"No Hope"

First Lady Michelle Obama, appearing on Oprah recently, commented that "now we are feeling what not having hope feels like."

Really, Madam First Lady?

Were you not so out of touch with most of America, you might know that the first post-election print of the University of Michigan Consumer Sentiment Index posted a 6.6-point jump from the previous reading.  The index reached its sixth-highest level since your husband was elected President in 2008.  Consumers sure look hopeful.

You might also know that the equity markets have been on a tear since the election, with the Dow Jones Industrial Average tickling 20,000 for the first time in history.  The Dow posted 17 record closes in the 32 trading days after the election, and is up nearly 9% since then.  Also, the Wells Fargo/Gallup Investor and Retirement Optimism Index, which polls small investors, reached the highest point a week after the election since before your husband was elected President.  Investors - large and small - sure look hopeful.

I haven't been out Christmas shopping this year; recovering from hernia surgery tends to keep one house-bound.  However, a PwC poll covering the holiday shopping season found that consumers, on average, plan to spend about 10% more this year than last, and consumers with household incomes less than $50,000 plan to increase spending more than consumers overall.  So holiday shoppers sure look hopeful - even those of limited means.

Millions of Americans are hopeful that their health insurance premiums will go down, or at least not continue to increase at an astronomical rate.  Taxpayers are hopeful that they'll get to take home more of their hard-earned pay, and that the legacy of government over-spending may finally end.  Small businesses are hopeful that they won't continue to be strangled by regulatory excess.

If you really want to see what not having hope looks like, Madam First Lady, might I suggest you look at the footage coming out of Aleppo recently.  Tragically, most people there have lost hope, as your husband's "red line" disappeared like the scrawling on one of those Magic Slate things some of us had as kids, where you lift the clear plastic sheet, and voila, the lines you drew are gone.

Or pay a visit to Africa - not for a photo op, as your husband did when he visited his grandmother in Kenya, but to spend time among people living in impoverished conditions.  My own experiences in Africa have taught me that many people there do have hope, because they place their hope in God, not in some politician.

And that brings us to an important point: the sheer arrogance of someone actually suggesting that the people's hope derives from who occupies the White House is pretty amazing.  Just because you bandy the word about as a campaign slogan doesn't mean you've cornered the market on hope.

Especially when, after eight years, you've failed to deliver on the change that was supposed to justify that hope.

Beyond the self-serving silliness of Mrs. Obama's claim looms the question: why is she making the claim, at this moment in time, to begin with?  Her husband has publicly pledged to work to ensure a smooth and orderly transition of power, adding, "We are all rooting for [Trump's] success in uniting and leading the country."

But there's another message being transmitted, by Press Secretary Josh Earnest, who has made numerous public anti-Trump comments since the election, and then this from Mrs. Obama, who apparently isn't among those rooting for Trump's success in uniting the country.  Instead, her statements are working against those efforts.

Mrs. Obama claimed in a campaign speech for Hillary Clinton, "When they go low, we go high."

Indeed.

We've Been Jobbed!

The December 2016 jobs report - the last one that will print during President Obama's time in office - was a mixed bag: non-farm payrolls rose just 156k, less than expected, but there were upward revisions to the October and November gains.  The jobless rate edged up a tick to 4.7%, still very low historically.  The brightest spot was wage growth, which hit 2.9% year-over-year, the first decent number since the recession.

Yahoo Finance placed a different spin on the report.  It printed an article titled, "President Obama's Legacy Has Just Been Cemented."  Hmmm.  Rather than accepting at face value an attempt by a left-leaning internet "news" source to salvage one piece of the outgoing Democrat President's now-threatened legacy, let's look at the numbers and the facts, shall we?  Point by point, we'll debunk the Yahoo Finance (YF) puff piece.

"75 consecutive months of job gains."

Can't argue with that one.  However, read on.

"Wage growth acceleration."

To justify this assertion, YF presents a graph showing average wages since 1980.  They then unabashedly mine the data, showing that wage growth averaged just 0.1% per year from 1980 to 2007, but it's been 1.3% since 2012.  Sounds impressive, right?

