The End of Cheap Money

I just read a very interesting article from MSN Money describing how the end of cheap money is coming soon.

Not tomorrow soon, but in the next few years soon.

Basically, it breaks down like this.

1) Over the past decades large countries have been saving less money and investing less money in infrastructure. So, since they are not spending the money on infrastructure, the pool of cash that they borrow from (people’s savings) is not needed. So the price to borrow money (interest rates) drops.

2) Because there are so many emerging countries (China, Chile and others) that will soon be adding billions of miles of housing, roads and infrastructure, they will need to borrow money to invest. They will come to that same pool of money, which won’t cover all of the need. So, the cost of borrowing money will go up.

He is optimistic about the result of all this: “So while the end of the era of cheap money will make it harder for households and governments to live beyond their means, it will usher in a new age of global prosperity and stability while putting an end to the risky, yield-seeking behavior that inflated the housing bubble.”

That’s the long term.

In the short term, we will also see the cost of borrowing money go up because governments will have to spend less in order to get out of debt, leaving less money in circulation. As the author says, “This will mean the end of 0% credit cards, 0% auto loans, interest-only mortgages and low-cost auto leases. If you need to borrow money for something, now’s the time.”

In the long term, he actually suggests getting away from real estate and going to stocks. By long term he means by 2030. In any case, I would never put all my eggs in one basket. I’ll keep a diversified portfolio between real estate and other options, thanks.

What does this mean for you?

Well, first, put it all in perspective. Don’t get stressed out over the difference of half a percentage point if you are buying a house today. Ten years from today you will marvel at how good you got it.

Second, if you are thinking of buying now, buy now. These rates are not going to hold!