If It Breaks

A Mortgage Is An Investment If The Dollar Breaks And Interest Rates Soar

I'm in the process of moving my financial writings from my old Foner Books website to this site.

My perspective on finance is that of a self employed sole proprietor who hasn't held a "real" job in nearly twenty years. My educational background was in engineering. After working for a few years years as an engineer, I went back to school for an MS in Electrical Engineering, but other than a little consulting, I've never done any engineering work since.

But my approach to writing about finance is that of an engineer. I look at issues such as interest rates, taxes and the Federal Reserve bank printing trillions of dollars, as inputs to an equation that nobody can really wrap their mind around. Yes, it's clear to everybody that inflation must follow dollar printing, but where is it? I'm paying around 50% more for food than I did ten years ago, but it doesn't show up that way in the official government numbers.

The Japanese have been printing money for almost two decades, yet they've seen far more deflation than inflation. Their secret? I think it comes down to the fact that 95% of Japan's government debt is purchased by Japanese, so Japanese savers are happy with deflation as it's the only return they get on their savings.

The situation in the U.S. diametrically opposed to that of Japan. We sell most of our debt overseas, though last year, the Federal Reserve was the biggest buyer, "printing" roughly a trillion dollars to purchase Treasuries. We call this "monetizing the debt." And there's nothing you or I, as American citizens, can do about it. We can't even vote the bums out because they aren't elected, and whoever does get elected will be too frightened to make any changes.

The Japanese stock market is around a quarter of the level it was twenty years ago when their real estate and stock market bubbles burst. The U.S. stock market is less than 20% off its all time high, and although I'm short the DOW, in a sick way, it's logical to plow money into stocks when the government is so dedicated to breaking the dollar. But what will happen when the dollar finally does break?

And I believe that the term "investment" is thrown around by people without thinking about what it means. To me, stocks, unless you own enough shares to get a seat on the board, aren't an investment. You have no control of whether the company is going to pay the CEO $100 million dollars for issuing bonds or otherwise borrowing money to buy other overpriced companies and juice the earnings. An investment is when you build an addition on your home and rent it out.

People think bonds are a safe investment, and then they buy bond funds. Bond funds are not a stand-in for bonds. If you buy a bond from the government or a company, you know that as long as the government or the company doesn't default, they will pay your interest and return the principal. When you buy a bond fund, it's like buying a stock. The fund shares are worth what people feel like paying for them that day. When interest rates rise, the value of the underlying bonds plummets, and the share price of the bond fund falls even faster.

Cash? Well, if you live in Japan, cash is a fine investment, but in America, inflation is a growing fact of life. And there are no safe options for savings that keep up with the reported inflation rate, which is woefully understated. If you want to own a home, or a bigger home, you're almost certainly better off locking in a 30 year mortgage at 4%, paying the bank and getting a tax break, rather than leaving your money in the bank, getting a trivial interest rate, and paying taxes on it.

Gold? I own some shares in the iShares gold trust and they've done very well for me. But the governments of the world can crash the price of gold any day simply by announcing the intend to start selling their reserves - they don't even have to pull the trigger. Gold is an emotional purchase, a hedge for if the financial system breaks apart.

But rather than ranting about this and that, I hope stick with explaining the nitty-gritty of finance that many people are weak on, such as mortgages, interest rates and taxes.

If It Breaks Home | Contact