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How to Hedge Against Inflation With a Home Equity Loan

By: Steve Johnson

9/29/2009 - 55 Comments

Home equity loans were a large part of the consumer credit expansion that fueled the economy for more than a decade.

The housing market bubble drove up housing asset prices, but without refinancing a homeowner couldn’t spend their new found fortune unless they got a home equity line of credit.

If you are unaware of the coming wave of inflation that will threaten to unravel the global financial systems, all I can say is wise up or read some of my previous articles

If you are aware of the inflation that is being created, then I want you to also know that the Federal Reserve is not leaving you with any low risk options to park your money.  This is the time to bet your savings on inflation.  In the next few years, inflation is going to confiscate your hard earned savings unless you hedge against it. 

Stealing From The Savers

If you did the right thing and saved your money, paid off your debts and didn’t extract the equity from your home to buy a big screen TV, then you don’t deserve to lose it all to inflation.  Inflation is the process that the government hopes to pay it's bills with, by confiscating the wealth of the savers to pay for the debts of the spenders.

By borrowing money that we cannot possibly repay without increasing the currency supply by buying our own treasury bonds, the Federal Reserve is in the process of confiscating the wealth of the savers to pay for the debts of the spenders that cannot pay their debts because the risks they took were so great.

The big banks that took the huge risks were encouraged by the very same Fed monetary policy to take the risks that they did – knowing that they were ‘too big to fail’ and sure to get bailed out – which they did.

Few Safe Places

Savers have a tendency to avoid risk, which the Fed is very aware of and is taking every advantage of.  Yet the only way to protect your wealth against inflation is to invest in asset classes that are usually risky like foreign markets and precious metals.   Inflation has reversed the risk, making bank savings accounts and homes the most risky place to store dollars.

It is always a good idea under normal conditions to pay off your home, which I advocate.  But in this situation, with failing home prices and a falling dollar, you should consider using a home equity loan to borrow your own money at low interest rates and investing it in inflation protection assets like gold and silver.

If you were to use a home equity loan to borrow 50K at 5% and invest it in gold with a 30% return, you would be netting 12.5K per year.  Before you think that is a great deal, realize that investing in gold will only keep you even with inflation.  So if your return is 10% or 60% it's not that you made a lot of money it’s just a reflection of the real rate of inflation and you are just keeping even with it.

A home equity loan is a good way to protect at least some of your wealth invested in your home from inflation, but if you home is worth 300K, then 50K in only 1/6th of your investment.  I realize that it’s hard for savers (like myself) to come to the understanding that the current monetary policy of the Fed does not protect money that is invested in a home, but that is exactly what has happen. 

Your money is not safe, even if it feels safe.  The value of the dollar is dropping like a rock and that means that the dollars invested in your home are losing value.  Your money is being confiscated while you sleep in your own home every night.

For this reason, I cannot pay off my home and I have a home equity loan with the money hedged against inflation. 

A lot of people who are trapped on a fixed income are going to suffer with the high prices that will result from the inflation that the Fed is pursuing.  Only smart investors will be able to protect themselves. A home equity loan is a poor mans hedge against inflation.

Another reason to get a home equity loan right now is because they will probably not be available within a few years as consumer credit continues to decline.  So get one while you still can.

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