Last month’s absurd and embarrassing political shoving match over the debt ceiling, befitting of the most backward of Banana Republics, got me thinking – will the United States evolve into a Third World economy?
Looking on the bright side of things, as I’ve been trying to do these days, I realized that I’ve got a fair amount of theoretical and practical experience in that world. Living in an economy with an unstable currency and galloping inflation forced me to invert many of my basic conceptions about money and finance. Maybe the most illuminating example was the story of my mother-in-law buying a house.
She had to scrape together every last penny she had to buy a small place outside of Barquisimeto almost fifteen years ago. Being one of the most hard-working people I’ve ever met, it doesn’t surprise me that she managed to get the down payment together by selling empanadas and working odd jobs. When she moved into the house things weren’t immediately much easier, because she had to keep working dawn to dusk to make the monthly mortgage payments. For her budget it was a heavy burden – a whopping 60,000 bolivars per month.
Today, you’d have a hard time buying lunch with that much money. She and her husband invested to expand the house, putting on a big comfortable back room and a second floor that now serves a lounge. All these years the value of her house has risen along with inflation – which for the last five years has clocked in between 20 and 30 percent – while the value of her mortgage has been steadily eroded. She considered paying off what was left, but decided – why bother? She took that money and made additional improvements to the home.
She did what most Venezuelans in the middle class have done – she made inflation work for her.
Is this where America is headed? I can think of a number of reasons why it might be. No matter how much the world has gotten comfortable with the dollar as a monetary base, no currency can remain perpetually stronger than its underlying economy. The US is not only in an economic bind right now, it suffers from divisive politics that are preventing it from making a serious dent in the problems that face it. These problems go way beyond the debt and the deficit; they involve much bigger issues such as the decline of public education and the lack of capacity to create jobs. Sooner or later, something may well give.
Which brings me back to houses, in this case mine. I bought an apartment not long ago in Washington (yes, I’m still planning to move there, someday). I made a bigger down payment than I had to, because I have some strand of Depression Era DNA in me that simply abhors borrowing money. Paying interest strikes me as a drain on my savings that wastes away my hard-earned cash. My instinct is to pay down the mortgage as quickly as possible to keep my housing costs as low as possible.
This logic makes sense in the America of yesterday, but I’m not sure if it fits with the America of tomorrow. Even with unemployment staggeringly high and the economy in the doldrums, the country’s inflation rate is 4.6 percent. That is actually higher than the rate of interest I’m paying. Which means it’s more profitable to let my mortgage get eaten up by inflation than to pay it down. Now, what will that look like in five years from now if oil prices skyrocket, Chinese goods start getting more expensive to import and food prices go through the roof?
It’s hard to say what the future will look like, but I’m fairly comfortable thinking it won’t look like the past. I’m guessing I’ve been given an early glimpse of what it might be.
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