Except the period from 1980-2007 included three full recessions and parts of two more, yet YF conveniently starts the recent growth trend well after the most recent recession ended.  Why not compare wage gains from the time President Obama took office?  Or compare the recent growth spurt to other periods of strong growth in wages?  The fact is that wage gains have been an anemic trouble spot for the labor market from the end of the recession until about 2014, and only then have they picked up.  When it comes to data mining, if you torture the data long enough, it'll confess to anything.

"Full-time job boom."

 Attempting to refute the claims that much of the job growth we've seen since the recession ended has been "lower-quality" jobs, YF presents a graph comparing growth in full-time vs. part-time employment.  They note that full-time jobs have grown by 13.7 million since December 2009 (again, conveniently excluding the decline in full-time employment from President Obama's inauguration until December), while part-time jobs have grown by only 420,000.

Not so fast.  Those who argue that the jobs we've added are of lower quality than those lost during the recession base that argument on the U6 rate, which by definition is "Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons."  In other words, it's not only those out of work plus those working part-time because they want full-time work but can't find it.  It's those that are flipping burgers at McDonald's when they'd rather be making mortgage loans, like they used to, which accounts for a large measure of job replacement and gains since the recession.

The U6 rate has definitely improved since the recession.  However, it remains at 9.2%, nearly double the headline unemployment rate (it was below 8% before the recession).  And, like the headline rate, a big part of why it's come down is that the labor force participation rate has fallen from 65.8% in February 2009 to 62.7% - the eighth-lowest level since 1978 - in December.

What does that mean, and why is it important?  It means that the percent of the population that is working or actively looking for work has declined by more than three percentage points during that span (that translates to about 7.3 million people).  Since the number of those working has increased, that means the number of those looking for work has declined precipitously.  Why?  Simple: they've given up looking, unable to find jobs.

Why is the number important?  It's a key determinant in any measure of unemployment.  The headline unemployment rate is those able and willing to, and actively looking for work, but unemployed, divided by all of those able and willing to work.  If you're not willing, you aren't counted in the participation rate, so you fall out of the jobless rate equation.  The same is true of the U6 rate.

In other words, as the number of discouraged unemployed - those who've given up looking for work - increases, driving the labor force participation down, both the headline unemployment rate and the U6 rate look better and better.  Statistics are like a bikini; what they don't reveal is often more interesting than what they do.

"Outpacing the rest of the developed world."

YF goes on to note that job growth in the U.S. has exceeded that in the rest of the G-7 combined (this point was also touted on CNBC Friday morning by the outgoing Labor Secretary).  Again, can't disagree.  However, it must be noted that the U.S. population is more than double that of the next-largest G-7 country, and is nearly equal to the combined populations of the other six members.  Still, it's true that even on a relative basis our job growth has outpaced countries like Japan, which remains depressed, and Italy and France, whose economies remain stagnant.  But it's a bit of a misleading argument without comparing the relative populations, labor force participation rates, and myriad other moving parts that influence one nation's job growth vs. another's.

YF led the piece with a statement that "Since the beginning of 2010, 15.8 million private sector jobs have been added to the economy."  "Since the beginning of 2010" - again with the data mining.  Let's look at some real numbers.

During the recession, a total of about nine million jobs were lost, counting only those months from July 2007 through September 2009 in which nonfarm payrolls declined.  During President Obama's tenure, the total gain in nonfarm payrolls was indeed about 15.8 million, counting only those months in which payrolls increased.  So we replaced the nine million jobs lost, and gained another 6.8 million.  That's very different from gaining 15.8 million jobs from a starting point of zero.  (The first 20 months of President Obama's tenure saw 16 months of job losses, totaling about 4.6 million jobs.)

If you average the net new jobs under President Obama's tenure over the 95 full months he's been in office, you get an anemic average monthly growth rate of about 71,000.  Hardly impressive.

However, none of my points above should be misconstrued as an argument that "President Obama hasn't created enough jobs."  Politicians don't create jobs, demand does.  There are three ways a President can foster job creation:

1.  Expand government employment, which brings with it a host of disadvantages, including larger deficits.  To his credit, federal employment has declined under President Obama - yet that actually makes him a job-cutter, not a job creator.

2.  Jawbone individual companies to hire workers or keep them in the U.S.  This is a pretty novel approach, and one that's been employed recently by President-elect Trump.  It's been somewhat effective, but it's a drop in the bucket.

