Wednesday, October 10, 2012

Maturing Thoughts on Borrowing for Non-Productive Purchases

I have been a lifelong opponent of assuming personal debts.  I have never maxed out a credit card or applied for a loan.  The handful of times I've been late on a bill payment in my life are some of my gravest mistakes, and the tiny finance charges I paid each time for my oversights are a source of shame.  I hate debt.  That was the mature attitude to have during normal, boom-bust business cycles marked by productivity-driven growth and inventory-derived recessions.

Times have changed.  The historically normal boom-bust model is giving way to its once-in-a-lifetime deformed cousin, the hyperinflationary depression crisis.  An overindulgence in government, business, and household debt is driving the Fed to quantitatively ease away the dollar's value.  This will destroy dollar-based fixed income assets.  That's bad for savers, bondholders, banks, and hedge funds holding fixed-rate notes.  That's good for debtors owing fixed-rate loans, as the devaluing dollar enables them to pay off old debts with dollars of lesser value.

My point is that now is the time for previously debt-averse people like me to seriously consider taking on debt as a time-based arbitrage strategy for a self-destructing currency.  I scoffed for years at consumers who  took out automobile loans.  Owing money on a consumer good that immediately loses half of its book value upon purchase ought to be financial suicide.  Buying a vehicle with debt is good if said vehicle is used as an income-producing asset, i.e., a taxi cab, delivery van, ice cream truck, or urban safari tour bus for the hills of San Francisco.  I thought that way until very recently.  Now I think a loan of any kind, even for something as unproductive as a new car, is a useful way to acquire a hard asset with an increasingly worthless liquid asset.

I've been window shopping for a new car for some time.  My 2003 Ford Mustang still hums but at 80K+ miles it's getting long in the tooth.  When I turn the ignition key on a brand new sports car of some sort (another Ford Mustang or a Porsche are my leading contenders), it will be with the help of a fixed-rate loan that I will be happy to owe.  Watching the loan lose its value in the years ahead as hyperinflation enables me to pay it off in today's equivalent of pennies will be great for my net worth and my stellar credit rating.  Why, I may just pay that five-year loan off a month early as a show of generosity just to ensure I'm not the final nail that drives Ford Credit or its hedge fund syndicate into bankruptcy.

Nah, just kidding on that last count.  I'd never accelerate my payment schedule or do anything else to give a brain-dead counterparty some temporary advantage.  They'd probably assess me a prepayment penalty just to reach for my wallet one last time from beyond the bankruptcy grave.  Don't think a creditor wouldn't resort to that if a post-hyperinflation political regime allows it in one final act of financial repression.

I'll be checking with my local auto dealers soon to see what kind of financing terms they offer on new, flashy sports cars.  I'll also be checking with my bank's loan desk to see if they'll let me max out some one-year consumer loans just before this hyperinflation show gets rolling.  The Godfather of Soul, James Brown, once sang "Papa's Got a Brand New Bag."  Well, Tony here needs a brand new car, paid for by creditors dumb enough to loan me money as the dollar goes down the drain.