation, the dollars that people have agreed to pay back to the bank will be worth very little and most likely very easy to obtain because nobody will want them. Hundreds of thousands of future dollars might be worth tens of dollars in today’s money.

It may be coming up on a time when having a house or a piece of property that you think you cannot afford now will start to look like a good trade for future dollars that will be worthless. Think about the fact that even today when the rate of interest is lower than the real rate of inflation, the United States Government spends about twelve percent of the annual budget on interest. The percentage of the budget taken up by interest payments will go up at an exponential rate as the rate increase. It would not take more than a few percentage points to bring it up to a burden that is beyond what is manageable. Then if you take into account the fiscal gap, which is many multiples of the GDP by anyone’s figures, it means that the government is already in more than far enough over its head to arouse our worries about a catastrophic economic downturn happening at any second.

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Cyril's picture

Hmmm...

Hmmm...

I'm not sure I want to read/speculate that far deep into the possible outcomes in a possible future, out of several others.

But again, I've never been very much (at all) in betting big or gambling on anything. (Just AFAIC)

I know there's always what I can see, and there's also so much of what I cannot see, no matter how hard I could try.

Anyway, I'd still use some caution!

P.S.
I upvoted the post nevertheless for its thought-provoking temerity :)

"Cyril" pronounced "see real". I code stuff.

http://Laissez-Faire.Me/Liberty

"To study and not think is a waste. To think and not study is dangerous." -- Confucius

Does anyone know who started the housing collapse of 2008?

You don't have to look any farther than the squirel in the White house. When Obumer was an attorney during the 1990's, he and the acorn bunch started suing banks for not lending to poor blacks. He used a law that Jimmy Carter signed, but nobody wanted to implement (Community Reform Act).

So the banks having to give mortgages out to people that would defalt, started the scam of selling the mortgages to other banks as fast as possible. The banks all made money from these bogus mortgages just by passing them along. It didn't take long for banks all over the country to start the same practices that started in Chicago. It was like a big house flipping party and make as much fast money as possible.

Thanks Barak for the party and the hangover we're having now.

http://www.realclearpolitics.com/articles/2008/09/acorn_obam...

Gold standard: because man can not be trusted to control his greed

jrd3820's picture

Is this financial advice you yourself would partake in?

Do you own a house you cannot afford? Or are you in the process of buying a house you cannot afford?

Is this Jeremy?

I'm sorry if I'm way off man, but I forgot my buddy's username on the DP and I'm just curious.

jrd3820's picture

lol no

this is jenny :)

no worries.

Ha sorry.

Not a man.

Ryan,
Good to meet ya.

No.

I'm not an investor. The title is meant to be somewhat facetious. It's more a way to say that you can get people to trade you an asset that is on its way to destruction for an asset of tangible value.

Debtors Paradise

The creation of money is a debtors paradise, I understand. On the other hand, regulation is a business nightmare. Both seem to be moving hand in hand and the risk of regulation moving faster than inflation is far greater. With this being noted, I stay away from debt because regulation may kill income.

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wolfe's picture

A fool's investment.

What you suggest is a fool's investment. It presumes to know when/if a collapse will happen. Further, it assumes to understand the nature of a collapse. It also makes an assumption of your own personal future earning potential. The idea of any investment is to minimize risk, and yet your suggestion takes on risk at every turn.

Suppose you are right, and it takes 5 years to collapse, but you lose your current income (by say 50%) at some point before that 5 years. Well, now, you just over paid, and maintained a house for the bank for free (for them) for several years... You put yourself in bondage in the meantime, and walk away from it with nothing as the bank takes ownership again.

Furthermore, you will be the one to owe taxes on that high dollar figure despite the fact that you never saw a dime (both me and my parents have experienced this).

You only own what you can buy. Financing is the way to poverty for 90% of those who play that game. Less risk and more reward for playing the lottery. Stick with the Lottery Retirement Plan. That may be a bad idea, but your idea is worse.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

The point of the post was not to be investment advice

though it might have come off that way it was more a discription of the nature of the bubble that has been inflated and that there are many things that its popping might effect. The title was just meant to attract readers more than anything. I don't presume to know when the bubble will pop or how to time the market with your investment as to get your debt erased. It was just to open the eyes of some people that believe that the collapse is not coming or that hyper-inflation is not something that we need to worry about when it comes.

There are obviously many variables that are not considered in the post if it were an attempt to make an investment suggestion; such as what the government might do, or how the banks will respond to being owed money that is worthless, or even how the populace will respond to being taken advantage of. I am not going out and buying a big house on credit right now or anything. I am only trying to get people to think about the severity of the crisis.

wolfe's picture

Fair enough.

And I am just trying to wake you and others up to the fact that all debt is slavery.