3.  Foster an environment conducive to job creation.  Cut regulations, cut corporate and individual taxes, control health care costs, and otherwise get the hell out of the way of the private sector so it can do its thing.  Putting more money in individuals' pockets - whether from lower individual taxes or lower health care costs - will encourage them to spend, increasing demand, which increases jobs.  Cutting corporate taxes will make the U.S. more competitive relative to countries like Ireland, which has wooed away hordes of U.S. jobs since it slashed its corporate tax rate.  That's more employees in the U.S., with money to spend - again increasing demand, which creates even more jobs.  Cutting regulations (not to a ridiculous extent, just to a sane one) makes it easier for companies to do business, and if they can do more business, they'll need to create more jobs.

The first two means above are direct means, the third is indirect.  Regarding that point, has President Obama done any of those things?  Corporate and individual tax increases.  Increased regulation (Dodd-Frank, CFPB, etc., ad nauseum).  Obamacare, with its skyrocketing premiums.

Nope, nope and nope.

Can we really argue that the most business-unfriendly President of my lifetime has been the reason for any meaningful improvement in the business sector?

The bottom line is that it's fallacious to attribute job growth, stock market gains, GDP growth or any other economic metric directly to a President during his tenure.  There are too many moving parts, too many variables.  For example, do you think the Fed's zero interest rate policy and quantitative easing for nearly seven years might have something to do with economic and market performance under President Obama's tenure?

Also, there are lags between the implementation of policy (fiscal or monetary) and the effects of those policies.  The economy surged under President Clinton's watch, and the deficit turned into a surplus - in no small part due to the end of the Cold War under Reagan and Bush I, which paved the way for massive cuts in defense spending under Clinton.  It's taken several years for the Fed's low-rate policy to get the economy to the point where it can stand on its own, without life support.  And it's taken several years for the feared premium increases under Obamacare to rear their ugly heads.

So yes, we've seen considerable job growth since President Obama was sworn in, and a huge run-up in stock prices (even before the recent rally, which is a direct result of the market's hopeful expectations for a business-friendly administration).

But it's important to understand the distinction between coincidence and causation.  I've also gained weight since President Obama took office.  Does that mean he made me fat?  

The Return of the Curmudgeon

The curmudgeon is back, but not nearly as curmudgeonly - at least where the economy is concerned - as I was when I started this blog.  I'll let that story unfold in future posts.

As always, I will focus on speaking economic truth, because it's in short supply.  I find that understanding of economics is woefully lacking, including among some economists, as I've noted before.  And now more than ever, if you're getting your economic education from the media, you're only making matters worse in terms of your economic literacy.

I will also, as before, delve into politics, in part because economics and politics are bedfellows, and sometimes strange ones.

So a disclaimer is in order.  One, I'm not partisan.  In fact, I detest partisanship.  I'm a registered Independent, but have been registered in the past with both major parties, and voted across party lines when I was.  I do, however, lean conservative, especially on fiscal matters.

Two, I didn't vote for Donald Trump in the recent presidential election (I'll state why in an upcoming post).  Nor did I vote for Hillary Clinton (I'll address that too).  I wrote in the name of a third-party candidate who wasn't on the Kansas ballot, Evan McMullin.

So I'm likely to be an equal opportunity offender.  That's okay with me; at my age I've figured out that you can't make everyone happy, but pissing everyone off is a piece of cake.

If you are partisan, you probably don't want to read this blog.  But if you're open to civil discourse and witty repartee, I encourage you to visit, and even to chime in with comments or questions - but again, only if they're civil.  If you can't be civil, and refuse to hear a viewpoint that differs from your own, you're part of the problem, and should probably be reading Drudge or Occupy Democrats.  That will feed your bias, and prevent you from being exposed to the views of those who may think differently.

The next several posts will, in fact, likely be related more to politics than economics, because of the time we're in.  I've had a lot on my mind about recent happenings, so I've got a few particular posts teed up.  Stay tuned.

If you're new here, welcome, and if you followed before, welcome back (and sorry for the hiatus).  Here we go ...

The Cliff Revisited

Friends, we are NOT going off the fiscal cliff.  Bank on it.

