You Can’t Borrow Forever, You Must Eventually Pay It Off…

August 17th, 2007

For far too long the US and other Western Nations have been financing growth through debt. They’ve increased the amount of cheap capital available to consumers and that in turn allowed the citizens to bid up the price of homes (often the most pricey item consumers spend money on). As the price of homes were bided up over the last several decades, so too was the amount of ‘equity’ many home owners could use as collateral to get more debt by refinancing their homes. This money was used doing renovations, buying rental property or selling the house and moving up the property ladder and getting an even larger mortgage. The era of cheap capital may be coming to an end. With the fall of the sub prime lending, many lenders are being a lot more cautious about who they lend to and the collateral requirements are stricter.

Who Is Borrowing?

The scary part about this is that the majority of people buying homes and refinancing their debt to do renovations or buy rental property are baby boomers. The boomers are aging rapidly and approaching the retirement stage in life. Do they all plan on selling their homes and downgrading to last through retirement? If so, who will buy all these homes at these high prices? Mind you, it’s not the same in every part of the country. While watching some interesting real estate programs on TLC you will notice that for a quarter million dollars you can buy an extremely nice home in some areas… while other areas the same home would be worth well over a million. Each regions economic situation plays an extremely large role. So I’m just talking about those of us that live in expensive areas that expect to sell their homes and let the money see them through retirement; It’s absurd and not a good strategy… at least not if you’re on the tail end of the baby boomers generation.

All this debt has to be paid. In order to pay it many people are going to have to tighten the purse strings and stop spending massive amounts of money on new homes and expensive renovations. This will hurt the economy but it may still grow due to inflation and immigration. Time will tell.

US Government Making Same Mistakes?

The US government is making some of the same mistakes its population is. It’s borrowing and going heavily into debt during a time it shouldn’t be (right before a major segment of population retires and expects pension, health care, etc). This debt must be paid… my fear is that government may end up resorting to inflation to make past debt seem cheaper to swallow, or even collapse the currency and replace it with another. I think many of these issues are magnified due to the inherent flaws of fiat currency. No system is perfect though. It really wouldn’t surprise me if inflation or a currency collapse is used as an opportunity to make all this debt easy to swallow.

Pay That Debt Off, Invest in Finite Resources

It’s better to be safe than sorry. Do you really want to get caught up in a period of rising interest rates when you have a lot of debt and want to retire? Pay off debt and invest in finite resources! Get cracking! There is too much uncertainty in this world, no use getting caught on the short end of the stick! It’s easier to sleep at night if you play it safe, rather than sorry. It may also be easier to retire .

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