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If rates are going to rise, is it better to hold cash and use loans for purchases such as land, or is it better to pay cash up front now and invest the cash in

by dvdhnt 5y ago

If rates are going to rise, is it better to hold cash and use loans for purchases such as land, or is it better to pay cash up front now and invest the cash in money market funds or other financial instruments?

wing-_-nuts 5y ago
Honestly it's kind of a wash. Yes, rates are dirt cheap right now. Basically every asset out there is priced (high!) with this in mind. If rates were to rise, asset prices must naturally come down as people can afford to borrow less. If you don't have an emergency fund, now is the time to build one. Breaking inflation is a painful process that will eventually lead to a bad recession. Things will get worse before they get better.
- astrange 5y ago
  Reducing inflation by raising interest rates is indeed painful because it basically works by making everyone unemployed so they can't ask for raises. This is, as you can see, a bad idea and a violation of the Fed dual mandate, which they for once aren't ignoring.
  - seanmcdirmid 5y ago
    Reducing inflation by raising interest rates makes money more expensive, which hurts those that need to borrow it and benefits those that can lend it. Higher rates also make assets cheaper to buy as less leverage can be brought to bear in bidding. Anyways, the fed should have raised rates when the economy was good (and not just good because money was cheaper), so they could reduce them when the economy was bad. These days, we are all just addicted to cheap money and all fiscal discipline has been thrown out the window (cut rates in bad times and good!).
    - astrange 5y ago
      The economy hasn't been good anytime recently until 2019 or so. Unemployment consistently improved over time far past any mainline economists predicted, especially the Larry Summers types who ran the 2010 recovery. Maybe they should've lowered the rates then so they could raise it later - they certainly didn't do enough stimulus. There are weak models behind all of this at best; "cheap money and fiscal discipline" isn't even a model, just moralizing, but the actual arguments about fiscal policy use things like "potential output", which has assumptions like "the economy will overheat if black people have under 10% unemployment". https://stayathomemacro.substack.com/p/racism-skews-our-beliefs-about-whats https://stayathomemacro.substack.com/p/racism-skews-our-beli... As for current inflation, it's not yet enough to ruin the Fed's decades long record of undershooting the 2% target, but it is caused by an ongoing natural disaster and not money printing. So to fix it, you can try fixing the natural disaster…
      - seanmcdirmid 5y ago
        Even in 2019, Trump pressured the Fed into not raising interest rates, saying they would make the economy crash. Trump is hardly alone in blame, Obama, Biden, and Bush are just as bad. Money has been cheap since 2008. Did everyone expect it to be cheap forever without consequences? COVID just blew down a house of cards, fixing COVID isn’t going to magically fix our inflation problems, the house has already been blown down and it will take another decade of fiscal discipline to build something sturdy back up again. It should be possible to achieve better employment without punishing savers and rewarding debtors.
- dvdhnt 5y ago
  Thanks for the response. I assumed it wasn't a large enough amount to count peanuts necessarily. I'm looking at loan around $20k over 3 years compared to paying cash. The reason I asked is because we do have an emergency fund but paying cash outright would cost half of that fund, which is a tough pill to swallow.
JamisonM 5y ago
The question you have to ask yourself about building an investment strategy around rising rates is: How much will they rise, how fast, and where does that quantity of increase on that schedule actually have an impact on my decision? If you are looking at a 5 year time horizon will the changes in rates be enough, or fast enough to make a real difference? I personally doubt it unless an external shock acts on the market -- which of course could also cut the other way!

by dvdhnt 5y ago

wing-_-nuts 5y ago

Honestly it's kind of a wash. Yes, rates are dirt cheap right now. Basically every asset out there is priced (high!) with this in mind. If rates were to rise, asset prices must naturally come down as people can afford to borrow less. If you don't have an emergency fund, now is the time to build one. Breaking inflation is a painful process that will eventually lead to a bad recession. Things will get worse before they get better.

astrange 5y ago
Reducing inflation by raising interest rates is indeed painful because it basically works by making everyone unemployed so they can't ask for raises. This is, as you can see, a bad idea and a violation of the Fed dual mandate, which they for once aren't ignoring.
- seanmcdirmid 5y ago
  Reducing inflation by raising interest rates makes money more expensive, which hurts those that need to borrow it and benefits those that can lend it. Higher rates also make assets cheaper to buy as less leverage can be brought to bear in bidding. Anyways, the fed should have raised rates when the economy was good (and not just good because money was cheaper), so they could reduce them when the economy was bad. These days, we are all just addicted to cheap money and all fiscal discipline has been thrown out the window (cut rates in bad times and good!).
  - astrange 5y ago
    The economy hasn't been good anytime recently until 2019 or so. Unemployment consistently improved over time far past any mainline economists predicted, especially the Larry Summers types who ran the 2010 recovery. Maybe they should've lowered the rates then so they could raise it later - they certainly didn't do enough stimulus. There are weak models behind all of this at best; "cheap money and fiscal discipline" isn't even a model, just moralizing, but the actual arguments about fiscal policy use things like "potential output", which has assumptions like "the economy will overheat if black people have under 10% unemployment". https://stayathomemacro.substack.com/p/racism-skews-our-beliefs-about-whats https://stayathomemacro.substack.com/p/racism-skews-our-beli... As for current inflation, it's not yet enough to ruin the Fed's decades long record of undershooting the 2% target, but it is caused by an ongoing natural disaster and not money printing. So to fix it, you can try fixing the natural disaster…
    - seanmcdirmid 5y ago
      Even in 2019, Trump pressured the Fed into not raising interest rates, saying they would make the economy crash. Trump is hardly alone in blame, Obama, Biden, and Bush are just as bad. Money has been cheap since 2008. Did everyone expect it to be cheap forever without consequences? COVID just blew down a house of cards, fixing COVID isn’t going to magically fix our inflation problems, the house has already been blown down and it will take another decade of fiscal discipline to build something sturdy back up again. It should be possible to achieve better employment without punishing savers and rewarding debtors.
dvdhnt 5y ago
Thanks for the response. I assumed it wasn't a large enough amount to count peanuts necessarily. I'm looking at loan around $20k over 3 years compared to paying cash. The reason I asked is because we do have an emergency fund but paying cash outright would cost half of that fund, which is a tough pill to swallow.

JamisonM 5y ago

The question you have to ask yourself about building an investment strategy around rising rates is: How much will they rise, how fast, and where does that quantity of increase on that schedule actually have an impact on my decision? If you are looking at a 5 year time horizon will the changes in rates be enough, or fast enough to make a real difference? I personally doubt it unless an external shock acts on the market -- which of course could also cut the other way!