Leverage at stake
Arguably the most basic principle of investment property financing is the concept of leverage. And leverage requires lenders willing to accommodate investors with the capital to properly grow their real estate holdings. Without it, investors would be forced to acquire properties using entirely their own funds. Thus, no leverage. And virtually no means to truly grow a property portfolio.
In periods of extremely tight money, investors unwilling or unable to use their own funds to finance property purchases would be required to pay exorbitant interest rates on their mortgages, thereby helping to create negative cash flow scenarios out of previously positive cash flow investment properties. Basically, this would effectively eliminate the possibility for long-term profit.
So what if global mortgage lending became so tight as to be non-existent? And what kind of economic war could surface if that bleak scenario ever occurred? Recent events in Europe have me wondering…
The remnants of World War II
My father never liked to talk about his exploits as an Army captain in the Pacific theater during World War II. When he passed away years ago, I was the sibling who inherited a Japanese wrist-compass, one of the macabre “spoils” of war my father brought back from the fighting.
While never discussed, my siblings and I always assumed there were a whole lot of stories of mayhem and killing from our father’s wartime experience – stories that he just was not going to expose to his children. And he never did.
So while it was not uncommon for my father, as a Jewish survivor of the Greatest Generation, to adamantly refuse to purchase German products (most notably, German automobiles), I always felt it a paradox that Japanese products were perfectly acceptable for him to purchase. (Even when the Japanese were trying to kill him a generation earlier.) I chalked it up to the obvious extreme personalization and victimization the Holocaust cast on the worldwide Jewish surviving populace. I do recall feeling very awkward when my father bought his first Toyota – feeling he was being terribly hypocritical.
The rise of global markets
Little did I know in the ‘60’s the extent of global consumerism and global marketization that would come out of my Baby Boomer Generation…And little could I have predicted the economic powerhouse Japan was to become from those ‘60’s. A powerhouse, that is, up until the last few years, where they too have fallen victim not only to their own success, but to the vagaries of a wider global economic downturn.
European Union of necessity
I point this out in light of the very disturbing news coming from last week’s economic conference of participating European countries in the European Union – including those using the Euro, and those (like England) that do not. It is Germany’s ascension to the ranks of one of the world’s most powerful economic entities – dominating exports among all countries in Europe – that is quickly becoming the eight hundred pound gorilla in the economic room.
Dictating terms of “surrender”
In these latest round of talks, aimed at alleviating the unstable debt situation currently threatening Greece, Italy, Spain and Ireland, among
others, Germany all but dictated the terms of a kind of economic “surrender.” In return for assurances of financial backing to help prop up their already weakened economies, this “surrender” requires all Euro-based European countries’ economic oversight be governed by, and austere rules set by – you guessed it: Germany. Yikes. (Sort of like Don Corleone making them an offer they couldn’t refuse…) England was seen as the biggest short-term loser in the talks, as they had no support to try to block Germany’s moves. And now Germany is trying to ensure tight fiscal restraint on all of Europe. Is it me, or have you heard this one before?
And speaking of Germany’s export domination, I must note that I recently began a small breathalyzer vending machine business to help get drunk drivers off the road. I researched models of machines extensively, and ultimately decided to purchase several of the highest-quality, most technologically advanced and accurate models on the market today. And while I purchased them from a distributor here in the U.S., the machines were manufactured…well, in Germany. Ah, those German exports…And what power they wield…Much more than any Panzer tank division or blitzkrieg ever could.
Power grab – or protectionism?
So we come full circle to the predicament we find ourselves in now. President Obama decries this latest power grab by Germany. Hey – isn’t he running for re-election? And wouldn’t an austerity plan imposed by Germany on most of Europe simply because Germany holds a technological advantage (yes – they earned this position) be an invitation to a further global economic slowdown? You bet! And a global recession right before the U.S. presidential election next year is not something an incumbent President envies inheriting…
But when you’re the only real white knight of a banker in the room, with so many fragile neighbor countries’ economies on the verge of collapse, prime ministers will line up to kiss your hand if you‘ll help bail out their country. Germany is in the cat-bird seat, and exerting their economic power with great relish right now. I don’t think they’re trying to come off as the new master economic race – but unfortunately, their history does not help them assuage other countries’ historically-based fears. I can see how Germany simply wants to help protect their own interests. And they certainly can’t be faulted for that.
My daughter recently visited Berlin on a college semester abroad, and she raved about the look, sophistication and friendliness of all those she encountered. Of course, she did note that she was entrenched in her own age demographic, and congregating with mostly college-aged young adults, as well as those mostly in their twenties. Clearly, she thought Germans felt an overall collective national guilt, at least from her generation, from the lasting effects of World War II.
Compare and contrast with Japan
And while I process this notion of a nation still trying to heal itself some 70 years after the war, I see the similarity of Germany trying to replicate the economic world dominance Japan held in the second half of the twentieth century as a way of “winning” on an entirely acceptable plane. However, unlike Japan, Germany now finds itself smack in the middle of a scenario where they MUST play the banking savior…lest the entire fragile European economy fall into a grand recession. Which, with global
interconnections today, would create a domino effect of a potential U.S. and world-wide recession.
Such a strange twist of fate. Damned if they do, damned if they don’t. Let’s hope their austerity fix is better than the alternative of doing nothing, and watching as several European countries default, creating a natural economic domino effect across Europe. A domino effect that most assuredly would reach our shores in short order…
No master plan
This was no master plan that placed Germany in this position. Rather, frugality and steady national austerity, combined with simply creating better products the world wants has placed them in a dominant position, while Rome (and Athens and Madrid, etc.) burned…through respective national fiscal excesses.
And because of this, I don’t particularly like the writing on the economic wall…A global recession brought on by Draconian economic measures dictated by Germany (in order to help keep it’s neighbors afloat), could be a very scary proposition. The effects on U.S. property investors could be immediate and nasty: credit wouldn’t just be labeled “tight.” It could become virtually non-existent. And trying to grow your individual real estate empire would become quite an onerous affair…
But really, what are the alternatives? Let the weakest European economies fail? Too many banks and credit markets are at stake to allow that to happen. Germany, in simply protecting it’s interests, is unfortunately doing it in a very heavy-handed way. Let’s hope it succeeds, because they certainly are not making any friends with their approach…
Let’s also hope for it’s success because, if it ever came to a global recession, tight credit alone may be the least of our problems. This is the time for cooler heads. Especially in the sphere of investment property financing. Let’s hope an economic World War III is not possible in our globally-interconnected world. Of course, in a worst-case scenario, who’d be left standing to finance this kind of war?
photos courtesy of politiken.dk, leverage-your-resources.com, online.wsj.com, blogs.telegraph.co.uk, blogs.canoe.ca, guardian.co.uk, hotels-accommodation.info, en.wikipedia.org, socalfools.org, ilpopolopuntonet.blogspot.com