Monetary Policy and Me
March 20, 2006 6:50 AM Subscribe
I'm not afraid of bird flu. I'm afraid of waking up broke one day. How do I avoid this?
I'm slowly starting to digest some of the effects of monetary policy - particularly that of the United States over the last five years. I've read in various places that a large bit of America's debt is held by foreign entities. I've also read that monetary policy has been to simply print more paper money to stimulate the economy and avoid a recession.
Though I'm not expert, it would seem that these two things work to devalue the dollar. I'm sure that the American government would have us believe that it will never default on it's obligations and that the dollar will always be there. But anything's possible, right?
Didn't something happen in Argentina recently where the currency devalued so fast that the whole country was in anarchy? Utlimately, how can I shelter some of my assets in case the Armerican economy goes to hell in a handbasket? Buy euros? Keep them in a European bank?
I'm slowly starting to digest some of the effects of monetary policy - particularly that of the United States over the last five years. I've read in various places that a large bit of America's debt is held by foreign entities. I've also read that monetary policy has been to simply print more paper money to stimulate the economy and avoid a recession.
Though I'm not expert, it would seem that these two things work to devalue the dollar. I'm sure that the American government would have us believe that it will never default on it's obligations and that the dollar will always be there. But anything's possible, right?
Didn't something happen in Argentina recently where the currency devalued so fast that the whole country was in anarchy? Utlimately, how can I shelter some of my assets in case the Armerican economy goes to hell in a handbasket? Buy euros? Keep them in a European bank?
If we go down, they go down. If the dollar becomes worthless, then all those Europeans and Japanese holding dollar-denominated bonds are going to be in big trouble, too. In this hypothetical monetary meltdown, you are best off having a hoard of valuable non-money objects. Many scamsters will try to sell you gold or silver based on just this scenario. Personally, I think guns, ammo, waterproof tents, and water purification tablets would be more valuable should it come to that.
I've also read that monetary policy has been to simply print more paper money to stimulate the economy and avoid a recession.
I'm not sure that's accurate. We don't print money to stimulate the economy, we just deficit-spend like a madman. (Which has a similar effect).
posted by profwhat at 7:15 AM on March 20, 2006
I've also read that monetary policy has been to simply print more paper money to stimulate the economy and avoid a recession.
I'm not sure that's accurate. We don't print money to stimulate the economy, we just deficit-spend like a madman. (Which has a similar effect).
posted by profwhat at 7:15 AM on March 20, 2006
I'd like to second what profwhat has said, and add a thought of my own. If you're concerned about the economy suffering some sort of meltdown (hyperinflation followed by massive shortages, etc) - you're best bet is to get out of the country well in advance. IMO - life on an island where you fill a niche in the local economy would be the way to go.
It's a good bet that if America somehow self-destructed, that European and Asian economies would suffer some significant setbacks. Also, consider that America (like most countries) would very likely explore military options before sliding into ruinous chaos... another good reason to be out of America, Europe, and major Asian countries.
Personally, I don't think any of the above is likely... I'm just thinking out loud about worst case economic disasters. On the other hand - if it's a lighter weight American economic downturn that we're anticipating - then boning up on foreign investing mutual funds could help hedge your bets.
posted by machinecraig at 7:29 AM on March 20, 2006
It's a good bet that if America somehow self-destructed, that European and Asian economies would suffer some significant setbacks. Also, consider that America (like most countries) would very likely explore military options before sliding into ruinous chaos... another good reason to be out of America, Europe, and major Asian countries.
Personally, I don't think any of the above is likely... I'm just thinking out loud about worst case economic disasters. On the other hand - if it's a lighter weight American economic downturn that we're anticipating - then boning up on foreign investing mutual funds could help hedge your bets.
posted by machinecraig at 7:29 AM on March 20, 2006
We don't print money to stimulate the economy, we just deficit-spend like a madman.
Actually we do both, if by printing money you mean lowering the prime rate to increase the money supply.
There's no such thing as a completely risk-free investment. Even precious metals have wildly fluctuated in value. Aluminum was considered a precious metal at one time.
The safest thing is to diversify-- keep some in US$, stock index funds, and real estate should insulate you from all but total economic collapse. In that scenario, I guess guns and butter.
posted by justkevin at 8:03 AM on March 20, 2006
Actually we do both, if by printing money you mean lowering the prime rate to increase the money supply.