Debt is the Keynesian game. One that only the financiers will ever win.

Own what you own. Live your life. Ignore all unjust laws. That is the closest any man will ever come to being free.

p.s. At my highest debt limit I probably had around a half million in available credit and various outstanding debt so I am not discussing this from only a theoretical point of view. I once believed that credit was better than cash. I learned the hard way what happens when the music stops.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

I don't agree

I agree that there is a massive scheme right now to enslave people to debt, but I do not think that all debt is a bad thing. In a free society capitalists would be loaning capital to grow the market. I think that the real problem is fiduciary expansion. There is always going to be a premium paid for cash right now in exchange for cash in the future and people will always step up to fill that role. Credit is a necessary part of a capitalist society. I believe that in a free society lenders would have to be held to 100% reserve in order to limit exposure to business cycle depressions, but that does not mean that debt is evil.

wolfe's picture

Let's look at something you said...

Because I have a very strong understanding, from personal experience, what this statement actually means.

"Credit is a necessary part of a capitalist society. I believe that in a free society lenders would have to be held to 100% reserve"

First of all, I agree that all debt should be 100% reserve. No fractional banking which is just a fraud/scam.

But, in reality, if we had 100% reserve banking, the interest rates would stay closer to 15-20% on even low risk items and good credit. The interest rates are artificially reduced through fractional reserve banking. Making your suggestion that credit is a good thing even less valid.

Lastly, *CREDIT* is not a necessary component of capitalism. CAPITAL is! Hence it's inclusion in the name, and the reason we don't call it CREDITism.

In some cases, one may choose to enter into indentured servitude(borrow), with realistic expectations and with good reason. And in some cases, it may make sense, but to do so when you are required to buy from the company store is a proven way to work yourself to death as a debt slave.

Further, all debt is NOT FREE MONEY. It is a promise of your future labor. Promise enough of your future labor, and you are a slave.

Your hope/suggestion is that a collapse will invalidate that promise of your future work.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

?

That is an exceptionally skewed version of the way a market works. Yes capital is what drives the market, but some people have good ideas and no capital. They need capital, so they borrow it. This is not a bad thing. The interest they have to pay is just added over-head, not some sort of agreement for permanent slavery. We are talking about contracts entered into knowingly by consenting individuals. Are you too stupid to understand the terms of a contract? I tend to assume that people are smart enough to make decisions about their finances without other people having to protect them. How many leaps in living standards do you think have been financed by outside investors?

Why would higher rates mean that credit is a bad thing? You do understand that the rate of interest is more than just the rate at which people borrow money right? It reflects the entire time preference of the economy. Capitalists give up money today for more money later. The difference is the essence of the interest rate.

What in any explanation that I've written would make you think that I believe that debt was free money? I believe that inflation helps debtors and punishes creditors. But to say that a collapse will alleviate an individual from the requirements of his contract is no where in what I said.

But if you have a mortgage today and you are paying three and a half percent and inflation ticks up to five percent you are making money. What about that is evil?

wolfe's picture

Interest rates...

Are indeed the value that the market places on the use of money over time. This value would be much higher if it weren't for fractional reserve banking because hard/real capital would need to be used. And that is not it's only meaning. It is also the portion of your life you are willing to trade for immediate use of that money. 25% interest basically means that you are willing to trade 25% of the total value of that loan of your life/labor. So if you had a loan equal to 100% of your yearly salary and paid 25% on it, you would be exchanging 25% of your future life to use the money now. A form of indentured servitude.

"What in any explanation that I've written would make you think that I believe that debt was free money?"

Everything you have written in this post.

"But if you have a mortgage today and you are paying three and a half percent and inflation ticks up to five percent you are making money. What about that is evil?"

Except that is not true, and shows no understanding of the true mechanics. It -COULD- mean that you owe less of your labor obligation, but that is actually very unlikely as it ASSUMES your salary will increase to match inflation. That isn't true in the US anymore, and even if it was, would require job hopping, business ownership, etc to manifest itself.

We no longer incur direct inflation. Everything in the US pretty much creates stagflation. Where earning capacity either holds or decreases while the cost of goods rises.

And under NO circumstance are you -making- money because your interest rate is less than inflation, that is just ridiculous.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

Every purchase is a portion of your life you are willing to pay

by your assessment. Why are you calculating the benevolence/malevolence of the capital market based on the hypothetical percentage of a person's yearly salary? A person taking on a loan understands the contract that he is entering into. If that person purchases a loan for more than what he can pay it is no different than making a purchase of any other good that is going to interfere with being able to sustain his other necessities.

