Do you want to get a loan that will actually make you more wealthy? Do you realize that such loans are now available on home properties if you have good credit? Mortgage loan rates are now lower than the inflation rate and if you lock in a 30 year mortgage now your interest rate will most likely remain lower than the inflation rate for the foreseeable future. You will indeed become wealthier in the long run just because you took out a 30 year mortgage loan. Strange but true, thanks to the Keynesian insanity of the Federal Reserve Bank of America.
People with good credit can now get a thirty year mortgage on a home property for under 4 percent In addition, you can deduct the interest on your federal and state income taxes. That means that most people will get at least a 25 percent tax write off for the loan interest. In other words, after the write-offs you will actually be getting that 30 year loan for less than 3 percent of the unpaid balance a year. That is less than present inflation and far less than long-term projected inflation.
If there is actually higher inflation in America then there has been, and that seems pretty certain to be the case with our huge debt and overspending, then by taking the loan you will only have to pay a small fraction of what the property will be really worth when you sell it in the long-term future. The difference between what you paid for the property in inflation adjusted dollars and what you sold it for will be your net wealth gain for obtaining a loan.
I am assuming that our Federal Reserve will continue the policy to inflate our debt away. If we went into the world’s greatest deflationary depression, it would become a different story, but governments are simply not going to allow for that to happen, even if it means globalization and a new currency. If this great depression actually did happen, paying on your home loan would be the least of your worries anyway because the collapse of modern civilization would be upon you.
I also am assuming here that you have a secure source of income and that you will be able to make the monthly payments, otherwise you will lose the property and the down-payment. Therefore, if you are not fairly well off, or know that you will be selling this property in the next ten years or so, then this mortgage loan idea to gain additional wealth is not for you.
I point this wealth creating opportunity out to you, to show you the kind of economics that you will have to keep up with to gain wealth in the helter-skelter cuckoo nest world of socialist Keynesian economics.
You might wonder why these loans are going for less than inflation since no financial institutions could stay in business lending out money at less than the inflation rate in a normal world? I think it is because financial institutions are being lent money from our Federal Reserve for 1/4 of one percent and then the financial institutions make the mortgage loans and sell the loans at a profit to Freddie Mac and Fannie Mae who are operating at a huge loss but nevertheless still in business because they are now in the possession of our federal government.
To help Mac and Mae out, the Federal Reserve Bank buys up mortgages by just electronically creating money out of thin air. More dollars created means that people holding those dollars will bid up prices making prices rise. The resultant inflation then robs savers that are holding debt because they get less interest on their investment than the inflation rate.
Does that sound like wise monetary policy to you?? Yet, that is what our government is doing and it is why interest rates on mortgages are the lowest that they have ever been. Of course the Federal Reserve wants to sell those mortgages to investment and retirement funds at a profit so they keep Treasury bonds interest rates even lower than the mortgage notes by creating even more money out of thin air to also buy up U.S. Treasuries.
The problem with this crazy scheme is that they are just creating money to stimulate the economy and that will eventually devalue the dollar which will push up inflation and long-term interest rates. When that happens the jig is up and America either defaults or has to dramatically raise interest rates bringing hyper-inflation. The Fed is only getting away with this scheme now because there is so much fear in the financial markets of Europe and elsewhere. Markets are so shaky that investors are willing to park their money in the safety of U.S. Treasuries even knowing that they will take a loss after inflation.
Savers of U.S. government debt are getting almost nothing on their investment and less than nothing after inflation. Those buying Treasuries and bank CD’s etc, are continually getting poorer and the money that they lose is unknowingly subsidizing low-interest mortgages loans.
Even so, this scheme can only go on as long as fear makes savers willing to become poorer for the thought of keeping vultures away from their nest-egg. Once they feel confident enough to make other investments interest rates and inflation will rise. Then those that took out these low-interest loans will make out like a bandit because they will pay back the loans in dollars that are worth far less.
It sounds screwy and it is, but in this upside down world one way for middle class Americans to get more wealth is to get a long-term mortgage that they really do not need.
There is good reason to believe that the dollar won’t be worth much in ten years but your payment on your loan will remain the same amount of dollars. For example, let’s say that in ten years two dollars buys what one dollar buys today. In that case, in ten years your house is worth about double what you paid for it in dollars but what you continue to pay on your loan remains the same. Therefore, the difference in what you can sell the house for and what you owe is your increased wealth. I am assuming that in a few years housing will keep up with inflation (after the bubble is fully deflated and the surplus housing is sold off). I think that is likely because building materials and labor costs and land will continue to go up with inflation.
Of course there is always the chance that government can change the rules in the middle of the ballgame and index existing loans to inflation and/or stop allowing you to deduct your interest on your mortgage loan. Even so, if you do not spend the money you can always just pay off the loan. So I am not suggesting that people do this that do not have the resources to pay off the loan anytime they want. However, if you do have the resources then it might be financially wise for you to take advantage of this nutty government redistribution of savers wealth program.
