The sheep never learn. This makes things easier for shepherds, who have their shears close at hand.
Americans are using adjustable rate mortgages — ARMs — to buy their homes. They look at the 30-year rate of 4.5% — an incredible bargain in an era of looming inflation — and opt for ARMs. They can lock in 4.5% for 30 years. This is one of the great investment deals around. But they were too dumb to do it early last May, when the rate on a 30-year mortgage was 3.5%. So, feeling left out, they sign up for ARMs. They think they can beat the system.
The Federal Reserve pumps $1 trillion a year into the economy, but home buyers think ARM mortgage rates will stabilize. If there is a depression, yes. Rates will stabilize. They may even fall. But how likely is it that the FED will stabilize money in a recession, let alone in a depression? Not very.
When you buy a house, buy the fixed rate mortgage. The house’s price will rise in inflation. The rate is locked in. You profit both ways. You own an appreciating asset, and you also have something productive to do with depreciating dollars: pay off your mortgage. An ARM undermines this strategy. Rates can rise. Under inflation, mortgage rates will rise.
People do not learn. They do not understand inflation. They do not see the opportunities that inflation offers to a minority of investors. So, rich people buy bonds, and middle-class people borrow with ARMs.
The Federal Reserve will make hash of the plans of both groups over the next decade. Don’t be in either camp.