Now, let me just say that the consequences of doing so would not be so dire as the mainstream media would have you believe.  The Congressional Budget Office (CBO) has estimated that heading over the precipice would subtract 2.9% from GDP in 2013.  The latest Bloomberg consensus forecast pegs GDP growth for 2013 at 2.0%, so that would mean negative GDP of 0.9% - a recession, but the mildest in post-WWII history.  For perspective, the trough of the last recession was at -8.9% GDP.

Granted, the expiry of the Bush tax cuts for all Americans would crimp spending.  But spending's lackluster right now anyway - retailers are forecasting such a ho-hum holiday shopping season that they're turning Thanksgiving into Black Thursday by opening at 7 or 8 pm, barely giving Mom time to clear away the turkey leftovers.  Analysis by SL Advisors posted on Seeking Alpha estimates that this would detract 1.3% from GDP.

But the media would have you believe that we'd face the Mother of All Recessions, an economic Armageddon that would throw us back into the Stone Age.  And that hue and cry alone will spur the pols to come up with some compromise, kicking the debt can down the road a la Greece.

SL Advisors predict that the compromise will include a return to pre-Bush tax rates on the "rich," however we define them - joint incomes over $250-500k, somewhere in that range.  The CBO estimates that will result in a 0.1% drag on GDP growth (the rich spend pretty much the same regardless of the economic climate or the tax environment).  They also predict that the Obama reduction in the FICA tax and emergency jobless bennies will be allowed to lapse, as neither party has expressed much interest in continuing them (good news for Social Security, as it's already bankrupt).  That will produce a 0.8% drag on GDP according to the CBO, because it affects more people (ie, it's not "progressive").

So we're going to see a hit of nearly 1% to GDP anyway, and it's going to come on the revenue side.  The mandated spending cuts?  They'll be minimal.  The 0.4% automatic defense cuts won't happen, and the automatic cuts of the same magnitude in non-defense discretionary spending will be reduced and deferred long into the future (read: after the next election).

So the bottom line is that Washington will remain the media's lap dog and forge some compromise that will increase debt, maintain spending, and soak the rich, and the result will be another year of lackluster output growth.

And guess what?  We'll wind up in recession anyway - not because of the cliff, but because of other headwinds, including Europe, which Nouriel Roubini - who called the housing bust and the last recession - predicts will spread from the EU's periphery to its core.  Europe is already in recession, and that means that Bloomberg consensus forecast for 2013 US GDP is already too rosy.

SL Advisors go on to say this:  "Under different circumstances during these negotiations the President and Congressional leaders would be maintaining a watchful eye on the bond market for its approval of fiscal discipline, and to a lesser degree the rating agencies.  Except that, as a barometer of such things the bond market no longer works.  The Federal Reserve is by far the biggest buyer of bonds and since they're not economically motivated interest rates won't be allowed to respond by voting on the outcome."

But again, it's not the bond market that'll drive policy.  It's headlines like this one: "The Economy (Probably) Can't Survive a Short Dive Into Austerity Crisis."  "Can't survive?"  Really?  Ah, sensationalism - thy name is Legion.

A Washington Post headline recently screamed that "2 million could lose unemployment benefits unless Congress extends program."  The article notes that "many jobless Americans have come to depend on the benefits."  And there's the answer to the question of whether the benefits should be extended.

A Guy You Could Have a Beer With

Watching the debates (a sometimes painful experience), or more accurately, the post-game analysis (which could benefit from a little John Madden, frankly), I keep hearing this recurring theme of how the candidates "scored" with respect to their grasp of the issues, their facts, etc., and their "likeability."

There must be something to this.  Watching the little graphic that CNN has running below the shot of the candidates talking, the one that shows the reaction of supposedly uncommitted voters to what's being said (kind of like a polygraph, I guess), I'm left with the impression that a candidate could say, "Yada, yada, yada, and yada," and the line would still move.  And these people will vote.  God save us all.

And I also hear people say, "He has good experience," or "He has a grasp of the issues," or "I like his stance on Issue X," but then they'll add - "But is he the kind of guy I could have a beer with?"

Are you kidding me?  Really?  Do any of us thing we stand a snowball's chance in Death Valley of having a beer with the Prez?