There's no such thing as a completely risk-free investment. Even precious metals have wildly fluctuated in value. Aluminum was considered a precious metal at one time.
The safest thing is to diversify-- keep some in US$, stock index funds, and real estate should insulate you from all but total economic collapse. In that scenario, I guess guns and butter.
posted by justkevin at 8:03 AM on March 20, 2006
You are right to be worried. There is an economic high-wire act going on at the moment. No-one knows how it will turn out.
In the case of fiscal catastrophe, you want hard assets that are either useful or extremely liquid.
* Unmortgaged real estate is extremely useful if interest rates go through the roof (which they may do if the dollar has to be propped up against currency speculators). Rents will follow mortgages so renting doesn't help you in the long run. On the other hand *buying* right now is not a particularly good idea as we are probably close to the top of the market. However if you have mortgage debt, paying it down is a great investment (more so if you are out of the US). Alternatively, cash out of the real estate market and put your money in a safe harbour.
* Precious metals and so on, especially gold, are a traditional safe harbour for your assets in these circumstances. That is why gold is on a huge run at the moment.
* If the shit really does hit the fan, do you have useful skills? If your job disappears, and your assets disappear, is there something else you can do?
posted by unSane at 8:04 AM on March 20, 2006
In the case of fiscal catastrophe, you want hard assets that are either useful or extremely liquid.
* Unmortgaged real estate is extremely useful if interest rates go through the roof (which they may do if the dollar has to be propped up against currency speculators). Rents will follow mortgages so renting doesn't help you in the long run. On the other hand *buying* right now is not a particularly good idea as we are probably close to the top of the market. However if you have mortgage debt, paying it down is a great investment (more so if you are out of the US). Alternatively, cash out of the real estate market and put your money in a safe harbour.
* Precious metals and so on, especially gold, are a traditional safe harbour for your assets in these circumstances. That is why gold is on a huge run at the moment.
* If the shit really does hit the fan, do you have useful skills? If your job disappears, and your assets disappear, is there something else you can do?
posted by unSane at 8:04 AM on March 20, 2006
Didn't something happen in Argentina recently where the currency devalued so fast that the whole country was in anarchy?
That happens fairly often in Argentina, and in a whole slew of other countries with unstable economies. If you're really concerned about the U.S. going the same way, you should research those countries, and how the wealthy manage to stay wealthy with economy shifting around beneath them.
However, "the U.S. economy is going to collapse" has been a constant refrain for two hundred years now. The fact is that national finances are a very obscure and frequently non-intuitive field (for example, why would the U.S. ever have a debt when it is capable of printing money? Would you go into debt with a currency printing press in your basement?), and frankly I doubt anyone has a solid grasp of how it all really works.
As it happens, the U.S. has been affected by one great pandemic and one great financial crisis in its history. We're about as likely to be afflicted by either again, so if you're going to live your life on the defensive I'd suggest you try to protect against both.
posted by tkolar at 10:07 AM on March 20, 2006
That happens fairly often in Argentina, and in a whole slew of other countries with unstable economies. If you're really concerned about the U.S. going the same way, you should research those countries, and how the wealthy manage to stay wealthy with economy shifting around beneath them.
However, "the U.S. economy is going to collapse" has been a constant refrain for two hundred years now. The fact is that national finances are a very obscure and frequently non-intuitive field (for example, why would the U.S. ever have a debt when it is capable of printing money? Would you go into debt with a currency printing press in your basement?), and frankly I doubt anyone has a solid grasp of how it all really works.
As it happens, the U.S. has been affected by one great pandemic and one great financial crisis in its history. We're about as likely to be afflicted by either again, so if you're going to live your life on the defensive I'd suggest you try to protect against both.
posted by tkolar at 10:07 AM on March 20, 2006
There is no way to guarantee anything you buy today (cash, stocks, bonds, gold, etc) will be worth anything tomorrow. The best practise is the same thing your mother probably told you when you were young: 'Don't keep all your eggs in one basket'.
If you've got money to invest, invest in a range of different areas and that's as safe as you're ever going to be.
There's really not much of anything you can do to prepare for the collapse of the economy that doesn't in fact destabilize the economy further.
posted by tiamat at 10:51 AM on March 20, 2006
If you've got money to invest, invest in a range of different areas and that's as safe as you're ever going to be.
