The latest reports from Washington point to an anticipation of new actions on the part of the Federal Reserve System to help alleviate the current stagnation in the U.S. economy. Currently, chairman Ben Bernanke is looking at the possibility of having the FED pump huge amounts of money into the economy through the buying of trillions of dollars of bonds. What will the net effect be for property investors down the road if this were to occur? A brief review of some basics of monetary policy will be helpful in deciphering this type of investment property information…
What happens when the FED prints money?
One of my early teachers in Economics at Syracuse University was a gentleman named Melvin Eggers. When I took his upper level class in monetary policy, he had been Chancellor of the university for several years, and because of his “day” job, never taught classes any more. But he did come back to teach this course, and I remember jumping at the opportunity to learn from the master. Basically, I considered him the Milton Friedman of Northern New York.
Eggers espoused a number of key axioms about monetary theory that I hold as gospel to this day. One tenet was that when the FED prints money to prop up a sagging economy, there will always be a time when the economy has to “pay the piper.” In physics, I believe the corresponding law is known as “every action has an equal and opposite reaction.” When the FED prints money to pay for bonds – the types of bonds that spur growth through accelerated borrowing (for example, when government borrows to fund the repaving of a highway, or to build or maintain a bridge) – these bonds will have o be repaid overtime. Just like when you, as a property investor, have to repay your mortgage over a long term – say 15 or 30 years.
Pay it forward economics
The key element of course, is that this source of borrowing has to get repaid. Eggers liked to joke that businesses grew only though increased borrowing. Just like property investing. But, he would add, if you were really into risk and making easy money – just build up your credit – then use it, and fly off to South America to start your new life – preferably in a non-extradition country.
What a kidder…
The fact remains, when the FED eases monetary policy by pumping trillions into the U.S. economy – there will definitely come a time somewhere down the road – maybe not in a few years, but within our lifetime, where the rent’s gonna come due. It’s only hoped that the next generation can shoulder the financial burden. Right now, it ain’t lookin’ too good. As can be seen by the fiasco that the Social Security system has created. (And now some plans call for the privitization of social security with a cut-off at age 55. So much for governmental social contracts. )
Loose monetary policy effects
But loose monetary policy is kind of the same concept. The central component is that you institute the plan now to help alleviate an immediate strain on the economy, in return for shouldering a lot of pain on the same economy down the road (on the collective backs of the next generation).
So how does this help dictate what you as an individual property investor should be doing right now? Well, you’ll obviously want to try to grow your business, your little fiefdom of rental properties, utilizing the easy money policies being put into effect right now. Through these FED actions, borrowing costs for the Central FED banks will be lowered, which in turn will lower borrowing costs for all lending institutions in the country. The net result of this investment property information is that you benefit – when you borrow – for your next mortgage, for example.
The piper is always paid
Just know that your individual real estate portfolio, while set up to help fund the mid-to long term (like retirement), will also have to “pay the piper” somewhere down the road. Consider things a very long time away – like when your properties, as part of your overall estate when you die, get subject to all new sets of inheritance taxes that invariably will be passed on to your kids or grandchildren…the next generation. You may have set it up during this period of easy money, but as I mentioned above, there is always an equal and opposite reaction in the financial markets. Over time, that is. And you can certainly expect your heirs to pay the price after you’re gone.
Or, feel free to borrow up to your neck in debt. And abscond to a sunny beach down South America way…
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