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 General :: Outside the Cube :: Finances
Experiences and advice on personal finance issues. From credit cards over credit scores to mortgages and real estate investing.

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Featured Article

How can all that mortgage debt ever be repaid?

Question:

I have read that the total of all mortgages in the USA is between $10 and $20 Trillion. Further that the total of all cash Dollars in circulation in the world, if you added-up all the $100 bills, $50 bills is around $1 Trillion only.

How can one Trillion pay for $10 to $20 Trillion of debt?

Answer:

The following is a simplification of the real processes. You get a paycheck from your employer (or business), you pay the bank for your mortgage, the bank re-loans the money to your employer (et al), and this money is returned again to you in the form of another paycheck (et al). Moral of the story, you don't need all the money in circulation to pay for all the mortgages, you only need enough money in circulation to pay for the mortgages THIS MONTH, (plus food, gas, other liabilities and expenses, etc).

The money owed on these mortgages is done so on a 30 year basis. Now granted the mortgage-to-M1 (currency in circulation) ratio is certainly very high historically, but most mortgages tend to be of the 30-year variety. Over time more M1 is released by the federal reserve, and in this fashion, inflation reduces the size of your debt payments over the years. The fed does not have to release 1 dollar of every 1 loaned by banks. The fed only needs to release (est.) 1 dollar for every 10 than can be loaned. So it will not require a release of 10 trillion over 30 years to cover these mortgages, only 1 trillion. Granted the aforementioned dollar amounts don't cover expenses other than housing, but you get the point. Assuming there is one trillion in circulation, another 1 trillion released over the next 30 years would essentially double inflation. It's not a reach to expect inflation to double over 30 years, in fact that seems historically low.


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