Are 3% Mortgages on the Way?

Could we see 3% mortgage rates here? Absolutely!

But be careful what you wish for...

Japan has 3% mortgage rates. Its economy busted in 1990. In nearly 20 years, it has not recovered.

Now, the U.S. economy is busting. But strangely, our government is doingexactly what the Japanese did...

We're propping up ailing banks. We're cutting interest rates to record lows to "juice" the money supply. And now, we're planning the greatest public works program in our lifetimes (most of our lifetimes, at least).

Japan did the same thing. Let me share one example of its infrastructure projects... A new study shows that only 7% of Japan's sandy beaches are "without artificial structures or other human activity." Japan now has the world's ugliest, most-paved, least-natural coastline, thanks to useless public works.

The idea was that government spending would get the economy out of its hole. So the Japanese government borrowed money and spent it.

I'm not sure why Japan's government thought spending taxpayer dollars to pour concrete on beaches would fix the economy. Sure enough, it didn't.

Paving the beaches (to prevent erosion) made erosion worse. So the new plan is to spend government money to remove the concrete. Brilliant! 

And Japan's economy is still bad – nearly 20 years later. The stock market is down over 75% from its highs nearly 20 years ago. Short-term interest rates are essentially zero. Interest rates on 10-year government bonds are 1.4%.

The lesson from Japan is, this doesn't work. It only prolongs the crisis. How can we in America do the same thing and expect a different outcome?

But here we are, doing exactly what didn't work in Japan. Propping up mortally wounded banks and automakers is just the tip of the iceberg. And so far, we're getting the same result as the Japanese did.

Most Americans think interest rates have to go higher. Most Americans see interest rates at multi-generational lows and think they can't go lower.

Most investment analysts also think the massive injections of money by the government have to create inflation and higher interest rates. That is likely true... eventually. But you can go broke betting on that before it arrives.

My point today is, don't bet on interest rates heading higher right now.

Interest rates CAN go lower. Much lower, for much longer than you can imagine. Japan is living proof.

Good investing,

Steve