Trying to Keep the Economy in Perspective

Whats Wrong With the US Economy?
-Housing Bubble is Deflating
-The US economy is shrinking at an enormous rate due to downward spiral created and the uncertainty in the market

Whats Right With the US Economy?
-Energy costs are falling
-Interest rates have plummeted

What Do I Think Will Happen?
-The economy will shrink for some time. It needs time to get excess borrowing out of the system. Government stimulus may reduce the depth and duration of this slowdown, but I think it will still be long and deep.
-Long term income taxes may go up to pay for our current deficit & spending.
-Inflation may rise to reduce the significance of the housing bubble debt incurred by households and government spending.

What Are We Doing?
-We have a large percentage of our assets in leveraged positions. 4 properties all with 30 fixed rate mortgages that are ~70-80% leveraged. Remaining assets are heavily invested in equities that should hedge well against increased inflation.
-Not accelerating our debt repayment. Even though now seems like a good time to reduce debt, especially with the uncertainty of what lies ahead, borrowing costs are cheap.
-Not much else other than trying our best to stay away from media sensationalism.

I think this sums up my thoughts on whats going on in today's world.

Related in Wealth Building:

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Comments (9)

Given the credit crisis, have you found it any more difficult to get a mortgage for the fourth house compared to the first houses?

Posted by Jared | February 11, 2009 8:51 AM

Staying away from the media sensationalism is probably the best thing you can do in this situation. How many times can you hear the same doom and gloom types of stories?

I do agree that this economic slowdown will be quite long regardless of measures taken by governments. I also think this will force people to consider their finances a bit more - credit cards have their uses but they should not be abused the way they have.

Posted by Matt | February 11, 2009 12:50 PM

Ha! Good luck with that theory. Inflation doesn't just happen to help people out. Unwinding debt=Deflation. For years to come. With the past and current administration's policies being so anti-American and pro-bank, everything could be much worse than the prudent pessimistic view today.

Posted by Jones | February 11, 2009 1:21 PM

I found more substantation was needed to verify assets, but otherwise all lenders I talked to were ready and eager to lend.

Posted by 2million | February 11, 2009 1:43 PM

You forgot the banking industry mess. Fortunately they're in the process of rolling up the TARP, but the fact remains that the government wasted $700 billion dollars. Sure, they're now requiring the banks to substantiate why they need the money and in the same breath justify their expensive salaries and private jets, but to me that's just the smoke and mirrors of the politicians trying to save face with their angry constituents. I think it will be interesting to see how that all plays out, but I suspect we'll see more bank failures before it's all said and done. Actually, we're likely to see more bank mergers before all is said and done.

At any rate, staying away from the media sensationalism is a great piece of advice. The media constantly blows things out of proportion and we really don't need help in that area.

I think it's fine to stay where you are on your debt payments as interest rates have plummeted, but I hope you have a back up plan in the event of job loss, etc. Even cheap credit gets expensive when you don't have the means to pay for it.

Posted by Kristy @ Master Your Card | February 11, 2009 4:51 PM

Deflation is a very serious risk.

If rents decrease, that could cause some problems because your mortgage debts will stay the same.

Posted by thisson | February 12, 2009 12:44 PM

I am a bit suprised by the # of comments/concern over deflation. I don't think that is a very serious risk if the government is committed to spending like it appears to be, but I could be very wrong.

Posted by 2million | February 12, 2009 5:26 PM

I'm surprised too about deflation - is it really compatible with unprecedented financial easing?

It's really weird catching up with the financial blogosphere. Half are warning of deflation, and half of Zimbabwe style hyper-inflation. I suspect it's proof nobody knows.

Posted by Monevator | February 14, 2009 4:57 AM

Deflation is a serious risk, at least in the near term, because we are in a credit bust where debt-based money is being destroyed (written down) faster than new currency is being printed.

We may reach a tipping point where that changes.

Here's a good place to learn more about the arguments for the delation case scenario:

http://globaleconomicanalysis.blogspot.com/

Posted by Thisson | February 17, 2009 4:15 PM