The Up Side of Being Upside Down
Posted by Lise on 18 Jun 2008 at 06:30 pm | Tagged as: economics, personal finance
My friend Django brightened my day with this point about my weighty mortgage:
The other thing I was going to console you with is that, with the markets in the state they’re in, your financial position is actually perfect. [You're] heavily leveraged, i.e. a debt-to-net-worth ratio of close to 1.
The most likely result of a market crash is inflation as the fed pumps ever-more money into the economy… ditto tax relief, etc. In any inflationary situation, the ideal place to be is in debt up to your eyeballs, with the money from that invested in real assets (i.e. not credit card debt), since, as inflation pushes up prices and salaries, the amount of debt relative to income goes down. In the worst-case scenario (China dumps US currency, runs on the dollar, hyper-inflation) your debt becomes meaningless and you get a free house.
Conversely, in that worst-case scenario, the place you DONT want to be is holding bonds, pensions, or other fixed-income instruments (or just dollars) - because if a loaf of bread now costs $10,000, your pension isn’t worth very much.
This is what happened to Germany in the 30s (which they engineered deliberately, to get out of their debts to England and France) or Russia accidentally in the 90s, after they lost most of the countries money to a pyramid scheme.
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This is a very important point that most people don’t understand. Having $100 doesn’t give you any assurance of what that $100 will buy next year.
Hi Mark! I’ve been a fan of your blog for a while, so I’m delighted to see you made it to mine! Nice to see this one struck a chord with you.
Yeah, but what happens when your income doesn’t rise more than inflation — as is extremely common right now?
You’re still up to your eyeballs in debt, but now you can afford even less because everything costs more, including necessities like food.
I’d rather have the pension than a house I can’t afford because the price of food has gone up (along with property taxes, gas, and everything else) while my income has stopped short of keeping up with inflation. Sure, I could sell it, but that’s assuming that I could find a buyer at a time when there may be a lot of other people in the same situation.
Hmmmm….Sounds sort of like now, except it could get much worse.