The New Economy: Shorting the U.S. Dollar by Borrowing Funds for Passive Income Investments

Betting against the United States Dollar may seem counter-intuitive and even un-patriotic. Yet after analyzing the numbers and witnessing the ever-widening discrepancies between the Haves and Have-Nots, I dare say most of us have no choice.

The problem begins with quantitative easing, one method the U.S. Treasury has used in recent years to keep interest rates abnormally low. By printing more dollars and putting them into circulation the government has more cash to pay down debt. Unfortunately, that action also devalues our currency, which means we need more dollars to pay for food, housing, etc. In fact, the devaluation is the definition of inflation. That’s why keeping money in a savings account has become a loser’s game. The compound interest that once rewarded frugal Americans is long gone. And since all the cash the Treasury has poured into the economy cannot be pulled out, it continues to damage dollar values.

Fortunately, there is a potentially lucrative flip side to dollar devaluation. By borrowing money at low interest rates and investing it wisely we can overcome the loss in our savings accounts. By doing so, we are “shorting” the dollar.

The movie based on the nonfiction bestseller The Big Short: Inside the Doomsday Machine by Michael Lewis reveals how a group of savvy investors made millions of dollars shorting the fraudulent mortgage market that crashed in 2008. After doing their research, those money men and woman had no choice, unless going bankrupt sounded appealing.

In that same way, Americans must act as mounting evidence reveals cracks in the U.S. Dollar’s veneer of invincibility. If our currency, which drives world markets, loses value, Americans lose more buying power.

 A Winning Concept:  Borrowing to Buy Commercial Real Estate

Have you tried buying a single-family home lately? Good luck. There is a shortage of affordable homes, including “starter” homes for young families. We know this to be true because official data show that housing starts —new homes under construction—are down. The scarcity causes housing prices to rise rapidly. In my area, some homes won’t last more than a day on the market.  Eager buyers snap them up fast.

This phenomenon also puts pressure on the rental market. People need a place to live at a rate they can afford. Yet with more families seeking decent apartments, rents are rising too, which brings up another problem: Labor wages have not kept pace with the cost of housing.

Meanwhile, the cost of borrowing money is reasonably low. Wouldn’t it make more sense to seek loans and invest in hard assets, rather than park money in a savings account? Yes.

Real estate is not as liquid as some investments. Even so, it is a solid store of value because Americans will always need a place to live. Compare that to liquid paper assets, which are vulnerable to market downturns in this economic environment, and basically serve as savings accounts.

In my book The Passive Income Physician: Surviving a Career Crisis by Expanding Net Worth, I analyze the virtues of investing in apartment complexes, storage units and light industrial sites as opposed to single-family homes. As rents increase, investors in those types of real estate projects enjoy lucrative tax breaks, and have ample ways to increase monthly income.

Also, commercial real estate is purchased with non-recourse loans. This means, a foreclosure may be seized by the bank that issued the loan, but that institution will not be reaching into your pockets for more money. That is not true of the recourse loan used to buy single-family homes and duplexes.

Spend to Win

We all have favorite products we enjoy. When we see a sale we gladly spend, because we know we are getting a bargain on computers, cars or clothes. Or we stock up on a staple we know we’ll eventually need. When we buy low we win.

It could be argued that these days money loaned for commercial real estate is also a bargain. But are American investors taking note, or are they still just following the advice of their money managers and socking away more cash in low-interest Treasury Bonds and other so-called safe havens?

Shorting the U.S. Dollar requires assessing the cost of borrowing and the market direction of currencies. As interest rates rise due to inflation—and that day will come—borrowing money will become prohibitive. Investors will hesitate if they are not confident they can pay back the loan.

My strategy is simple: I buy commercial real estate using low-interest loans. I am confident the loan will be paid down because I collect rent each month from my tenants.

As the U.S. Dollar continues to lose value worldwide, who will pay back your savings account losses?

You may ask, but won’t the decline of the dollar lower real estate values? Sure, that’s possible. But my tenants will still be expected to pay the rent. That puts me in a strong position in a tumultuous marketplace because I’ve shorted the dollar. In essence, by borrowing $1 million today, in the years to come, as the dollar declines, I may only pay back a value of $800,000. An easier example to understand is borrowing a dollar from a friend, then paying him back with 80 cents. Sound good? For the borrower, yes. Conversely, the devaluation of the dollar delivers renters to the quagmire I described above: Their monthly expenses remain the same or rise but the power of their cash withers.

Financial newspapers and economists enjoy marveling at a stock market that hits new highs. It sounds exciting, makes for good headlines and many Americans only wish they had invested. Why pine for an investment you missed? What goes up will eventually go down. You know that, and so do I. That’s why I find it puzzling that so many friends and colleagues ignore their right to trade both market directions, up or down.

The new opportunity in America is preparing for lower dollar values. It can be done. It must be done to build your future.

Thomas Black, MD, The Passive Income Physician

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