ARBOR WEALTH: Medici family, usury and Rocky Balboa

Staff Writer
Walton Sun

“I’ve got money running through my hands like water down the drain …” from “Borrowed Money” as performed by Earl Thomas Conley

Some 600 years ago the Medici family built a banking empire that eventually helped fund the Renaissance. Their business was simple: they collected interest on loans, a practice that was then known as usury. Today, we call it lending.

According to The Economist, the Medicis first charged interest on loans by utilizing different currencies: “… the bank could lend, or accept a bill of exchange, in one currency and collect its debt in another, building a hidden rate of interest into the exchange rate.”

The practice of loaning money in exchange for charging a rate of interest can be a very profitable business. When you buy a $400,000 home with a 30 year mortgage at 5 percent, the actual amount you pay back will total well over $750,000. Short term street lending conducted by loan sharks (and with no notaries present), involves collecting vigorish. As Rocky Balboa tells one of his debtors during a collection, “You wanna’ dance, you gotta’ pay the band. You wanna’ borrow, you gotta’ pay the man.”

Right now, according to one recent study, you pay less to borrow money than at any time in recorded human history. Of course, it’s wise not to miss payments, either to a mortgage company or to Rocky’s boss.

Historically low interest rates are fantastic for families that want to purchase their first home and who can lock in low mortgage rates. Existing loans can be refinanced as well. Some corporations borrow cheap money and buy back their stock, thus using low interest rates to increase shareholder value.

Of course, low interest rates are the enemy of retirees and savers. Just take a look at current CD rates.

Another part of this equation is how historically low interest rates and low inflation impacts buyers who are purchasing a stream of income, like a fixed annuity. As interest rates and inflation rise, the predetermined monthly payout from a fixed annuity becomes less and less valuable over time. If things cost more every year, being stuck with the same cash flow every month is obviously undesirable. Therefore buying annuities that lock in payments based on today’s extremely low interest rates and inflation is likely to disappoint as rates and inflation rise. Ask anyone receiving a company pension with no cost of living adjustment if it buys as much today as it did 10 years ago.

Avoiding overpaying for dependable streams of income has never been more important or more difficult. Generating systematic income streams without overpaying frequently requires a unique, well researched combination of stocks, bonds, REITS, MLP’s and more. Caveat emptor for locking in fixed payments in today’s world.

Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 —, a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.