Sunday, April 21, 2013

A Profound Mass Illusion

A few years ago, vast numbers of people in many parts of the world believed in unison that real estate prices could only go up, despite this belief defying real estate market history. Inevitably after running up prices, those prices crashed, and we are still feeling the severe effects today.

Now vast numbers of people in many parts of the world believe interest rates will remain near zero in stronger economies and they are basing their investments and their savings plans accordingly.

In the U.S. that belief of near zero interest rates and gargantuan printing of currency is so strong, that the government is basing the rapid growth of its national debt upon it. It can continue to borrow and spend huge sums it doesn't have because the cost of borrowed money is so cheap.

This could become a huge mistake, for when interest rates do rise, as history tells us they will, the government's debt could be ensnared in a debt payment spiral, forcing either higher taxes and/or the printing of even more currency to pay for all of its prior borrowings, let alone those that might be necessary going forward.

The option of higher taxes potentially could crush the economy and the option of even higher currency printing could set off spiraling inflation.

For now, U.S. politicians by their actions don't see any risk of interest rates spiking upward and operate accordingly. But do take heart dear reader, for politicians respond to crisis' and they will respond when the immense problems of which they are sowing the seeds do manifest themselves as a financial crisis.

In the meantime, if possible, please don't over extend yourself in the current economic climate.



beachfnt said...

Thank you for posting this informative piece! Just like the recent housing crash and the equity crash that lead to the Great Depression, those who had prepared (for what seemed obvious to a precious few) were well positioned to not only survive but thrive in the market. While there was terrible suffering, there were also fortunes made during these times of turmoil.

Taking precautions seem like an obvious at this point. Even if the crash doesn't occur for 10 years.

Thank you again!

Dick Kazan said...

Dear Reader,

My son Kyle, a successful real estate investor and property manager, as beachfnt posted insight comments.

It may take years before we see the full impact of today's heavy government borrowing at near zero interest rates and the vast production of cheap money, but it will have consequences.

The real estate price collapse that began in 2007 and continued until 2012 took about five years to build, all the while people assuming real estate could no longer lose value.