05/26/11 Paris, France – Not much was revealed in the markets yesterday. Everything went up. The Dow rose 38 points. The price of oil rose above $100. And gold rose too – up $3.
More evidence came in, showing that housing is weak. But no more evidence was needed.
Want to make some easy money? Buy a house! Get a DEEP discount on a distressed sale. Then mortgage the house for 30 years at a fixed rate. As big a mortgage as you can get.
The house will probably become even cheaper…but some time between today and 2041 your mortgage is sure to turn into a gift. The feds are trying to undermine the value of the dollar. Sooner or later, they’ll succeed…even beyond their wildest hopes.
Yesterday, the politicians debated proposals to stave off national bankruptcy – see below. All that was revealed was more evidence America is governed by fools and knaves; there too, no more evidence was needed.
But we have a proposal. A brave, bold proposal that will solve America’s dollar crisis and protect the integrity of America’s public finances in a single stroke.
To put it in perspective. We begin with a news item.
Robert Gates, America’s top military man, says the US will “lose influence” if budget cuts are made.
We suspect Mr. Gates is ‘talking his book.’ That is, he’s got a book the size of War & Peace with the names of people and companies that benefit from Pentagon spending. Cutting back would certainly be a bad thing from their perspective.
But would it be bad from the taxpayers’ point of view?
We will take the question in two parts. First, we wonder what, specifically, does America’s ‘influence’ do for it? We spend billions on garrisons in various remote and inconsequential parts of the world. We send troops to fight various ‘wars’ for no particular reason other than they are available to us. Presumably, we ‘influence’ people in direct proportion that we are able to give them money or spend money protecting them from rival groups.
But what good is this ‘influence?’ No explanation has ever been offered.
America’s empire has always been a catastrophe from a financial point of view. The business of empire is essentially a protection racket. The empire establishes its pax…and demands tribute in return. It makes war often…to extend its market share and loot the losers.
The US has never got the hang of it. It tortures a few people. It murders one or two. It invades. It occupies. It spends. But where is the payoff?
Some analysts claim that the imperial objective has always been the same – to keep the oil flowing at low prices. America’s civilization, such as it is, depends on it. But wait. Japan, Germany, and every other country on earth gets to buy oil too – on exactly the same terms. The US provides protection. But it gets no advantage from it.
Influence, schminfluence. This is a bad business model. The sooner the US abandons it, the better.
Now to the other part. Not only is ‘influence’ worthless…it can be maintained only so long as the US doesn’t go broke. That was bin Laden’s insight; he realized that he could reduce America’s influence by suckering it into spending money it didn’t have on a war it couldn’t win. He was right. If the US continues spending at the present rate, it will be soon out of business.
You can do the math yourself. Add a few more $1.5 trillion deficits to the national debt. In 5 years you add debt equal to 50% of GDP. Add that to the existing debt and round off at $20 trillion. Now figure an interest rate of 5%. Presto! You’ve wiped out two thirds of tax receipts on interest alone.
Even Members of Congress can see this train wreck coming. They’re talking about throwing some switches to move some of this debt to another track. Here’s the latest from The Wall Street Journal:
WASHINGTON – White House and congressional officials said Tuesday that they were moving closer to a budget deal that would make a “down payment” of more than $1 trillion in cuts to federal deficits over the next decade.
But Vice President Joe Biden said he told Republicans that they would have to back down from their position that the deal avoid tax increases.
“I made it clear today…revenues have to be in the deal,” Mr. Biden said after a Capitol meeting with congressional leaders trying to negotiate a deficit-reduction agreement. Members of both parties say such a deal is needed to win support for an increase in the federal-debt ceiling.
House Majority Leader Eric Cantor (R., Va.), a member of the bipartisan group, agreed that more than $1 trillion in cuts were within reach, but he said he remained at odds with the White House on taxes.
“This House will not support tax hikes,” Mr. Cantor told reporters after the meeting.
Hey, how do you like that? Talk. Talk. Talk. The feds claim to be getting serious about cutting spending, right?
But one trillion over 10 years? How serious is that? When you are running trillion-dollar plus deficits EVERY YEAR? If deficits were to continue at the rate of the last three years, this proposal would mean additional debt of only $14 trillion rather than $15 trillion.
Serious? Not at all.
And the most likely way the feds will finance these huge deficits will be with some version of “QE” – that is, by printing money. Which is why a 30-year, fixed-rate mortgage may be the best investment you can make.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Well said BB. It is a strange empire indeed. What colonies do we have that make money?
I like your strategy on housing and may buy in the near future. However, like stocks, you could still pick a loser in a bull market. Looking back I think the best time to buy is when interest rates are sky high and about to turn. I can’t even imagine what our society would be like with mortgage rates at 12%. It is sinking at 5%.
Cheers.
Pretty much was banking on the mortgage becoming worthless clear back in 2007 when we bought a house. Fixed rate, after a refi all the way down to 4.875% and the house had been on the market 14 months when we bought it, having already dropped 22% from the original price in late 2005. Turns out the value of the house has dropped another 15% since we bought it, all but wiping out our down payment. We have about as much equity as the cost of a roll of paper towels. BUT…. It is a fixed rate mortgage, and so the monthly mortgage payments can be viewed as nothing more than rent payments until the day arrives when the postage stamp costs more than the mortgage payment contained within the envelope.
At that point, we’ll be “renting” from the county, the city, and every other taxing authority who can catch a ride on my coat tails. Once insurance is added on to cover the risk of tornados that no longer damage a neighborhood but instead wipe-out entire zipcodes in a single 3 minutes of terror…. And about then the realization will occur that I will never really own the place. There will always be someone lining up to take a piece of me in exchange for the privilege to live under a roof. Just the nature of things. Never the less, it will feel good to be able to one day tell the banks to shove it, and at least put that part of the home ownership racket behind me.
Yeah, ultimately we are all renters. I pay $455 a year for my irrigation water and there is no way out of that. You CAN beat the banks, but not the state.
And then the state started feeding the banks…
Talk about really never owning your home.
Here in Upstate NY property taxes run +-$4k/$100k. We always get talked up for how much house you get for the money. But, the reality is a $300,000. nice house has a $12,000./year never ending but always increasing payment.
Great article Mr. Bonner – and achieved with simple arithmetic. I agree with you and the feed backs that understand, in an inflationary world, being in debt is a wise investment.
Buying, selling, investing, sex; timing is everything.
Yep agree that taxes really make property investment look bad even at cheap prices.U
In a parallel universe, Obama hired Bin Laden and “took out” Bernanke. Now if someone can just figure out how to build a worm hole between universes. I