I am impressed with economists and financial analysts who could predict the economic outcomes to two or three significant figures.
You asked why the fed targets a non-zero inflation target. This is actually a great question that is not easily answered. I'm not the best one to answer it, but I can shed some light on the possible reasons. I think the real reason the fed targets a non-zero, positive inflation may be linked to our being a nation that runs on credit. So let me say a word about credit first and then I'll get into possible explanations for why the fed targets a positive inflation. Our Central Bank tries to achieve steady, slight, not very noticeable inflation. They have an official inflation target of 2% per year. Their typical means of targeting inflation is via adjustments to the Fed funds lending rate, which is a wholesale price at which banks can obtain money to lend out. The fed moves the funds rate up when inflation is greater than their target, and down when it is less than the target. It's a relatively weak tool for targeting inflation and it targets only inside money, i.e., the credit cycle. It is a non-linear tool. Small incremental changes at already low interest rates have very little effect on the demand for credit, but above some ill defined higher rate the demand for credit will become more sensitive to interest rates. A large part of the U.S. consumer economy runs on credit. There always comes a point where the amount of additional credit banks are willing to extend runs out. It's then that the consumer who is maxed out on credit must undergo belt tightening -- bankruptcies increase, and the economy moves into recession. The pattern of easy credit followed by higher rates and belt tightening is responsible for what is called the short-term credit cycle. One reason, often given, is that negative inflation, i.e., price deflation, is so dangerous that if the Fed were to miss its target on the low side we would slip into deflation causing an increase in real interest rates, i.e., the buying power you return to your lender is greater than the buying power borrowed. In reality, however, small incremental increases in real rates near zero inflation would have virtually no more effect on prices than small decreases in rate do. There is probably an ~2% window on either side of the zero point before we would get into real trouble. In fact when the U.S. was on a gold standard inflation sometimes did dip briefly into negative territory and then return to near zero positive territory without serious effect. What would be catastrophic, however, in an economy that runs on credit, would be significant deflation. Then the buying power of the dollar would rise, real interest rates would increase and real the cost of everyone's loans would rise. The economy would be thrown into a depression. But I suspect there is a much better argument for why we target 2% inflation, and not 1% or zero. (No one has to ask why we don't target a negative inflation, the answer to that is obvious, vide supra) I suspect the real reason we target a 2% inflation rather than zero may go something like this. If we can target an inflation rate below GDP growth, and the return on capital can be maintained greater than the GDP growth, then targeting a positive inflation rate < or = to GDP growth will result in the real interest rate on debt declining over time; yet still allow for a net positive real return on capital. I suspect this is the real reason for choosing a 2% inflation target (somewhat arbitrarily of course within the constraints I just mentioned). A positive target < or = GDP growth helps pay off debt via inflation without eliminating a net positive real return on capital so long as return on capital > GDP growth, which it is in capitalist economies because those with capital to lend out will not risk lending it without a real positive return. Now, I'd love to be able to ask a real MMT economist, like Wray or Mitchell, the only people who really understand this stuff, besides a genius like Bernanke, the same question you asked me.
I don't know either but I am not going to look a gift horse in the mouth. You can get a 2.5%-2.75% 30 year mortgage or if you are more adventurous, a 7/ARM for 2.25%. If you only borrow $750K, all the interests are federal tax deductible. Effectively you pay ~1.5% - 1.9%, below inflation rate so you are getting better than free money. If you use the money to then buy ABBV and get a 5% dividend, your carry trade, using none of your own money, gets a 2.5% payout. Look at it another way: A 5% dividend on a $750,000 investment net you $37,500 a year. You 2.75% 30 year mortgage has an annual payment of $36,740. Your ABBV dividend more than pay for your mortgage. After 30 years your ~8,000 shares of ABBV costs you $0. This is free money to us mom and pop on Main Street, a gift from the Fed/Trump.
In the bigger picture, that's peanuts. The vast majority of stock purchases this year are by the richest 10% of your country.
I like the way you think. Do you own a $833K house free and clear that you could borrow 750K on using a conventional mortgage? The bank will probably want to be sure you can pay your mortgage from your current income. They may not take into account your income from a future investment. The risks for both you and your lender are related to our inability to see the future with accuracy. This includes the risk you take by basing your calculation on one equity only and its current dividend. (I like ABBV!, and I have owned it.) What if real estate prices drop and/or you have to move. Technically, you can't qualify for conventional mortgage on a home you don't live in, and if the deal is seen as a secured loan on a stock investment my guess is that they won't lend at 2.75. But I like the way you think. Now try to think the way a banker might.
%% LOL exactly. And the US stock market was in an uptrend 100 years before the Fed was formed. I shop @ WMT some/not a stock tip. I ride more tech trends/etfs, myself...………………………………………………………………….
If your house is worth less, borrow less and if you already have a mortgage, do a cash out and invest the balance. If you don't own a house, buy one. If you don't have a job, well I can't help you then. As for your risk, it is quite manageable really. ABBV/ABT has been a dividend aristocrat for at least 30 years so the risk of lowering dividend rate is small. As for the underlying, just leave it alone, as long as the mortgage payment is taken care of, you can wait it out, it is free money anyway.