This crazy monetary policy will probably lead to the Federal Reserve going bankrupt and then those holding its treasuries and mortgage notes will not be paid or else the taxpayer will somehow have to come up with trillions of dollars to bail them out. The other scenario is that our currency gets devalued and make all savers big losers.
That is my story. What you do with the information is up to you. You will have to decide for yourself the morality of going into debt to make money. My real motivation for writing this is to point out the insanity of where the Federal Reserve policy is taking us, and perhaps to talk myself into taking out a loan so that I can build a house on my larger property. If you are so inclined to take out a below inflation rate mortgage to increase your wealth, you might want to also consider why increased wealth during the fall of America will do you any good anyway?
Conclusion: I think that you should be aware that insane people are running our monetary policy. This is not a good time to be a lender. High interest rates are right down the road and you’re going to lose wealth if you’re holding bonds. Government cannot create wealth, all they can do is redistribute the wealth that exists. Government wealth redistribution never works out for the betterment of any nation. Artificially low-interest rates from money created out of thin air means higher inflation in the future. There is no free lunch.
I am not telling anyone to go into debt. However, if you want to get in on this wealth redistribution scheme by getting a loan at interest rates that will be far less than future inflation, your time to do so is growing short. The Federal Reserve is creating money to try to stimulate the economy, but because of this Fed policy, lenders will see their wealth redistributed to borrowers (lenders are really all those that own bonds, notes, bank cd’s, mutual funds, retirement funds etc., just in case you do not realize that you might be a lender).
I have been searching for a simple way to explain why Keynesian Economics will ultimately fail. This is a great explanation.
Somewhere, sometime, some in Congress may wake up and authorize an audit of the gold the Fed is holding. Then the financial house of cards will immediately collapse. Until then, Ben and Timmie can create fiat money out of nothing.
Don, living in Canada I can only lock into a fixed rate mortgage for terms of 3, 5, 7 or at 10 years Max. So if I got a 30 or 35 year amortized mortgage for the max possible term of 10 years, I would need to renew at the end of that ten year term; and at the interest rates available at that time of renewal. Rates could have tripled.
What I’m asking is this… Is it different in the U.S? Can one actually “lock-in” for 30 years at a fixed rate that endures for the complete life of the mortgage. If you can do that down there… then YES go for it!
Typically during currency crisis things you normally purchase with cash go up in price, things like food and energy and basic materials. Things that you buy on credit, like housing and autos decline in value. I think the reason for housing to decline during hyper inflation is because no one can afford 30%+ mortgage interest rates, so housing prices decline to what cash buyers can afford. In a hyper-inflation scenario there won’t be mortgage money available for borrowing. With inflation running at 15% I wouldn’t lend you money for 30 years at 25% because I don’t know how bad the inflation will get even just six month down the road.
Everyone has to live somewhere I suppose, nothing wrong with a paid for house. farm land, oil companies and precious metals might perform better than housing if we end up in an inflationary spiral.
Al,
Yeah its different here. 30 year term loans with fixed rates for the entire 30 years of the mortgage are the most common mortgages here. You can even get a forty year fixed loan.
Tim,
I think you missed the point. Hyperinflation will nullify most of the financial effects of your 30 year loan in a very short period of time. Housing value is not going to decline to much less than the replacement costs during an inflationary spiral even if there is a surplus of housing. A home is a tangible asset much like Gold but try getting a low interest loan to buy gold.
If we had 30 percent inflation you would have to be nuts to get a mortgage. People will only be buying in cash or trade.
The difference in farm land, oil and precious metals is that you must already have money to purchase them. People generally get loans to borrow money because they do not have the money to purchase a house.
If government inflation policy is going to make you richer in the end if you borrow, it certainly beats buying the debt of others and losing wealth.
Don,
I understand your point alright and it is a valid point assuming the borrower has his wages rising along with the inflation so as to pay off that mortgage more easily. Rising wages imply to me a robust economy, from some of your recent posts I didn’t think that’s what you were anticipating. What sort of inflation are you looking for? during the 1970’s we had high inflation and rising wages, coupled with the demographics of the baby boom generation buying their first homes that pushed housing prices way up. Those boomer demographics are now reversing. Germany’s hyper inflation wiped out the middle class and real estate was a hit or miss proposition depending on individual circumstances, as the below snippet seems to imply.
I suspect housing in 1920’s Germany traded well below replacement value. Unlike food, oil, gold you can’t export existing housing. Although you can import buyers and that is happening to some extent in Miami Beach and Scottdale but there are tax ramifications to the foreigners relocating here.
I’m not advocating anyone buy gold instead of a home. Certainly a place to live is more important than to speculate with investments.
Below taken from, The Nightmare German Inflation by Scientific Market Analysis, 1970.
“Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. ….. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.
Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold,saved their capital.”
