Hedging Hyperinflation With Fixed Rate Mortgages
Now is the time for patriotism and embracing the American dream of becoming overly indebted! Consumer debt won’t cut it. If you think modern patriotism is heading to the mall and furiously swiping plastic for big screen TVs, iPods, iPads, iPhones, and other iJunk (not a hit on AAPL, just got a little too poetic), then you’re way too old fashioned. Think bigger…
The US dollar is in a death spiral. Sure, we have had temporary respite from USD declines relative to other currencies, but relative to gold and general purchasing power, the dollar is doomed. Since 1920, the dollar is down 94% in purchasing power:
That’s just the start. As of March, 2010 the revised 2009 federal budget deficit measured in GAAP accrual accounting methods reached $4.3 trillion. Total GAAP-based obligations for the federal government (at the end of 2009) totaled $71 trillion. ShadowStats estimates a looming $9 trillion real federal deficit in 2010. For how much longer can the government spend trillions of dollars they don’t have? The only future recourse will be to create lots and lots of new dollars to pay the bills.
There are far more eloquent advocates of hyperinflation than I, so that’s as far as I head down that path. Rather, let me merely suggest that its risk is sufficient to consider hedging.
Traditional inflation hedges include gold, silver, commodities, Treasury Inflation Protected Securities (TIPS), and corporate equities. I briefly touched on each of these in an earlier article: What If You Don’t Trust The Government With Your Portfolio?
While advising a client this week on whether or not to buy an investment property in the South Bay, I caught myself explaining the benefits of a fixed rate mortgage as a hyperinflation hedge. The light bulb in my head clicked and I quickly realized that everyone who can afford it should take on a good amount of fixed rate debt while rates are low. Despite real estate prices in Manhattan Beach continuing a prolonged downward trend, the asset diversification and hyperinflation hedging potential of a tax-subsidized, income producing property in a high demand rental location has its merits.
Depending on how badly the government and Federal Reserve mess up the dollar, borrowing large quantities at fixed, historically low rates now might be the bet of the century! There’s a significantly increasing probability that the $500,000 you borrow today at a fixed 4.75% rate might be equivalent to the cost of a loaf of bread in 10 years. You might one day find yourself wandering down the bread isle of your local grocery store and stop yourself to think, “Should I stock up on another loaf of bread, or pay off my mortgage today?”
The benefit of real estate debt versus other forms is that it is the most readily and abundantly available for the average person. Try to get a $500,000 loan to buy a car, or an case of iPads…it’s not going to happen. But anyone with a decent credit score, a job, and proven ability and desire to make payments can buy a house with a mortgage. Income properties buy down even more risk in that a cash flow stream is generated to offset debt service and operating expenses. Finally, real estate is (theoretically, and in the long haul) an appreciating asset. iPads have a much smaller and finite lifespan-they depreciate over time. If inflation gets bad, nominal real estate prices will go up.
It is sad that one of the best reasons I can come up with to buy real estate now is to protect yourself from the scourges of Keynesian-Kool-Aid-Drinking politicians and they’re collaborators heading up central banks around the world! While they destroy the world’s major fiat currencies (and our savings) one of the best protections is to hold a fixed rate mortgage that can one day be paid off for the price of a loaf of bread.
DISCLAIMER: Make sure you can afford the mortgage! I am not advocating the assumption of quantities of debt that will bankrupt you as soon as the payments begin. Rather, prudently consider your financial condition: income, risk of income disruption, current liabilities, and comfort levels with servicing debt.