Hard Truth Week in Review – Uncertain Recovery Edition

October 4, 2009 by  
Filed under Blog

Chicago’s rejection by the U.S. Olympic Committee may be a metaphor for what’s happening with our economy: our belief that we were in the early stages of recovery was actually wishful thinking.  The terrible news about unemployment continues unabated by the effects of stimulus spending.  As the Penny Jobs blog wrote this week, a jobless recovery is no recovery at all.  Now for some more reading suggestions:

Although economists in government have not exactly been stellar performers in recent years, I still enjoy reading the comments of those on the outside. In this round table discussion from the Economist, the idea that certain institutions are “too big to fail” is really more about being “too connected to fail.”  Politics trumps all.

Personal Finance Advice wrote about life of owning a house with no mortgage. I enjoy the comments on posts covering mortgage payoff. On commenter argued this:

So if you have a fixed rate of 5% and you assume long term inflation of 2%, it is really only costing you 3% per year to carry the debt. Can you find long term investments that can beat 3% interest? I think I can.

So if I follow this logic, we should all be borrowing as much as possible at 5% on an extended payback program because inflation makes it free money. That argument makes a lot of dangerous assumptions.  Here are four: (1) That you will remain gainfully employed throughout the borrowing period, with no disruptions; (2) that your income will keep pace with inflation year after year; (3) that you can find secure investments with a guaranteed real return (after inflation return) of 3%; (4) That if you want to sell your house and move, you will have enough home equity to make that happen. Now consider what has happened just in the last 18 months and tell me how valid those assumptions are. I rest my case.

Budgets are Sexy published a round-up of comments from folks who have been ridiculed for their frugality. Being a contrarian myself on many personal finance issues, I know what it is like to be a target of the “normal” people.

Enjoy the rest of your weekend.


Feed Mr. ToughMoneyLove

FREE UPDATES: If you enjoyed this, please subscribe to receive the newest hard truth from Mr. ToughMoneyLove automatically by RSS feed (what is RSS?) or by spam-free Email.

Share
  • Banner

Comments

12 Responses to “Hard Truth Week in Review – Uncertain Recovery Edition”
  1. kitty says:

    “So if I follow this logic, we should all be borrowing as much as possible at 5% on an extended payback program because inflation makes it free money. That argument makes a lot of dangerous assumptions. Here are four: (1) That you will remain gainfully employed throughout the borrowing period, with no disruptions; (2) that your income will keep pace with inflation year after year; (3) that you can find secure investments with a guaranteed real return (after inflation return) of 3%; (4) That if you want to sell your house and move, you will have enough home equity to make that happen. ”

    I think you are missing a few things here:
    (1) This is a very good point. If you are unemployed it is easier to live without a mortgage. However, it only applies if you can pay off mortgage completely. If you pay it little-by-little then when you lose your job while you still have your mortgage, all the extra equity you’ve earned by making extra payments is a whole lot less useful than money you could’ve had in a bank by not making these extra payments and actually putting money in a bank. If you paid off mortgage with a lump sum, then it means you had a lot of cash. So if you lose your job, this extra cash can be used for payments.

    (2) How does your income keeping or not keeping pace with inflation is relevant here? Your mortgage rate is fixed and is not keeping pace with inflation. How does it matter if your income is? I don’t see the relevance here. If you mean that other expenses go up as well – this is true. However, if you don’t have the mortgage you still have the money, right? Now, if the money is invested for long term, it may be a problem, but if you have an emergency, investments can be sold.

    (3) At this time, I could probably find long term AA and AAA municipal bonds which would provide me with tax free return of over 4%. Last fall during credit crisis I bought some with yield-to-maturity of 5.5% which includes tax free 5% and 5.25% interest rate. Yes, it’s not risk free but the risk is very low.

    (4) True. But again, if you have cash, you can use it to make up for the difference. Plus, if you are not upside down, cash may come in handy for the down payment on the new home. Also, if you decide to rent out your previous place instead of selling it, cash is a whole lot more useful than equity — you can use cash for downpayment on a new place (which is what I did and which is why I am now living in a paid off home; I can assure you that I am very happy I didn’t make extra payments on my previous home and kept cash instead).

    Additionally, one thing that you are forgetting is that when inflation goes up so do interest rates. Interest rates right now are very low, they cannot go much lower. An average mortgage is for 30 years. So, let’s say I have a mortgage and 5%. Instead of paying it off, I put money in the bank on a regular CD. Yes, right now, I’d be losing money as I can only get 2%. But what happens 3-5 years from now? Most people right now believe in high inflation and higher interest rates. The probability that we’d get way over 5% in a bank in 3 years is pretty high. We may even get 80s style double digit inflation. I’d imagine in 1983 people who had 9% mortgage were feeling very happy they haven’t paid it off – as they could get over 13% on a regular CD in a bank.

    I am not arguing that one shouldn’t pay off one’s mortgage. It’d be hypocritical since I do have a paid off mortgage, and yes, it is nice. But when I repaid my mortgage the situation was different: 1) my rate was 7% – this was on a mortgage taken in late-90s 2) I was able to pay it off with a lump sum which meant I did indeed got rid of payments at once. BTW – this was money that I cleared from sale of property I was renting out — the one I was able to rent out specifically because I wasn’t making extra payments on it and saved money instead 3) interest rates were low at the time; there was no inflation and no sign of future inflation. Incidentally, I am still not sure it was the right thing to do, maybe I should’ve refinanced it instead. If we get high inflation in a couple of years I may regret having paid off my mortgage.

