Americans Are Smart

In Appreciation is Not Savings I talked about how "investment" in one's own abode is not really something one can retire on. Since posting that article, however, my thinking on this issue has gained some clarity, particularly with Dave's reminding me of the existence of things like reverse mortgages.

It turns out that going into debt to purchase an asset, including your home, that you anticipate will appreciate, makes a lot of sense, especially when your cash is losing its buying power. Americans are showing their lack of confidence in the dollar by taking short positions in it and long positions in non-dollar-denominated assets such as their homes and equities. Homes and equities are the '90s and '00s equivalent of the Weimar Republic's wrong-sized shoes. Equities lost their attraction a bit after the dot com bust, but people seem to be attempting to relive that through Google. People seem to be getting turned on to commodities now, especially with the new ETFs for things like gold and silver that don't require dealing with futures.

Even adjustable mortgages could in many cases be the smart thing to do because of the flexibility they provide. Sure, they may not seem smart when one anticipates an increase in the interest rate, but as long as one anticipates the Fed's doing everything it can to keep the housing market headed to the sky, one should expect that only people in the most marginal situation will end up in bankruptcy; mass bankruptcy would be a disaster that surely the Fed would tolerate ridiculous commodity prices to avoid. A friend of my mom's just after the dot com bust took out an interest only loan on her house and put the money in the stock market. I'm sure she doesn't regret that now, though I haven't asked her.

So, in fact, appreciation isn't savings; when the dollar is losing its purchasing power, it's better. What's really interesting to me is that most Americans didn't have to go through the thought process I've had to go through to figure this out :dunce:

On the other side of the coin, we have the Chinese with their ridiculously high savings rate, owning lots of dollars by proxy through their government (most Chinese, to my knowledge, aren't allowed to own foreign securities). What are they going to buy with their dollars as the yuan appreciates? Oil perhaps? Probably anything from any country that is more interested in dollars than the Chinese are.

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1. China's dubious legal and

1. China's dubious legal and political system means that "hard" assets there do not have the same value as "hard" assets here, therefore holding dollars -- which is a proxy for our "hard" assets -- remains a logical choice for Chinese savers.

2. Of course it makes sense to own assets that appreciate but the assumption is that they *will* appreciate: Houses are by no means a bullet-proof choice. During the tech boom my friends and fellow wage-slaves thought I was nuts moving everything into bonds and out of stocks. I said "bubble" they said "new paradigm".

There remain plenty of places where real estate is overvalued and where I see people losing money: if not in nominal terms, then at least in real ones.