If interest is 25% and some person needs $1000 dollars today because that $1000 today is worth more than $1250 in a year how is this bad? How is the 25% (or whatever hypothetical interest rate you choose)any different from the cost of any other purchase? It isn't. You could buy $1000 dollars today because you knew of an investment, just invented something that you believed in, etc. at a %25 interest and agree to pay the debt in one year, for simplicity. That $1000 could give you a return of $10000, and the $250 that it cost you ended up being a wise expenditure.

And how can you presume to know where the rate of interest will be under a system that rejects fractional reserve lending? If we can assume a system that has abolished fractional reserve banking then we must assume that it is a system in which a large part of the populace has woken up and is moving society forward in liberty and sound economics. That kind of an economy, in which sound money was the rule, would build capital and probably have a deflationary trend. This would make saving much easier and would have a downword effect on the rate of interest over time. That is not to say that I have any clue where the rate would move on its way to equilibrium, just that it is foolish to presume that it would necessarily have to be extremely high.

Inflation has a positive effect on people that have debt and a negative effect on people that lend money. That is a fact. You sign an obligation to pay someone $1000 dollars of today's money with 5% yearly interest and that $1000 loses 7% of it's purchasing power in one year. That $1050 that you pay in a year is worth $976.5 of the money at the time that you made the deal. You just made money. That has nothing to do with the amount of money that you earn for a living, it has only to do with the agreement that you made with the lender. You may have lost money elsewhere in your finances because of inflation and the rise in your cost of living may have offset the gains that you made with paying your debt off. But the inflation that made your dollar weaker at the grocery store also meant that you paid the lender back less than what you originally agreed upon.

wolfe's picture

...

"Why are you calculating the benevolence/malevolence of the capital market based on the hypothetical percentage of a person's yearly salary?"

I did not do that. I did however make a statement about the lack of wisdom and understanding of money that you have in regard to the subject.

"And how can you presume to know where the rate of interest will be under a system that rejects fractional reserve lending?"

I do not presume to know how much interest rates would be. But there is some historical evidence to tell us roughly how much. But I DO presume to say that it would be more under a non-fractional system. That goes without saying.

I did not say borrowing or lending was good or evil. I said borrowing in the hope that inflation will somehow offset your expense is foolish beyond belief. I also said that borrowing is self-imposed slavery and some may choose that for good reason. Your reason is not a good one.

"Inflation has a positive effect on people that have debt and a negative effect on people that lend money. That is a fact."

That is not a fact, and once again shows your misunderstanding of the mechanics. First, inflation is -CAUSED- by the lender. When the money supply inflates due to fractional lending, it creates more money, for the bank to lend while decreasing the value of the existing monetary base. So, your belief that somehow inflation hurts the lender is incorrect. It is also what causes stagflation instead of inflation. Inflation has been running wild for years now. Has your salary increased to match that? No? Shocker. Because it isn't true inflation. If the value of your service increased, matched with inflation, then you could be correct. That does not happen in the US.

Outside of a fractional system, inflation AND deflation can and do occur when their is an increase or decrease in supply in the core monetary commodity. In that situation, lending based on the belief is purely a gamble. You lend/borrow based on the value of the money vs. the value of the signature(slavery). However, in that scenario, inflation/deflation would behave as you describe.

But your suggestion/advice lacks an understanding of the difference between inflation/deflation in a fractional vs non-fractional world. And in a non-fractional world, the degree to which you would be required to enslave yourself for immediate use of money would be much higher, because money would be limited to it's existence and not merely what a banker thought that they could get from you.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

I really have enjoyed this debate. And I thank you.

You are very sharp and worth debating. I up-voted all of your rebuttals. I still do not believe that debt is slavery. I believe that it is a completely necessary part of a free society and one that will always exist.

Here is rothbard explaining that inflation helps debtors and hurts lenders
(paragraph 19, under "Myth 4: Every time the Fed tightens the money supply, interest rates rise (or fall); every time the Fed expands the money supply, interest rates rise (or fall).")
http://mises.org/econsense/ch2.asp

Here is Mises explaining that inflation helps debtors at the expense of lenders in an experpt from his book "The Theory of Money and Credit".
(paragraph 9, under section 3, Inflationism)
http://mises.org/books/Theory_Money_Credit/Part2_Ch13.aspx

Here Hayek confirms that inflation helps debtors and hurts creditors.
(paragraph 2)
http://mises.org/tradcycl/avoidinf.asp

I hope that this is a sufficient number of economic scholars that agree with my position to convince you that it is at least a reasonable one. I think that you and I would agree on most things if we were to meet, but we're not going to come together on this one.

-Ryan

wolfe's picture

Important, so put it in it's own comment....

The powers that be have used terminology against us. They call the stagflation, inflation so that they can reference books and say "but see why it's not such a bad thing", etc.