There's really not much of anything you can do to prepare for the collapse of the economy that doesn't in fact destabilize the economy further.
posted by tiamat at 10:51 AM on March 20, 2006
If you're concerned about losing ground relative to people in other countries, you could get a CD or an account denominated in foreign currencies. I've thought about doing this, but I've never gotten around to it. I think you lose some money on the fees.
posted by landtuna at 1:00 PM on March 20, 2006
posted by landtuna at 1:00 PM on March 20, 2006
Don't believe the hype. Anyone who says the U.S. is headed for disaster has something to sell you -- whether it's gold, canned tuna or just breathless, sensational prose. Step back, take a deep breath and ponder the enormous size and complexity of the U.S. economy.
posted by frogan at 3:18 PM on March 20, 2006
posted by frogan at 3:18 PM on March 20, 2006
I know some people investing heavily in Euros for just this reason....
posted by salvia at 5:50 PM on March 20, 2006
posted by salvia at 5:50 PM on March 20, 2006
Euros? Forget that, the U.S. is going to drag Europe down with it.
If you're expecting western civilization to collapse, the Chinese Yuan is the place to be.
posted by tkolar at 6:03 PM on March 20, 2006
If you're expecting western civilization to collapse, the Chinese Yuan is the place to be.
posted by tkolar at 6:03 PM on March 20, 2006
"If you're expecting western civilization to collapse, the Chinese Yuan is the place to be."
Except that the Yuan is tied to the dollar (and a basket of other currencies, but mainly to the dollar).
posted by afu at 6:55 PM on March 20, 2006
Except that the Yuan is tied to the dollar (and a basket of other currencies, but mainly to the dollar).
posted by afu at 6:55 PM on March 20, 2006
Except that the Yuan is tied to the dollar (and a basket of other currencies
Which is exactly why you shouldn't be worried about an incipient collapse of the dollar.
posted by frogan at 7:08 PM on March 20, 2006
Which is exactly why you shouldn't be worried about an incipient collapse of the dollar.
posted by frogan at 7:08 PM on March 20, 2006
afu writes...
Except that the Yuan is tied to the dollar
Yeah, and how long do you expect that to last if the dollar collapses?
The Chinese economy appears to have gained some very solid footing in the last fifteen years. Admittedly their export market would suffer heavily if Europe and the U.S. weren't buying, but I would venture to say that they're fully capable of withstanding a western meltdown.
posted by tkolar at 7:46 PM on March 20, 2006
Except that the Yuan is tied to the dollar
Yeah, and how long do you expect that to last if the dollar collapses?
The Chinese economy appears to have gained some very solid footing in the last fifteen years. Admittedly their export market would suffer heavily if Europe and the U.S. weren't buying, but I would venture to say that they're fully capable of withstanding a western meltdown.
posted by tkolar at 7:46 PM on March 20, 2006
However if you have mortgage debt, paying it down is a great investment
If you have a fixed-rate mortgage, and you're expecting hyperinflation, paying it down is the worst thing you could do. Better to be a debtor than a creditor when inflation hits. Those of you with ARMs should have refinanced already, but it's not too late.
If the US economy crashes, everywhere crashes, and life isn't going to be pleasant for anyone who doesn't own their own island. So you can adopt a survivalist mode now, and live in a Montana cabin with a hoard of food and water and gems and be just as crappy off no matter what the economy does, or you can live your life normally, get a diversified portfolio, and be in the same boat as everyone else.
(And wealthy Argentinians stay wealthy by keeping their wealth in dollars or other stable currency. That doesn't help someone who thinks the US is going to crash.)
posted by commander_cool at 5:23 PM on March 23, 2006
If you have a fixed-rate mortgage, and you're expecting hyperinflation, paying it down is the worst thing you could do. Better to be a debtor than a creditor when inflation hits. Those of you with ARMs should have refinanced already, but it's not too late.
If the US economy crashes, everywhere crashes, and life isn't going to be pleasant for anyone who doesn't own their own island. So you can adopt a survivalist mode now, and live in a Montana cabin with a hoard of food and water and gems and be just as crappy off no matter what the economy does, or you can live your life normally, get a diversified portfolio, and be in the same boat as everyone else.
(And wealthy Argentinians stay wealthy by keeping their wealth in dollars or other stable currency. That doesn't help someone who thinks the US is going to crash.)
posted by commander_cool at 5:23 PM on March 23, 2006
If you have a fixed-rate mortgage, and you're expecting hyperinflation, paying it down is the worst thing you could do. Better to be a debtor than a creditor when inflation hits. Those of you with ARMs should have refinanced already, but it's not too late.
