Quantum Change In Gold And Silver Demand, Jan. 2, 2018

We hope everyone had a happy New Year.

There is a long informercial airing on American TV. It shows an endless parade of senior citizens, struggling to pay their bills, unable to buy that motorized stairway lift, play golf, or eat out at restaurants. The solution?

Get a reverse mortgage! The number to call is 1-800-GET-CASH. That number again is one eight hundred get your free cash now!

To summarize the point of the commercial—if not the terms of the fine print—the senior gets a monthly check, and this free money pays for all the things currently missing in his life. Free, as in magic unicorns and rainbows. Right?

Not so fast. The senior is merely borrowing. He’s just going into debt. He leverages his house to buy consumer goods. He begins with an asset worth, say $500,000, and no debt. And he ends with the same $500,000 asset only now it’s matched with a $500,000 liability. Therefore $500,000 worth of equity has been drained away. His equity, or more accurately, former equity has been dissipated.

He is spending his house, while still living in it. His kids, of course, forfeit their inheritance. The family home must be sold to pay off the mortgage—to a buyer who will probably have little to no equity either.

There is a great libertarian metaphor. First, the government breaks your leg. Then it gives you free crutches. People are supposed to be—and apparently are, looking at voting behavior—grateful for the crutches. But it should be obvious that crutches plus broken leg do not equal two strong legs.

The government breaks the legs of seniors by depriving them of interest on their savings. Good thing government comes to the rescue with crutches, in the form of reverse mortgages. The senior may not be able to walk—earn interest—but at least he’s propped up by an artificial appliance—a reverse mortgage.

Zero interest rate policy is the utopia envisioned by John Maynard Keynes. He actually called for the “euthanasia of the rentier.” Rentier means someone who lives on interest on his capital, including senior citizens. Euthanasia means driving interest to basically zero, to suffocate them.

The reverse mortgage promises the economically impossible. It would seem to violate Say’s Law, which basically says that you get the consumer goods you want by producing something to trade for them. The senior is no longer productive. And with zero interest, his capital is not enabling a productive activity either. So how does he get this free purchasing power? Where do the free stair lifts and golf clubs come from? What does he give, in exchange?