America's Real Estate Burden Ensures Inflation

By Dr. Jeffrey Lewis   Mar 11 2010 2:59PM

The Obama administration and the US Congress have together made inflation the real monetary policy of the United States. While pundits and talking heads focus on the bailouts and loan packages, they're missing the bigger picture. It isn't what the US government outright purchased (stock, debt, and real estate paper), but it's what the US government is guaranteeing that will make all the difference.

Exposure to Real Estate

The US Government, the Federal Reserve, and ultimately the citizens of the United States have more exposure to real estate than they could have ever imagined. The US government owns huge positions in several large banks, as well as individual debt obligations from others. However, dwarfing all of these real holdings is its massive exposure to real estate through Fannie Mae and Freddie Mac.

Calculating the Risk

Though politicians and pundits have labeled the total US exposure to the mortgage/lending business at the cost of TARP, which is roughly $700 billion, obligations to back the full losses of Fannie and Freddie extend into the trillions. The duo, which have grown to represent 90% of the secondary mortgage market in the United States, have home loan portfolios worth roughly $6 trillion, an amount equal to the entire money supply of the United States and half of the national debt.

Inflation is Necessary

Now on the hook for $6 trillion in mortgages, the politics of the US government are coming full circle. Politicians realize they're losing votes by the day for the bailout (which is so far under $100 billion out of $700 billion), and they will soon be losing money on their agreement to back Fannie and Freddie against huge losses. If they can pull off the seemingly impossible profitability, then they might stand a chance at explaining the necessity of the program to the American taxpayer. However, to generate a profit, the government will have to literally inflate so quickly that every home in America is again above water.

Real Estate, Precious Metals, and Inflation

Real estate has long been seen as an investment class that hedges the rate of inflation. This trend has held constant, except for periods of extreme growth in population, as well as times of financial uncertainty. Unlike gold, silver or any other precious metal, housing is a commodity that can be created day in and day out, whenever the price of the output rises higher than the cost of the inputs.

Therefore, as housing prices rise due to inflationary policies, new supply is sure to come on board, and prices will again settle.

The US government economists and politicians aren't totally naïve; they know what they'll have to do to pull off a profit for the taxpayer, and they'll be willing to do it at any cost. Each recession the solution is the same: inflate yourself out of the problem. However, this time the problem is much bigger, and the solution is just as big.  Protect yourself, your assets, and what you've worked so hard for. With inflation being assured, you'll want precious metals.

Dr. Jeff Lewis

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Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-R eview.com