Go Buy a House That You Can't Afford.Submitted by Shamus_McMises on Sat, 03/15/2014 - 18:30
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.