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"One should either write ruthlessly what one believes to be the truth, or else shut up."

Arthur Koestler 

Monday
Dec162013

Health Care Solutions? 

While health care is only a small part of the interview, it seems to me that unless Health care is solved some of the worst case economic scenarios become more likley. Kotlikoff's solution seems radical, but it is worth an examination. 

Saturday
Dec142013

Economic Predictions About the Year 2000 

Beware economic predictions! Here is a fun one from 1999. 

Friday
Dec132013

EU's Future Is Mixed

There are a lot of problems within the European Union. Southern nations like Greece, Spain, and Portugal are basically bankrupt. While I doubt the validity of the meme that things are so bad in Greece that people are purposefully contracting AIDS to go on disability, things are very bad. The budget deficit in these countries is quite large and the banks are zombies. (I have accounts with a bank that is owned by a Spanish Bank, so this is not academic for me.) These problems will mean that once again America has the cleanest dirty shirt. 

Italy and France are not in good shape either, but they are continuing down a path that will have to lead to default or confiscation of assets. 

Northern European countries are not in such bad shape, but this is relative. German banks are also capital-impaired. They might be zombies as well because of the governmental bonds they bought from southern European countries. 

In times of crisis money will seek a safe haven and right now that is the US. So putting on my prophetic hat, I predict continual strength in the dollar, until it crashes. It probably will not crash in terms of the currency of other nations as they are in even worse shape, but the dollar will have issues, just not right away. 

Get ready.

 

Thursday
Dec122013

I Know the Plans I Have for You

Nice catchy song. 

Wednesday
Dec112013

The Effect of Interest Rates on Housing Prices

Most people do not buy a house--in reality they buy a payment. Buying the house comes later, because they begin with no equity, and most of their monthly payment for a long, long time goes not to create equity, but just to pay the interest on their loan. Let's say you borrow $200,000 and your payment is $954 at 4% interest. As most people tend to max out what they can borrow and get a bigger house if they can, the payment amount that they can afford will not change. So if interest rates go up to 6%, then this payment would be $1199. That is out of the budget restraints for the potential new home owner. A $160,000 loan at 6% will be $959. (For a handy amortization calculator, click here. All figures are from this calculator.)

Think about what this means. When, not if, interest rates go up, house prices will have to go down. Under this scenario they will decline 20% making a huge number of home "owners" owing more on their home than it is worth. (Remember that it will be years, many years, before a home owner has much equity.) The market would have already been affected by the modest increase for the last 6 months except that investors are buying 50% of all homes and they are paying "cash." A lot of these investors are using very low interest rates to buy the houses. It is a gigantic gamble

So the "rule" is that as interest rates go up, house prices go down. 

Get Ready