INFLATION – THE ROOT OF ALL EVIL????

It seems that a lot of discussion about inflation is being tossed around by the talking heads on all the financial channels and in the media wherever you look, listen, or read.  It’s true that whenever the government aims to solve a crisis by turning on their mighty presses and cranking out virtual mountains of money, things could get a little dicey.  Inflation is not certain but certainly looks like a reasonable scenario in this topsy turvy financial realm we exist in today.  Sometimes it might seem like we have fallen down the rabbit hole along with poor Alice and would have to agree with her assessment that everything keeps getting “curiouser and curiouser.”  There seems to be no way to avoid the impact of some degree of the ravages of the probable coming inflation.  Or is there?

 I offer you this different point of view.  It’s not a totally new one but one with which not very many people are familiar.  There is one sure way to avoid the painful effects of a deflating dollar, buy real estate.  It isn’t so much THAT you are buying a tried and true hedge against inflation but HOW you are buying it that’s important.  The key here is that the document you use to buy a house or property with, whether it be a mortgage or private contract, is your salvation.  The effect of locking your purchase price to a number of dollars at today’s value effectively stops inflation dead in its tracks. 

 I will illustrate this point by passing along a story told to me by Karl Rieche, a shrewd German gentleman who migrated to the U.S. in 1938 and worked for me until he retired.  He told the story of the deteriorating German Deutschmark which was inflating so fast that his father, a railroad engineer, had to get paid twice a day.  Karl and his siblings had to pick up that pay and run directly to the store to buy food in order to get the most for their money at that moment.  He said that the only people who benefited from such wild inflation were those people who had mortgages or contracts written years earlier on their homes.  Those debt instruments were, of course, for a set dollar amount without any consideration for future inflation.  He said that debtors were chasing down their creditors and “unmercifully” paying them off with buckets full of inflated and devalued money.  For some of us who have had our fill of our banker’s bad behavior, that picture might bring a smile to our faces.  I can feel that sensation creeping over me as I write this.   

 So, to recap; if inflation doesn’t occur then hurray, the fed has done its job and we are in sound financial waters.  However, if day follows night and inflation does rear its ugly head, be in a safe position.  Hold some gold, maybe some silver, but for sure, lever your way to financial security. Use mortgages or contracts to tie up some real estate right away before severe inflation even starts.  You’ll be glad you did.   – Mike West