Bzzzzt!! It's not hyper-inflation that is likely to be the problem, but high interest rates. Most people on fixed-rate mortgages are locked-in for a fairly short term. I've lived through two housing crashes.
In the first, during the late 1970s, interest rates went to extraordinary heights *for many years*, way beyond the 3-5 fixed terms that most mortgagees have right now.
In the second, mortgage lending had been liberalized and house inflation was taken for granted, so thousands of people were sitting on 95% mortgages having bought at the top of the market (sound familiar?). The result was massive negative equity, which means you can't sell your home and have to keep paying the mortgage even if you can't afford it. This is a horrible position to be in.
Mortgage debt is a great debt to pay down. Just check out the spread between the interest rate you pay on your mortgage debt and the return you get on your investments.
posted by unSane at 10:40 PM on March 23, 2006
Bzzzzt!! It's not hyper-inflation that is likely to be the problem, but high interest rates. Most people on fixed-rate mortgages are locked-in for a fairly short term. I've lived through two housing crashes.
In the first, during the late 1970s, interest rates went to extraordinary heights *for many years*, way beyond the 3-5 fixed terms that most mortgagees have right now.
In the second, mortgage lending had been liberalized and house inflation was taken for granted, so thousands of people were sitting on 95% mortgages having bought at the top of the market (sound familiar?). The result was massive negative equity, which means you can't sell your home and have to keep paying the mortgage even if you can't afford it. This is a horrible position to be in.
Mortgage debt is a great debt to pay down. Just check out the spread between the interest rate you pay on your mortgage debt and the return you get on your investments.
posted by unSane at 10:40 PM on March 23, 2006
unSane seems not to understand what a "fixed-rate mortgage" is, as the scenario he describes is one involving adjustable-rate, not-fixed-rate mortgages. A mortgage where there is a "3-5 fixed term" is not a fixed-rate mortgage, it is (at best) a 5/1 ARM.
I have a fixed-rate mortgage, and interest rates could go through the roof to three-digit levels, and I'm only contractually obligated to pay 5.25% for the remainder of the mortgage. If interest rates do go way up, I'm much better off not paying off my mortgage (where my return, by definition, is only 5.25%) and instead investing the money elsewhere (where, presumably, my returns will reflect the fact that interest rates have gone way up because there is so much more demand for money than there is money to borrow).
In short, I'm right and unSane is wrong. If you have a fixed-rate mortgage, and you think interest rates are going up, paying off your mortgage is a dumb idea. If you have an ARM, and you think interest rates are going up, refinance to a fixed-rate, since you're probably not going to be able to pay off the entire mortgage from cash sitting around. (Of course, if you think interest rates are going up, why were you so stupid as to get an ARM in the first place?)
posted by commander_cool at 7:48 PM on March 24, 2006
I have a fixed-rate mortgage, and interest rates could go through the roof to three-digit levels, and I'm only contractually obligated to pay 5.25% for the remainder of the mortgage. If interest rates do go way up, I'm much better off not paying off my mortgage (where my return, by definition, is only 5.25%) and instead investing the money elsewhere (where, presumably, my returns will reflect the fact that interest rates have gone way up because there is so much more demand for money than there is money to borrow).
In short, I'm right and unSane is wrong. If you have a fixed-rate mortgage, and you think interest rates are going up, paying off your mortgage is a dumb idea. If you have an ARM, and you think interest rates are going up, refinance to a fixed-rate, since you're probably not going to be able to pay off the entire mortgage from cash sitting around. (Of course, if you think interest rates are going up, why were you so stupid as to get an ARM in the first place?)
posted by commander_cool at 7:48 PM on March 24, 2006
I understand perfectly well what a fixed rate mortgage is.
In the real world of (currently) extremely low interest rates people generally take out N-year fixed rate mortgages, where the rate is fixed for a specific term and then either floats or can be fixed again at a new rate (or whatever the product terms stipulate).
You do not address my central point which is that *the housing market is quite likely to crash* if interest rates are raised to protect the US Dollar, which is the *most likely scenario* since the key for the US is to keep its debt attractive to foreign investors.
In this scenario sitting on a big lump of negative equity because you bought at the top of the market is a terrible place to be.
