Back in November, I called gold a bubble due to the fact that it’s next to useless in industrial applications, and its value is based solely on perceived value. At the time gold was trading around $1150 per ounce. I wish I had been right, but in March of last year I said the same thing at $1000. And now it’s close to $1230. I stand by my belief that its overvalued, but I was wise not to put money on it. The reasons people invest in gold are diverse, but they ultimately come back to not having faith in any one currency or asset class.
With euros and dollars being printed left and right, perhaps one of the main reasons people are heading into gold is as an inflation hedge. The latest releases on inflation do not yet point to an immediate problem. In fact, deflation is actually still a concern. However the supply of money in our economy combined with cheap credit is bound to catch up with us, about as soon as the economy starts to pick up steam. Then you’ll start to see inflation.
The Federal Reserve is supposed to protect us from runaway inflation, but our inflation is so low right now we’re not even at levels the Fed would consider “acceptable”.
This is why it’s time for you to start borrowing a boatload of money. If you can get your hands on any kind of fixed rate loan, get it. That’s a bit of an exaggeration. All I really want you to do is go get a mortgage if you’re in the market for a house. Not only are interest rates the lower they’ll be in your lifetime, but if inflation ever does happen, you’ll be glad you got in now.
If or when inflation occurs, your mortgage payments will be the same. Inflation will make everything else more expensive (including your wages), but your payments won’t budge. Let’s do a hypothetical:
You buy a $200k house, financing $160k at 4.75% with a payment of $834 per month. You make $3000 per month so your payment is 28% of your income. Assume you never get a raise for doing hard work, but only cost of living increases (inflation). If inflation is 4% a year for the next 10 years, you’ll be making $4400 per month. But your payment will still be $834, which is now 19% of your income. But if inflation is only 2% over the same period you’ll only be making $3700 per month. That’s 23% of your income (note: for those whipping out your calculators to check my math, I did some rounding). So any inflation is good in terms of freeing up money to pay down your mortgage faster.
Now this does make a number of assumptions, primarily that you do get a cost of living increase in wages. This isn’t the case for everyone, but on the whole it does work out. And of course inflation makes everything else more expensive, but hopefully your increased wages will offset that. So if you’re lucky enough to be in a position to buy a place in the next 18 months or have been thinking about a refi, you will literally not have a better opportunity in your lifetime to do so.
Now if I can just get that gold bubble to pop so y’all will know I’m always right….
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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