I talked on Tuesday that the next plan to come from the government would be mortgage loan modifications. Just two days later we get word that the program is going into action, with news announced today that Citigroup will be the first bank to participate.
Our economy is a train speeding faster and faster to the edge of a cliff, and this new program will do its part to get us there even faster.
In a healthy real estate market you have private capital purchasing real estate loans. Let's say you are a Chinese citizen that had $400,000 saved up back in 2005 . You decided to take your money and give it to an American to purchase a home. It is a fixed rate mortgage of 5.5% for 30 years. This means that investor is planning on getting paid $1,833 in interest every month on his investment.
He gets a telegram in the mail on January of 2009 letting him know that the American government is now stepping in to change his loan. They tell him that a judge has decided that the borrower now only owes $300,000 on the house and his new monthly interest payment is only $1,375. The note comes with an apology and a brochure to buy new mortgages in the future.
Now, in a real market if this happened no one would invest again in real estate mortgages. Why? Because they would be afraid that our government would just change what was owed if the homeowner didn't make their payments. There are two problems with this:
1. They are breaking contract law
2. In order for investors to take on the risk of investing in US mortgages with this possibility, mortgage rates would go sky high to offset the risk.
This doesn't matter to the United States, however, they just shrug it off. You know why? Our Federal Reserve now buys our mortgages. Why do we need private capital to help homeowners pay for homes? Our Federal Reserve will just print as much money as necessary, and they will buy the debt.
The other option they can pursue would be to have the government cover the $100,000 difference in the mortgage loan. It is kind of laughable, but do you know where they will get the $100,000 to cover the difference? They will borrow it from another Chinese person, or perhaps the same one.
Two major headlines hit the news wires this morning in the articles that I was reading:
1. "Obama announces that we need to get used to $1 Trillion deficits for years to come, and that our best goal to get out of our current economic hardships is to increase government spending"
2. "China is starting to lose its appetite for US debt"
We have two major buyers remaining to purchase our debt. The first is China and a few other foreign countries. The second is the Federal Reserve.
Once the first option finally gives way, that will only leave option two: Ben Bernanke. This means hyperinflation and the final destruction of our currency, economy, and the world we now know.
How long can the rest of the world prop us up? How much longer will they want to? That's the question you need to ask yourself every day, because every day you hold dollar denominated assets you are playing russian roulette with your life savings.