One of my favorite newsletters to read every week comes from John Mauldin who is a great economics thinker and investor. Plus, he hangs out with a ton of very smart people like Lacy Hunt. When writing about Japan and their massive QE experiment over the last nearly 30 years, he tells us that “massively increasing debt actually reduces interest rates, productivity, and GDP growth.”
You would think that in the normal ordinary world of “supply and demand” that more debt being created would cause rates to rise; but in fact it does the opposite as the Central Bank/the Fed has to purchase this new debt created by the federal government. Here in America the Treasury Department is issuing new debt and the Federal Reserve is buying this new debt. If the Fed wasn’t buying this debt then rates would rise. But, the Fed has to “bail out” the Treasury by buying the Treasury’s new debt. If not, the Treasury couldn’t even afford their interest only payments.
And the Treasury would then ask for a Negative Amortizing loan. Do you remember those from last decade? With this type of the minimum monthly payment didn’t even pay all the interest that accrued. Instead the principal balance was increasing each month.
Further issuing new debt/aka as printing money reduces productivity as why produce more with extra work when you can create something out of thin air? That thin air is money. Third, by constantly printing money you are constantly encouraging people to consume and buy today which will constrain GDP growth in the future.
Unfortunately, our budget deficit and cumulate debt is increasing rapidly each year; thus the Treasury has to issue more debt/aka print more money. If Lacy is correct, then both short-term and long-term interest rates have to drop in the future. Thus, mortgages may get even cheaper in the future, making real estate an even better investment.
You combine lower mortgage rates with highly local control of real estate development (unlike Japan that I wrote about last week) that constrains supply of new housing, this may be the perfect formula for investors.