And honestly, is the kind of guy we'd have a beer with the guy we want to be President?  I mean, I've had beers with a lot of guys in my lifetime, and I have to say that none of them (no offense to my friends here) is someone that I'd want having their finger on the red button.

Especially after a couple of beers.

And I assume they feel the same way about me, which is fine.  (For the record, no one has ever suggested that I run for office.  A few of my friends have said they'd like to have me as Fed Chairman, a role in which, of course, I'd be stellar.

But seriously.  My good friend Steve, with whom I downed a few beers a couple of weeks back when I was in Denver on business (spreading my usual economic doom and gloom for a client), was emailing me not long ago about how he wished he ran the country.  And our discourse on that topic led to our Grand Plan of having matching leotards, complete with capes that would have our nicknames on them (Pogo and Thor, in case you were wondering - he's Pogo, I'm Thor, and you don't need to know why), and we'd have Big Wheels on which we'd tear through the halls of 1600 Pennsylvania Avenue.

Fun stuff for Pogo and Thor, not so much for the rest of you, I'm afraid.

I don't want a guy who I'd like to have a beer with to be President.  I want a guy (or gal, makes no difference to me) who knows what they're doing, has the character to do it while upholding and not embarrassing the office, and will comport him- or herself in accordance with the task at hand.  If he or she would be a total bore, or boor, or bear, to have a beer with, so be it.  I'm good with that.

However, this seems to be a matter of no small import to many voters (shudders and face-palms), so I'll weigh in.  Bear in mind that I'm not a fan of President Obama, so maybe this colors my view of his likeability.  On the other hand, I'm about the most objective guy I know - at least in my opinion.

Much has been made of Romney's gaffe about the 47%.  But really, how different is that from Obama's infamous comment four years back about people "clinging to their guns and their God?"  In fact, Barry seems to have this arrogant elitist view of much of the American populace - and maybe the rest of the world.  Remember when he spent some of his supporters' money on the campaign trail to visit his long-lost granny in Kenya?  He hadn't seen her since childhood, but he took time from his busy campaign schedule to pay her a visit (on someone else's dime, of course).

And what did he do with his time with her?  Had a few photos taken, and split.

I've been to Africa, and I know how people live there.  I understand that Granny O is very poor, like many Africans.  But Barry didn't bring her gifts, or leave her with some cash, or even spend the day catching up.  He got a photo op, and he moved on.

He did the same thing when he visited Elkhart, IN not long after he was elected.  He went there to talk about all the people who were out of work, and who had to go to food pantries.  He stood outside a factory and gave a pretty speech.  Then he split.

In response, I actually found one of the Elkhart food pantries, and sent them a check.  I figured if our President was going to use them for a photo op, I'd at least help them out a bit if I could.

Romney, on the other hand, can tell you stories (corroborated by people who've known him for a long time) about how he used personal funds to help people in his congregation that were in need when he was a pastor, or how he visited people in the hospital, just to visit them - no cameras, no reporters, just a guy caring about his fellow man.

So which guy would I rather have a beer with?  The one who would take the time to actually talk to me over that beer, to get to know me, to inquire about how I was doing and how my family was?  Or the guy who'd have the White House press corps there, snapping pics while he smiled and put his arm around my shoulders and hoisted his mug - then left me with the tab?

A Real Cliff-Hanger

There's been a lot of talk in the media about the looming "fiscal cliff" - the scheduled expiration of the Bush tax cuts and the Obama cut in the FICA withholding tax, along with programmed spending cuts to be imposed across the board because our lawmakers lacked the political will to agree to a reasoned combination of cuts.

But first, why do we still call them the "Bush tax cuts" when Obama has extended them?  Why not now call them the "Obama tax cuts?"  Or, do they really need a moniker tied to a particular president?  Since they've been the current tax rates since 2001, why don't we just refer to the current tax rate as the current tax rate?

As another aside, in my humble opinion, the cut in the FICA withholding rate was a stupid move.  It did zilch to stimuluate the economy, and Social Security is already in a deep hole, one that our children and grandchildren are going to have to dig us out of.  Why give them more dirt to shovel?  (Having said that, if you want to cut my taxes, okay - I'll pocket the money.)

Anyway, back to the cliff.  Fear not: we aren't going over it.

