After being debt-averse my whole life, I finally got a mortgage in 2020 when the prevailing interest rate dropped below the expected inflation rate. Because that meant real rates were negative, and sure, I'd love to get paid for taking out debt. At least so far, it's been a great trade, with me paying 2.75% on my mortgage and my home's value up about 35%.
Out of morbid curiosity, I'd like to know who I'm screwing over. Somebody out there is getting a 2.75% cash flow in a 7% inflation environment. Is it my mom's pension fund? The Saudi sovereign wealth fund? Wells Fargo? The Federal Reserve, and hence everybody who pays for goods with dollars?
Vanguard's trademark total bond ETF BND, which is a part of the classic 3-fund portfolio [1], a cornerstone of passive investing, has 2.2% commercial and 20% government-backed mortgage backed securities [2]. So a lot of everyday folks across America, especially those retired looking for a stable cashflow for retirement, are helping fund your mortgage. It's a bit of win-win situation (albeit a loss for them during high inflation as you point out): you need money now, and they need a mostly guaranteed return on their money in 10-20 years time that pays out better than Treasuries, and gives them diversification compared to bonds (either Treasury or commercial).
You are not screwing over anybody. It is a two-sided deal that both parties find good.
The interest represents the time value of money, which may be different to each side.
Maybe the other side thinks that the 7% inflation is just a short spike over the duration of the mortgage.
Maybe they would like to get USD in the future from a stream of USD denominated mortgage payments if they think the dollar is going up relative to their own currency.
Aside from the time value there may be other reasons, too:
Maybe there are regulatory reasons forcing them to buy a certain amount of mortgages or bonds to diversify across asset classes with different risks.
Or maybe it is just their own diversification strategy to do so.
Financial risk relates to how much the value of an asset changes over time (its variance) so in many cases holding “too many” high-growth stocks in a portfolio is beyond the risk appetite for many investors. Lower yield more stable assets are desirable to balance this.
> You are not screwing over anybody. It is a two-sided deal that both parties find good.
There are no situations in which every participants wins. There are always "losers" as long as there are finite resources.
Like you said, both participants in the mentioned deal could be profiting, but there are more participants involved on the open market which are affected.
The "losers" are often hard to determine, as the previous commenter correctly pointed out. Nonetheless, the wealth came from somewhere.
If it really was "created" from the interaction then this creation causes inflation, effectively removing wealth from everyone holding the currency in which the money was "created".
It's true that this particular deal will have a miniscule effect, but in does matter in aggregation with everyone else that made similar deals.
Macroeconomics is a much more challenging topic then you seem to realize
The theory is valid but too abstract to really point out where people lose something in return for what they've gained.
It's true that people can gain efficiency with specialization for example, but that's not necessarily a gain unless you define efficiency as the primary goal to be achieved.
This gained efficiency will then over time make this the most economical way to produce. This effectively harms everyone that hasn't adapted yet
It's just not an easy topic and claiming it is doesn't help whatsoever
No, it's not. A full field of research can never be adequately reflected with a single term.
Nor did I ever claim that it was Zero Sum at any point.
I just pointed out that there are, by necessity, always "losers". That doesn't make it a zero sum game, as the values can be different and have very confusing side effects.
There are not always losers, though, in a very real sense. If I have nothing but 100 gallons of water and you have nothing but 100 pounds of meat, then an exchange of some amount at the margins benefits both of us in every way. If we set the amounts that we trade carefully enough, then we'll both win by the exact same amount (however we measure that in our own heads), and it's really hard to call anyone in that situation a "loser".
Presumably what you're referring to is that in a realistic market, there are also tons of other people who are willing to swap their wares, and maybe they'll offer me something better for a gallon of water than a pound of meat. So sure, I could be taking a sub-optimal deal by trading with you at the rate you want. But the trade is still positive-sum, no loser in sight. In an efficient market most trade is net beneficial to everyone and doesn't necessarily have losers, including when you start layering in credit and derivatives and inflation and velocity of money and whatnot, even if it gets really complicated. That is possible because we all have slightly different self-valuations of money, goods, and risk at different scales, and the markets let you trade each for the other until you've self-optimized your portfolio blend.
That's not to say you can't come up with scenarios where there are unambiguous losers, but it's definitely not some law of economics or anything like that.
This discussion is quiet far from what I've initially said from my perspective, nonetheless...
> it's definitely not some law of economics or anything like that.
This is a no true scotsman fallacy. It's true that this is not a preordained truth, but you'll realistically always have someone at a loss for as long as resources are limited. And if you can't see one than you're just ignoring the one's at a loss as irrelevant.
I.e. descendents with natural resources or even non-human entities in the context of meat production etc
Not sure there is a strict necessity for "losers", either, if you want to go to positive sum, but claim some gain more than others lose. Situations where in a small world both sides gain (ie no loser) are conceivable.
Edit: I flatly reject the notion that strictly someone's gain requires someone's (non-proportinate) loss, ie that there are always "losers". That notion is also not really a current macroeconomic position.
You're screwing the people who have to pay much more to get on the property ladder than those before them. In essence, it's a transfer of wealth, predominantly from younger people (getting on the property ladder) to those who have been on it for a long time. What the younger generation will do when it's their turn (when most of them couldn't even afford to get on the ladder in the first place, nowadays), I don't know.
The idea of the "property ladder" is that your first house is (relatively) cheap, and then as your get older your earnings increase and the old mortgage seems cheap, and maybe you now have children and want a bigger place, so you sell your property, hopefully making a profit on it, and buy something bigger that you couldn't have afforded before, and repeat. The reason for the ladder metaphor is that each house is a step towards the next bigger house, but if you hadn't bought the first house, probably you wouldn't have the increased equity available to make the more expensive house available to you. Likewise, with a ladder, you have to do all the steps in order.
> In reality, the Jyske mortgage borrower in Denmark is likely to end up paying back a little more than they borrowed, as there are still fees and charges to pay to compensate the bank for arranging the deal, even when the nominal rate is negative.
Ahhh, there it is. So they probably just make Central Bank finance their fees, using borrowers as a conduit. Clever.
I'm still not sure how comes we have inflation closing in to 10% but banks are willing to give me mortgages under 3%. Somebody is getting suckered here, and I suspect it's me, but I am not sure yet how.
> Somebody out there is getting a 2.75% cash flow in a 7% inflation environment
Everybody with cash savings, I guess. Savings rates are abysmal for a while now. Otherwise, not sure.
After being debt-averse my whole life, I finally got a mortgage in 2020 when the prevailing interest rate dropped below the expected inflation rate. Because that meant real rates were negative, and sure, I'd love to get paid for taking out debt. At least so far, it's been a great trade, with me paying 2.75% on my mortgage and my home's value up about 35%.
Out of morbid curiosity, I'd like to know who I'm screwing over. Somebody out there is getting a 2.75% cash flow in a 7% inflation environment. Is it my mom's pension fund? The Saudi sovereign wealth fund? Wells Fargo? The Federal Reserve, and hence everybody who pays for goods with dollars?