Analysis: This is not going to be easy to say, and will likely not make me popular.  Nevertheless, it has to be said, I think.  We’re in trouble.  This economy is in serious trouble.  Lasting, probably permanent, possibly fatal trouble.

The trouble is not coming from the usual sources.  It has very little to do with unemployment, or with productivity, or with declining innovation among US firms.  It has to do with the complete abandonment of fiscally-sound policy by the federal government, which is leading to the destruction of the dollar.

A friend of mine asked me the other day why, if the government is printing trillions of dollars to finance the national debt and keep the payrolls fat, we’re not seeing inflation.  I told him that we were.  It’s not showing up in the Consumer Price Index yet (though it eventually will), but that’s because the CPI measures only price increases.  There is another way for inflation to express itself, and that is in the decline of the value of the currency against international standards, like the price of gold or oil, or the value of other currencies, all of which are spiking.  There is no consumer pressure on prices because a) nobody is borrowing money to spend, because they can’t get loans b) nobody has any liquid savings, so no spending can come from reserves and c) banks are holding on to cash instead of lending it, because right now, who is a good credit risk?  Anyone?  Much better to fatten the balance sheet to prevent your institution from being taken over by the FDIC.

We got in debt as a people, then our government got into debt over what it could handle, now we’re trying to get out of debt by borrowing or printing money.  A child could see that this won’t work.  What is required is discipline and sacrifice.  Unfortunately, discipline and sacrifice are hallmarks of a bygone age.  Unless we recapture it, we’re in for a hard time.  This is only the front porch of the house of horrors, if we don’t shape up.

Advice: Don’t borrow money for anything that does not appreciate in value (education and land, pretty much).  Shed your debt as quickly as you can, including your home loan.  Learn valuable, off-grid skills like how to grow carrots and raise chickens.  And pray very hard.

Cj

First, interest rates aren’t very high, on a historical basis. 6.25% sounds like a lot, but most people can remember 7.5% fairly recently, and some can remember 12%. Business still got done.

Second, let’s look at the real difference between 6.25% and 6% mortgage interest rates. On a 30-year mortgage, beginning balance of $250,000, the payment difference is $41/mo ($1498 vs $1539). That’s less than $500/yr, or .1% of the gross annual income of a typical homeowner for a home with that kind of loan. Suppose your company comes to you and says “in order to cut costs and keep the company alive, we’re going to have to cut everyone’s salaries. The cut will be .1%. Please don’t kill us.” Anyone going ape over that? Over what amounts to one family trip to Wendy’s every month? Yet there are borrowers that have attempted suicide when their rate rose by an unexpected .25%.

Third, keep in mind that on fixed-rate loans, you pay with the house’s money, to use a gambling term. Every year inflation rises, and that means that every year the effective payment on your mortgage DROPS. Know how we talk about “real dollars” as a way to price things? That, say, gasoline, despite its huge runup recently, is still cheap in 1975 dollars (costs less now than it did then, actually)? Well, in 2015, you’re going to be paying your mortgage with 2015 dollars, and if things go the next 7 years the way they have the last 7, that will be the equivalent of paying only $1249, a $250/mo cut in real dollars, more than 6x as much as the difference between 6% and 6.25%.

Bottom line? Don’t panic when rates rise. If you’re refinancing, just hold your cards, tell us what rate you want, and we’ll tell you when it gets there (hey, a stockbroker for mortgages – for FREE!). If you’re buying, just buy. The cost of a new heater will be 25x as much as any difference in your interest rate, so don’t waste energy on irrelevant things.

30-year rates at 6.25% this morning, although there are bonuses for credit over 720 and for larger loan sizes and for lower loan-to-value ratios, so you need to check with a pro to know where you are for sure. Bryan – still 6.125%. Hang in there.

Cj

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