I'm talking within the context of risk pricing and how created money changes risk profiles. There is noone willing to lend their hard earned money during desperate times so we cleverly introduce money that noone ever had to work for. Hence, why i call it "money that has an hour price of 0" How can it be of same value if i have to engage in an activity for an X time to earn X dollars while printing does not. Do you understand how long it takes for me to work at McDonalds to buy a billion worth of government bonds? With printed dollars, time value suddenly doesn't exist which, again, simply refers to the price of 0. If printed money had the same value as "real" money from the beginning why would we ever need to print it in the first place? We would just take that money from the real world.
We consumers can print money too. If you have any real estate property, in 2020-21, you can "print" (borrow) from the bank at 2.5%-3.5%. Put that in a CD and you can now get 5% return. So, effectively you print your own currency and better yet, you get a free 1.5 to 2.5% return on the money you printed, stimulating your "economy". Just the same as the USG.
Simple. In 2020, I own my house free and clear, so I did a cash out refi @ 2.6% 30 year fixed. That money is now generating 5% a year in CD. I net 2.5% a year on the money I don't have (borrowed), free money. It is a once in a lifetime gift from our Government. In fact in 2020, a Danish bank was offering to pay you a yearly interest (I think it was 1.5%) to get a mortgage. Banks were paying German Gov an annual interest to buy & own G G bonds. It doesn't take a genius to figure out those were great deals and we would be foolish not to jump in. In fact I could get more if I invested in a dividend paying stock like ABBV paying 5%. So now with the money I don't have, I get 5% + stock appreciation.
Wait, did you just say you KNEW interest rates were to rise? Cause if i understand this correctly you're referring to 2 different times. So technically you were just "long yield"? Am i correct? But what if interest rates would'nt have risen?
I am an amateur retail trader, didn't really know. Just a lucky guess, looking at US historical interest rate trend, after WW II....
It's because your money's unit value has nothing to do with how hard you worked to get it. You had to work hard to get it because it already had value and apparently there was no one around willing to give you money (because it was valuable) unless you worked for it. Of course, from a personal, individual viewpoint, it is what you can exchange for money that gives your money value, not how hard you personally had to work for it. But why work specifically for dollars and not pesos or francs!? Its because you are going to be buying things from sellers that won't accept pesos or francs. Also, getting paid in U.S. dollars will obligate you to pay taxes, in one form or another, to the U.S. Government, or go to jail. And it turns out that the U.S. government will not accept anything other than U.S. dollars in payment for taxes! This is why MMT economists say, "taxes give money value." So, in summary, although it was your hard work that helped create the things that people are willing to exchange their valuable money for, at the end of the day, the money you worked for had value independent of how hard you had to work for it. (Nowadays) All the money in the economy has it's root in "outside money,"; the money created by government and spent into the economy. Spending is what brings this outside money into existence. It's appropriated by Congress, but it doesn't have an existence until it is spent into the economy. This is a model to use if you want to understand fiat money. When a bank using fractional reserve banking makes a loan it is creating new temporary money that will disappear when the loan is paid off. This temporary, "inside" or "bank" money has its root in "outside" money which is permanent in the economy until taxed away. (Note that under normal circumstances the amount of outside money in the private sector economy is dwarfed by the amount of temporary "inside" money. In other words, inside money is the main contributor to "the money supply" for which M2 is a measure.)
Was that 2.6% the APR or before closing costs? If you did that at 2.6 APR, then you made a very smart decision.. It is almost an arbitrage if you buy Treasury securities or CD's. (I think of true arbitrage as being virtually zero risk.) To get an APR on an equity loan at 3 or below, both your credit rating and timing would have had to have been excellent. May I suggest ABBV is too volatile and risky as an income producer (though it is neither very volatile nor very risky) to get you near a true arbitrage. A little better choice might have been AMGN. Anything with a long steady history of dividend increases, low beta and recession resistant would qualify for consideration. And you might prefer not having all eggs in the same basket. But any dividend common stock leaves you with perhaps more risk than's wise. I'd consider a preferred stock for this use also.. But by actively managing your equity loan for a couple years you will, or already have, create[d] the opportunity to turn it into a virtual zero risk arbitrage via U.S. Treasuries. Perhaps you did that! (Let me just add in passing a warning to others that it's high closing costs on some of these home equity loans that can wreak havoc with the APR and the returns.) I very much like the way you think!
https://x.com/sevenloI/status/1723092752206885002?s=20 *seven @sevenloI *United States Outlook to Negative From Stable by Moody’s *Moody’s: Downside Risks to US’ Fiscal Strength Have Increased *Moody’s: US’ Fiscal Deficits Will Remain Very Large *Moody’s: Debt Affordability to Be Significantly Weakened 4:38 PM · Nov 10, 2023 · 10.6K Views