Washington lacks political will these days.  (That's like saying, "Replacement refs suck.")  Moreover, our lawmakers may not know much when it comes to economics, but they know all about getting re-elected.  And that, after all, is their primary motivation.

You can bet your FICA withholding savings that they're paying attention to what's been happening in Greece, Ireland, and France, and what's about to happen in Spain.  Austerity breeds protests, and those protests ultimately manifest themselves in voter outrage, which results in incumbents getting voted out of office.  It happened in Greece.  It happened in Ireland.  It happened in France.  And, as soon as Spain asks for a bailout from the EU (which it will any day now), and is required to impose austerity measures in exchange for said bailout (which is a given), the voters will revolt, and Spain will have a new leader.

What are "austerity measures?"  Simple: tax increases and spending cuts.  And allowing previous tax cuts to expire - which will return tax rates to the higher level at which they stood prior to 2001 - is a tax increase, no matter how you spin it.  So allowing the Bush tax cuts to sunset would be, in effect, a tax increase.

Likewise, the programmed spending cuts called for by the failure to compromise by our lawmakers would affect many Americans.  The combination will make people mad.  Mad enough to protest, and mad enough to vote out incumbents.

And the incumbents don't want that.  So they'll keep the tax cuts in place.  Not sure what they can do about the spending cuts, but they'll probably try to do something, like put some watered-down compromise in place at the 11th hour, one that will claim to cut spending but will actually merely grow it slower than they'd planned to, which in Washington-speak is a spending "cut."

This will happen no matter who wins the presidency in November (and the handicappers are giving the race to Obama, who's more than happy to dig a deeper deficit hole).  It's a safe bet that the GOP will retain control of the House, and they may gain seats in the Senate, so we'll be looking at another four years of gridlock, which also augurs for extension of the tax cuts.

Of course, this will exacerbate our deficit problem, and will lead Moody's to follow S&P in downgrading Treasuries.  At that point, Washington won't be able to hide its collective head in the sand anymore, and blame one rogue ratings agency for jumping the gun.  Rates will go up.  China will slow its purchases of Treasuries further.  And we'll start heading down the Greek path.

But hey, your paycheck will remain as big as it is now (at least for as long as you have a job).  So you can take some comfort in that.

More on Mortgages, and Money

I got a call today from an old dear friend - the friend's not old, the friendship is; we were fraternity brothers in college (though, during the course of the conversation, I was reminded that next year will be the 30th anniversary of my undergraduate degree, which officially makes me old, I guess).  He had read my blog post last night about bubbles, and about taking equity out of your house by refinancing, and he had some questions.  That made me realize there were some points left out of my post that I ought to address.  So thanks to my friend (I'll call him Paul, because - well, that's his name), I have fodder for another post today.

Heck, I'm just gratified that someone reads this stuff.  And even more gratified that someone actually thinks I might know what I'm talking about (besides my Mom, that is).

The key point I neglected to make relates to the equity in your home.  That's an asset, right?  So why would I recommend reducing it?

For one thing, equity in your home is not a liquid asset.  You hope it's there when you eventually sell the house, but until then, it does nothing for you (except provide some peace of mind, perhaps).  I love being debt-free, don't get me wrong.  But I love having a nice, comfortable liquid cushion even more, especially in these times, with so much uncertainty on the horizon.  And especially if it's not going to cost me much to attain it (more on that later).

Paul and I talked about various scenarios, including the doomsday scenario in which not only do all the myriad bubbles I alluded to in last night's post burst, but banks fail, which could threaten our money on deposit with them.  But wait - that money is safe as long as we don't hold more than $250,000 per account, right?  (That's the current deposit insurance limit, and as I think of it, would make an excellent topic for yet another post.)

Then there's the Armageddon scenario in which our government's financial system fails, and deposit insurance can't cover banks' losses (and if you think Frank-Dodd removed the "too big to fail" risk, you probably also still think "Hope" and "Change" are things you can believe in).

That scenario isn't just the stuff of conspiracy theorists; it's a plausible risk.

So taking equity out of your house can also be seen as a hedge against that risk.  If the bubbles burst and the banks fail and the government collapses, selling your house in a few years to get the equity out probably isn't going to happen.  So why not get some of it out now, and have some cash with which to make your escape to a third-world ex-pat haven?