It is our job, to move past the semantic trickery to understand the underlying mathematical and logical principles.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

wolfe's picture

Those sources do not dispute what I am saying.

I enjoy the debate as well, and consider the discussion with you valuable.

They are referencing true inflation/deflation of the monetary commodity. If they are not, then they are wrong. Which I had already stated in a previous comment.

What you are discussing is not inflation/deflation of the monetary commodity. That would be a discussion of the value of the dollar. What we are discussing is the more common understanding of inflation as the cost of goods and services. Which does not behave according to true inflation/deflation principles but instead hold to stagflation.

Here is the core difference: True Inflation/Deflation = immediate change in value. You can see bitcoin as a good example of what this means. One day, a coffee costs you 10$ USD, another day it costs you 20$ USD, but it wouldn't matter to you if you were in bitcoin because it would be 1 bitcoin on both days, and you get paid 20 bitcoin regardless of it's value in the USD.

So if prices go up, then so does the value paid in services causing a party to benefit/lose according to lending/borrowing. However, that is NOT what we are discussing. We are talking about inflation that isn't realized in anything but the cost of goods. Which means you cannot benefit as a borrower, unless you had a magic way of translating that inflationary percent into what you are personally paid for your services.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

I would say that true inflation would actually mean

an increase in the supply of money. True inflation, in the classical economic sense of the term, does not refer to the value at all. Just the quantity. There is not really any true measurement of the value of a currency because its value does not move evenly on any scale. There is no measure for this because there are an infinite number of variables that go into the price of every good and every service. I guess I do not understand what on earth you could use as a measurement for a currency than its purchasing power against goods and services.

I was using a general sense of the term, which is somewhat falacious and I understand that. But sometimes the modern sense of inflation has to be used even though it does not really translate because it is accepted and understood. So yes, using the CPI version of inflation is incorrect.

I'm not trying to get the last word

I swear lol.

wolfe's picture

There is no last word... :)

Just an endless discussion until we grow bored... And then come back to it in 3 months. If I have learned nothing else from the DP, I have learned that... ;)

You are correct about inflation/deflation representing supply of the commodity. The problem is that supply of the USD is entirely unknown (to us), because 90% of it comes from fractional banking, chosen by the bankers. And so when I referenced the value of the dollar in terms of commodity pricing/supply, that is because it is our closest approximation point for the USD.

But the core point, is that it's change is not immediate and realizable. In order to obtain any gains, you must be able to realize them. Since, the way to realize benefit from inflation is through increased value on your personal services, it becomes unachievable in the current US environment. Unless, that value was directly reflected somehow, which that is only possible by being reflected in the value of the commodity (i.e. my bitcoin example).

Has the USD dropped in value by 10% every year, despite the CPI or Shadow Stats numbers? Nope. I would have to look up it's value, but I can assure you, it hasn't dropped 10% every year. Though I would have to look up the numbers to prove it.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

Just wanted to chime in

and say that I'm enjoying the discussion between you two. ;D

It's quite interesting.

A signature used to be here!

Thank you!

I'm just glad someone besides Wolfe and I was actually reading it.

wolfe's picture

Ditto... :)

It makes it seem more worthwhile to have these discussions if others are paying attention... ;)

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

wolfe's picture

I love to hear that... :)

I actually believed exactly as he did probably no more than 5 years ago. But I couldn't resolve the differences in theoretical inflation/deflation with what I saw occurring. Which is why I enjoy the discussion. And it isn't about which of us is right, but that we all get smarter from the discussion... :)

So I spent a lot of time trying to understand why what looks right on paper, wasn't right in the real world. And it boils down to the fact that textbook inflation/deflation (commodity supply) isn't what we have and so the mechanics are quite different.

Having a system of perpetual inflation without deflation, and without randomness is what creates the stagflation mechanism that we have. It is also the primary thing killing the middle class, and widening the wealth gap.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

I bought last year with the

I bought last year with the intention of buying at the top of my income/assets' reach. A house bought in the right town at the right rate (low 3's) is good debt to have even if inflation's "only" bad and not hyper.

10-15 million more voters need to believe in non-interventionism (liberty) at home and abroad to change America. Minds changed on Syria. Minds changing on privacy. "Printing money" is part of the dialogue. Win minds through focus, strategy.

right

Inflation doesn't have to go crazy for you to reap some benefit. If you have a loan at 3 percent and inflation ticks up to four or five percent, in real terms that reflect your personal spending not what the CPI says, than you still ending up paying back less money than you borrowed.

Wasn't this already done resulting

in the housing crisis?

Predatory lending and all that...

The law cannot make a wicked person virtuous…God’s grace alone can accomplish such a thing.
Ron Paul - The Revolution

Setting a good example is a far better way to spread ideals than through force of arms. Ron Paul