I’m having trouble convincing the spouse that now is the time to spend on strategic survival oriented products. I feel like all the retirement/savings will be go up in a millisecond-to-minutes, so what was the point in hoarding (if you will)? [that was a rhetorical question];
I still prefer to be in the black than in the red. Now, maybe, you could mortgage close / under your net liquid investments, but what would you buy (other than your abode)? If you’re looking to purchase spare real estate, then I recommend it be within walking distance – otherwise, in a millisecond-to-minutes, it will be somebody else’s property thereafter.
I had ideas of buying a large tract of unspoiled / wilderness / woods and setting up shop (say, in SC), but then there’s the moving/selling hardship. Instead, I’m just going to dig in and make due with the plans I have in place.
I still think it’s wise to invest in strategic survival products, but I sure am having trouble convincing the spouse of the need. Watch and pray.
Tim,
Nobody really knows how bad inflation will get because nobody knows for sure what governments will do. I certainly think that in ten year the dollar will not buy what 50 cents will buy today unless we do go into the worst depression ever known where even the richest nations default on their debts. That of course would bring the end of entitlement age and that would lead to civil war all over the world. So the elite are not going to allow a world depression to happen even if that means preventing the depression means that savers lose. I think we saw the direction they will take since 2008.
Sure house prices could fall more, in fact I expect them to fall in areas where the average house is still over 2 1/2 times the average yearly family wage. If we go back into recession and wages keep falling housing prices will also fall with the downturn but a nation does not stay in a downward spiral unless it is in a long term depression and governments with a dependent class simply cannot allow that to happen. The biggest economies of the world cannot and will not allow deflation or in our age of entitlement it will mean the end of civilization and if that happens people are not going to be paying their mortgages anyway.
Governments obviously have to continue to take the other route and just do more to stimulate and inflate the impact of the debt away. There really are only three choices and that is to continue to create more money to pay the bills causing inflation, or to create a whole new world currency and pretty much start over, or to end entitlements and massively cut the size of governments. The third option would bring civil wars and even world wars and in the other two cases the savers will lose and the borrowers will win.
Homes are a tangible that will hold valve relative to everything else. The exception is in speculation bubbles. By the way, other tangible commodities also would fall against the dollar in a real depression. The reason why Gold and Silver has gone up so much in this recession is that investors are betting that the policy of governments will create weaker currencies and long term inflation, not depression.
Again, I am not arguing for or against owning other tangibles. I am saying there is only one tangible that you can buy through a no cost loan when adjusted for inflation. And if the inflation continues higher than the loan rate, which seems more than likely, you will not pay anywhere near full value for that property over the life of a thirty year loan.
Craig,
Actually your wife is right, to a point. Anything more than a few months survival stuff will just be taken away in your kind of EMP scenario. Investing in what you or your descendents will still use and holds value if the worse case never happens is what make sense to me.
This is certainly interesting.
I have a sense that only a relatively few people will be able to “create wealth” this way because I doubt the system will remain intact very much longer, as we know it. (Sorry to be vulgar, but the what popped into mind when I read this was the phrase “f-you economics” It really fits both sides, I think.)
What a system; what a world. I can’t wait for Christ to take-over management!
Brett,
Yeah, that fittingly comes after a voodoo economics spell.
Even so, if the whole system goes down I would think most of the loan obligations will go down with it.
Seems to fit the people and their government, and their counterfeit God in three counterfeit persons, while they counterfeit the real God and the truth created thereof (actual wealth).
Come to think of it, real wealth will be distributed at the rewards banquet, while real debt will be settled at the Great White Throne Judgment — “each according” (which is a polar opposite to the current “people”).
Don, I know this is off topic but I’ll chance it. It’s been on my mind.
Would some End Time prophecy move closer to being fulfilled if Ron Paul – a man with a popular domestic policy, but with a foreign policy that would leave Israel VERY vulnerable – became President .
At this moment in time I don’t see or even remember another candidate with a respectable chance at the Presidency, that advocated rolling out such a foreign policy that would make POSSIBLE some of the End Time events in regards to Israel. The Burden of Damascus and Gog-Magog Attack come to mind.
If Paul IS elected do you feel we would be a giant big step closer to the above mentioned prophecies being fulfilled?
Al,
Of course it is off topic and more than once now I said that the place for off topics remarks is in the comments of my monthly perspectives. I also have articles where such a question would fit. That is what the search aids are for.
A don’t think Paul will make a difference. Presidents need Congress. The Senate and the House will force Paul to do what they want regarding Israel. I cannot see Paul controlling Congress in any way shape or form. The bulk of the Republicans consider him a libertarian and the powers in the Democratic Party think that he is a nut case. Paul would get few of his views passed on domestic policy and none on foreign policy.
Frankly, Paul does not have a snowball chance in hell of ever becoming president. He could not even carry Texas. The only way that is possible is that Paul is selected as someone’s vice president to get the votes of his libertarian followers and then the President is somehow removed from office.
The timing of the Gog-Magog war and the destruction of Damascus is in God’s hands. To say events in America will bring it about is really putting the cart before the horse.
Thats the end of this diversion because it has absolutely nothing to do with the post topic.