    In some cases it makes sense to pay off the mortgage. In some cases it doesn’t. How high or low your rate is, whether it is fully deductible in your case, how much money you have, how soon you can pay it off, how old you are, how long you’ll live there, what you prefer – all of these play a role. It’s really an investment decision and as any investment decision it can turn out to be right or wrong depending on future circumstances.

  2. J. Money says:

    Glad you enjoyed all the frugality snippets! Appreciate you chiming in as well…my 2nd favorite line from it (the Palin one was my first one), “Generally, it’s those who don’t have much money that mock the most…” Very well said my friend.

  3. Rick Beagle says:

    Chicago was a TERRIFIC example of what’s happening in our country. The POTUS goes out of his way to help promote his hometown to be the site of the 2016 Olympics and “poof” the entire Right thinks it’s a TERRIBLE idea. They cheer when they hear that the bid failed and then go on the six o’clock news complaining about job losses (which everyone has said will remain a problem into 2010 for the last six months).

    I don’t know where you get your nonsense from TML, but everything that is happening has been laid out for the American people for the last eight months. Do you really need to keep showing up on the short bus and gasping in surprise at something that has been alluded to for months?

    Yeah, the economy is bad, and job losses will continue through 2010. The good news, the economy does appear to be sputtering along despite repeated efforts (like the Chicago example you provided) of right wing nuts hell bent on stopping any sort of recovery or a promising future.

    Get a grip people, the Olympics in Chicago would have been wonderful for that city, and our country. Refusing to support something simply because Obama supports it is a sure sign of either overt racism or a weak mind.

    Peace.
    Rick Beagle

  4. MasterPo says:

    Hey Rick – Did you see the number of people who were protesting *against* having the olympics there? I did.

    Ask the merchants in Atlanta how wonderful it was for them. (hint – It was faaaaar from raining money from heaven when the olympics were there because of all the security and traffic restrictions in place.)

    Besides, the olympics would have taken place in 2016 – 7 years from now!

    We need *real* jobs today!!

    Oh, that’s right. Obama has re-written the economic rules: Recovery without job creation!

  5. Rick Beagle says:

    “We need *real* jobs today!!

    Oh, that’s right. Obama has re-written the economic rules: Recovery without job creation!”

    Hmm…. You expect him to wave his wand and undue the damage done by you, and your party? How is that trickle down working for you?

    As for your comment about recovery without job creation… Historically, jobless rates have lagged behind recovery numbers. But common sense and historical precedents seem to escape you?

    Read a book that wasn’t authored by a twit from Alaska.
    Peace.
    Rick Beagle

  6. MasterPo says:

    Well, our Messiah won the Nobel Peace Prize a mere 2 days into office so yea, I do expect magic from our strapping young lad!

    Don’t forget, our Nobel Laureate (and his administration) *promised* that if the stimulus wasn’t passed NOW when unemp was at 8% it would go up to 10%+. It was passed and we’re at 9.8% and rising.

    I’m sure it’s just a matter of time of course. Bills and food can wait for his grand plan to take shape. He’s just the Nobel President.

    • Rick Beagle says:

      MasterPo,

      But I’m sure if we voted in a Republican, he would be able to fix it right up huh?

      Yeppers things are bad., want them worse, vote for those good old Republicans. I am sure there are still a few things that they have completed $%&# &*. I mean, wow they didn’t get a chance to “privatize” SS. Oh that would have worked out really well huh? Maybe we should give them another chance?

      You can complain all you want MasterPo, but our memories are not so short that we don’t know which party screwed us over. At least this one is trying….

      Congratulations on winning the Nobel Peace Prize President Obama! It seems that beyond the walls of our partisan hacks, the world is pleased with the direction we are heading.

      That just has to hurt doesn’t it MasterPo?

      ROFL.
      Rick Beagle

  7. MasterPo says:

    If you honestly think that commie (yea I said it!) deserves a Nobel prize for just 2 days in office then let me sell you this bridge I have…..

    • Rick Beagle says:

      MasterPo,

      I am old enough to remember when Gorbachev came to power in the old USSR. I remember that feeling that even things were still crazy over there that hope hadn’t died, and I think many Americans living in the Cold War felt the same.

      Must be troubling to you to know that the rest of the world thinks of President Obama, like we thought of Gorbachev. He is a reason for hope in the minds of the rest of the world.

      Commie? LOL! Again, you haven’t a freaking clue about what that means or how it could possibly apply. Just regurgitation the sound bite you got off Fox.

      The end war criminals and borderline sociopaths in the executive branch of the US is heart warming to the world. But yet again that American arrogance that is so pervasive on the Right… NOOOOO they stammer out, we aren’t really buffoons?! The majority of the world has to be wrong, just like they are about health care, and global warming too!!!! Surely the right can’t be full of blow hards more intent on achieving power than telling you the truth? /snark

      Peace.
      Rick Beagle

  8. MasterPo says:

    Don’t pull the “I’m old enough” line. I well remember Carter and the Iran hostages. And I well remember the gas crisis (thank you too Carter!) of the 70’s with odd/even license plate fueling days. So don’t pull the age thing.

    Wish I had all night to go back and forth with you but I do have productive things to do.

    I’ll conclude with this:

    Now that the Messiah has his Nobel Peace Prize, GOD HELP THE OBAMA ADMINISTRATION if at any time in the next 3-7 America is attacked again (especially with a WMD)!

Speak Your Mind

Please leave a comment and tell us your version of the hard truth...

You must be logged in to post a comment.