Wednesday, January 11, 2006

We Will Soon be Paying for Our Profligate Ways

Now is a good time to shed your debt and if you’ve been thinking about selling real estate you own now is the time. If China, as reported by the Washington Post and others, does in fact reduce its purchase of U. S. debt interest rates will rise and the value of the dollar will drop. If Japan, Korea, and oil exporting nations begin to do the same the effects will be all the worse.

7 comments:

Anonymous said...

If the value of the dollar drops.....it might be a good idea to borrow dollars now......that way when you have to pay them off in the future it will cost less becuase the dollar is worth less......Of coarse if you follow this strategy you have the daily hassle of having debt hanging over your head so you have to work....but from this point of view....going into debt in times preceeding inflation can be a money making strategy.

You Know Me said...

I don't understand; but, then again, I'm fairly ignorant on the subject. If the dollar is worth less in the future it seems it will require more dollars than you borrow today to pay back what you've borrowed. It seems to me that if you borrow a dollar today and tomorrow the value of the dollar drops to 50% of its value today then it will require two dollars to pay back the one dollar you borrowed today.

I agree that perhaps borrowing makes sense during times of inflation, but doesn't the inflation rate generally decrease as interest rates increase and reduce economic activity, jobs, and etc.? Rising interest rates will be good for those with cash to invest but bad for those borrowing.

Am I wrong?

Anonymous said...

Of coarse if you borrow dollars today it would only make sense to convert them out of dollars to for example a house or a car. If inflation occurs the house or car will cost less since you are paying with future dollars that are worth less than when you purchased the "real" property.

Another strategy is to purchase foriegn dollars with the american dollars that you have borrowed. And then in the future sell the foriegn dollars and buy back american dollars...This would yield more american dollars then you borrowed if the dollar fell in relation to the foriegn dollars.

mb

mb

Anonymous said...

I'm a little late reading this, but believe you are wrong about decreasing debt if interest rates rise. All other things being equal, interest rates rise along with inflation. It is an over simplification, but that is why rates rise. As inflation begins to increase, people/countries/investors demand more interest in compinsation for their money being worth less. Why would you ever loan money for less than the inflation rate; do so and you are actually losing money.

Of course if our federal fiscal insanity continues, it's hard to say what we end up with. Because of a reckless Greenspan and the overprinting of money to help the overspending by government (Bush) for a reckless war while giving tax breaks - we are all likely screwed.

NL

You Know Me said...

Again I am fairly ignorant on this subject and probably should not even be addressing it, but you know me.

As far I as am able to understand you are correct. Inflation and interest rates generally track. Lenders build an inflation expectation factor into the interest rates they offer. As interest and inflation rates increase one had better hope that her or his income increases with the inflation rate. As I understand real incomes have been declining somewhat in recent years.

My poorly enunciated point was that those who support there lifestyle with consumer debt will be well advised to shed debt.

If foreign governments stop buying U. S. debt instruments the government will have to raise the interest rates they offer on those instruments to continue financing the huge federal debt; and, I read, the value of the dollar will decline.

From what I have read on the subject, rising interest rates will slow general economic growth, as businesses borrow less to expand their businesses; and will put a dent in the housing and refinancing markets which have been driving a large part of the economy in recent years. Consequently unemployment will rise.

Additionally, as the value of the dollar drops the costs of imported consumer goods rises, thus reducing imports and reducing consumer spending. Consumer spending represents a huge portion of economic activity. As consumer spending declines unemployment rises.

There are lots of folks in the U. S. who are so far into debt that the loss of their job will push them over the financial edge (if I’m not mistaking personal debt relative to income is at an all time high). Foreclosures will rise and real estate values will decline, really putting the screws to the millions of folks who have taken out interest only mortgages.

Again, please correct me if I’m wrong.

Anonymous said...

I agree with on this post. Bernanke is stuck between a rock and a hard spot - created by Greenspan. As interest rates rise, I don't think it will be less business spending but a crushed housing market that will create a downturn. It's not a clean cause and effect, but more complicated as those with ARM's get spanked bad. Some will need to sell putting preasure on prices. Speculators will abandoned housing for something new, putting yet more preasure on housing. Meanwhile higher energy and interest rates squeeze home buiders. They stop building. All of a sudden many are underwater on their loans. No more financing spending habits when that happens - so they sell their homes. It could get ugly because.......as you said.....because people are at record debt levels.

On an unrelated subject. Roberts! Sided with the Supreme Court Wackos, Scalia and Thomas siding with Ashcroft on a minority opinion. This is an awful sign for two reasons; state vrs. federal rights and personal freedom. The case of course is the Oregon Right To Die with dignity. The right decision came from the courst but it seems Roberts will live up to everyone's worst fears.

NL

You Know Me said...

I hadn't read who voted how on the Oregon right to die case. When Alito is added we can look forward to years and years of decisions enhancing federal and presidential authority. Fascism is on the march.

Here's a link to a USA Today article indicating that 43% of first time home buyers do not make down payments and suggesting a coming collapse of the housing market and a drop in real estate values. It's a good time to sell if one has been contemplating such.
http://www.usatoday.com/money/perfi/housing/2006-01-17-real-estate-usat_x.htm