The other thing about your equity is that taking some of it out of the house by doing a cash-out refi doesn't really reduce your assets.  Let's say you own a $300,000 house free and clear, and you borrow $130,000 in a cash-out refi.  Your house is still worth $300,000, but you now have a $130,000 liability in the form of a mortgage, so the equity in your home is reduced to $170,000.

But you have $130,000 in cash, which is also an asset.  (If you go out and spend it on things that aren't stable assets, you learned nothing from the last decade, and I can't help you much.)  So your overall net worth is unchanged; the only thing that's changed is the portion of your net worth represented by the equity in your home.  In other words, you've merely re-distributed your net worth, reducing homeowner's equity and increasing cash.

That's like selling off part of your stock portfolio and investing in it bonds.  We call this "diversification," and it's a good thing.  So think of it that way.

Now, let's talk about money.  It's a funny thing, something nearly all of us have, and have to deal with, but not many of us understand very well.

Sort of like spouses.

Think of money as a product.  Like any other product, it has utility.  My car has utility; it gets me where I need to go.  My guitar has utility; it gives me enjoyment and lets me provide the same to others (at least I hope they enjoy it).  Food has utility; it keeps me from starving.

Taking that view, saving and borrowing is really just selling and buying money.

For any product that gives us utility, we pay a price - cars, guitars, and food all have a price tag.  So does money.

As savers, we're giving the bank the utility of some of our money, so they pay us a price (interest earned).  As borrowers, the bank is giving us the utility of some of its money, so we pay a price (interest paid).

That takes us back to a point I made last night: if somebody is going to give me the utility of a given product for a certain useful life, I pay a price.  If they offer me that utility for double the useful life, I'd expect to pay roughly double that price.  But in the case of a 30-year vs. a 15-year mortgage, I get the utility of the bank's money for twice as long, and I only pay about 24% more for the additional useful life of that "product."  That's a no-brainer.

Now, there are those who say, "But wait - I only have ten years to pay on my current mortgage.  I'm skittish about taking on a new obligation that won't be paid off for 30 years."  Understandable.  Except most of us won't pay that obligation off in 30 years anyway; we'll sell the house before then, and pay off the mortgage with the proceeds.

So, you might argue, why not just stick with my current mortgage and pay it off in ten years, owning the house free and clear at that time?  Then, when I sell, I get the full value of the house, not the sales price less the mortgage balance.

That's fine, but again, you're not diversifying if you do that - indeed, you're putting all your eggs in one basket.

Besides, your equity is going to keep building.  You're going to pay down the mortgage - albeit slowly on a 30-year loan - and your home's value is going to increase.  The worst of the housing decline is behind us, and even though home prices aren't going to rise by double digits in the future, they're going to rise.  If they only rise at the inflation rate (which theoretically is the rate at which residential real estate should appreciate), and the inflation rate stays around where it is now (which is unlikely; at the rate the government is printing money, it's likely to go much higher, which means real estate values would increase at a faster clip), then in ten years, price appreciation alone will add more than $91,000 to the value of your home (assuming 3% inflation).

At the same time, that $130,000, 3.25% mortgage is going to go down by slightly more than $30,000.  So you now own a $391,000 house, and you owe about $100,000 on it, so your equity is now $291,000 - just $9,000 less than you had before you took out the mortgage.

And if rates on savings accounts average just 1% over that ten years (and granted, they're well below that now, but they're likely to go much higher than that within a few years, if not months), the $130,000 in equity that you took out of your house and stuck in the bank will have grown to about $142,000, netting you $12,000 in interest income (ignoring taxes on both sides, which actually favor the mortgage side).

So your net worth has gone up by $3,000 in ten years.  Not huge, but better than staying the same.  And that's assuming that interest rates on savings stay at 1%.  If that's the case, you're still money ahead by pulling equity now.

If rates are above the 3% appreciation rate on your house, you're better off pulling the equity.  And I'm willing to bet they will be.  If they're above the 3.25% you pay on your mortgage, you have positive arbitrage, which a lot of guys on Wall Street would give their left arm to attain.

And if the Armageddon scenario materializes, you can take your cash cushion and live comfortably in that third-world paradise, and read about the demise of the US in the local newspaper.  If they have one.  If you're lucky, they won't, and you can just focus on your suntan.