I know people this happened to the last time. It took a decade before housing prices caught up with where they were before the crash.
posted by unSane at 6:27 AM on March 25, 2006
In the real world of (currently) extremely low interest rates people generally take out N-year fixed rate mortgages, where the rate is fixed for a specific term and then either floats or can be fixed again at a new rate (or whatever the product terms stipulate).
You do not address my central point which is that *the housing market is quite likely to crash* if interest rates are raised to protect the US Dollar, which is the *most likely scenario* since the key for the US is to keep its debt attractive to foreign investors.
In this scenario sitting on a big lump of negative equity because you bought at the top of the market is a terrible place to be.
I know people this happened to the last time. It took a decade before housing prices caught up with where they were before the crash.
posted by unSane at 6:27 AM on March 25, 2006
I understand perfectly well what a fixed rate mortgage is.
In the real world of (currently) extremely low interest rates people generally take out N-year fixed rate mortgages, where the rate is fixed for a specific term and then either floats or can be fixed again at a new rate (or whatever the product terms stipulate).
The first paragraph is inconsistent with the second paragraph, which is not describing a fixed-rate mortgage, but the opposite of a fixed-rate mortgage, called an adjustable rate mortgage (or ARM). An ARM with an N-year fixed-rate adjustable once a year at the end of the term is an N/1 ARM, but it's still not a fixed-rate mortgage. It's like being a little bit pregnant: either your mortgage is adjustable rate or fixed rate, but it's not both. A fixed rate mortgage is fixed for the entire term of the mortgage.
In any event, I know many people (including myself) who locked in low interest rates by getting a true fixed-rate mortgage that doesn't adjust.
In this scenario sitting on a big lump of negative equity because you bought at the top of the market is a terrible place to be.
Then the answer is to sell and rent, not to throw good money after bad and pay off a fixed-rate mortgage. If interest rates go up, I'm much better off paying my 5.25% mortgage on schedule and using the extra money on investments that pay higher than 5.25%. If, on the other hand, I've paid off my mortgage, I have no spare cash, and my only asset is this depreciating equity that you just told me to blow my life's savings on.
I also don't know where you get the idea that interest rates will be raised to protect the dollar: every politician talking about exchange rates is complaining that the dollar is overvalued and asking other countries (e.g., China) to change exchange rates to make the dollar weaker against the foreign currency.
Anyway, if I'd followed your advice, I'd really be screwed: my stocks are up 5% since this thread began. Yay, Overstock.com short squeeze!
posted by commander_cool at 9:13 PM on March 27, 2006
In the real world of (currently) extremely low interest rates people generally take out N-year fixed rate mortgages, where the rate is fixed for a specific term and then either floats or can be fixed again at a new rate (or whatever the product terms stipulate).
The first paragraph is inconsistent with the second paragraph, which is not describing a fixed-rate mortgage, but the opposite of a fixed-rate mortgage, called an adjustable rate mortgage (or ARM). An ARM with an N-year fixed-rate adjustable once a year at the end of the term is an N/1 ARM, but it's still not a fixed-rate mortgage. It's like being a little bit pregnant: either your mortgage is adjustable rate or fixed rate, but it's not both. A fixed rate mortgage is fixed for the entire term of the mortgage.
In any event, I know many people (including myself) who locked in low interest rates by getting a true fixed-rate mortgage that doesn't adjust.
In this scenario sitting on a big lump of negative equity because you bought at the top of the market is a terrible place to be.
Then the answer is to sell and rent, not to throw good money after bad and pay off a fixed-rate mortgage. If interest rates go up, I'm much better off paying my 5.25% mortgage on schedule and using the extra money on investments that pay higher than 5.25%. If, on the other hand, I've paid off my mortgage, I have no spare cash, and my only asset is this depreciating equity that you just told me to blow my life's savings on.
I also don't know where you get the idea that interest rates will be raised to protect the dollar: every politician talking about exchange rates is complaining that the dollar is overvalued and asking other countries (e.g., China) to change exchange rates to make the dollar weaker against the foreign currency.
Anyway, if I'd followed your advice, I'd really be screwed: my stocks are up 5% since this thread began. Yay, Overstock.com short squeeze!
posted by commander_cool at 9:13 PM on March 27, 2006
This thread is closed to new comments.
posted by jonesor at 7:09 AM on March 20, 2006