So.....what is your bet?

Question

I am typically very conservative when it comes to taking on debt and over-leveraging myself. But I can't help but think about the currency inflation the Federal Reserve and government have been pushing the past few decades. With the insurmountable national debt, the absolute worst fear of the Fed is to allow deflation and they will do anything to prevent it...including inflate/hyperinflate the dollar. They can't afford to let it go any other way.

Should this be our future, it would be very advantageous to acquire a lot of property now and let the ensuing inflation erode away the debt. The risk-averse side of me says no way could I take this gamble, but still I wonder.

So...what is your bet?

Should this be our future, it would be very advantageous to acquire a lot of property now and let the ensuing inflation erode away the debt.  The risk-averse side of me says no way could I take this gamble, but still I wonder.

So...what is your bet?

Dennis M. · Answer

I’ve got to where I stopped worrying and caring about things I have no control over in this life . What I do have control of is how I spend my time and my money . I’m going to keep working diligently and acquiring income producing assets .As whacked out as things are I trust God is still in control and let him worry about the details !

Mike Dymski · Answer

People don't spend because they are Americans or save because they are Japanese.  Jobs, demand, and confidence drive spending and population growth.  At a low 2.5% fed funds rate and an already big balance sheet, some feel the fed is running out of monetary heroin (while others feel that QE can go on indefinitely).

@Alexander Felice I agree.  Interesting though, the last ten years have bucked historic trends...everyone called for inflation and it never happened.  Some suggest that globalization has kept prices and inflation down.

This stuff is all so unpredictable.  I stick with good locations, adding value, cash flow, prudent debt, and reserves.  That is all I can control.

Scott Passman · Answer

@Mike Dymski You're right, and that's the other side of the coin.  Japan in the 80's had a lot of similarities to our present day situation.  Although it is my understanding the Japanese were diligent about saving which contributed immensely to the contraction of the currency supply leading to the marked deflation that occurred.  We are very much a nation of spenders, as evidence by the negative savings rate of the average consumer.  That, combined with the massive currency influx the government is willing to throw into the mix makes for a very bad recipe.

It will be interesting to see how everything plays out, especially if the dollar gets displaced as the world currency reserve.  I agree the best defense is to continue sound investing strategies, both in real estate and other asset classes.  Just curious what other thoughts are on this tenuous economic environment.

Mike Dymski · Answer

Ask Japan how that worked out for them.

Frank Wong · Answer

I have no idea what the debt will do.  I know if I make more money, focus on my investments, be properly leverage everything will work out just fine.

Alexander Felice · Answer

Printing more money to reduce the debt does seem like the most likely outcome to fix our balance sheet, based on our current social/political situation. I do not advocate this approach, but I do think it's quite possible.

Historically I can't think of a single scenario where this hasn't gotten away from a government (drastically) and became a catalyst for hyperinflation. It's too hard to measure the money supply in real time, so when governments do this, they do WAY too much and end up creating hyperinflation.

Good examples would be Zimbabwe (2000's)  Venezuela (current), early Soviet Union (1910s) and post WW1 Germany (1920s). There are more but these are the ones I'm familiar with and well known.

Any small benefit you may get from reduced value of debt would be offset by the reduced value of the asset income. Additionally, all the examples I mentioned came with such volatile political strife that would far outweigh any small benefits you may hope to gain.

my bet is that any financial mess, no matter how catastrophic, will be short term. So accumulate a diverse set of resources to weather any financial storm, however unlikely.

Dane C Allen · Answer

@Scott Passman

Once my financial future is secure through diversification of assets and income, I’ll likely move on to Doomsday prepping.

Jim K. · Answer

The guys who are constantly pushing the hyperinflation scares sooner or later all try to sell you gold. We're going to have plenty of gold once they start mining the asteroids for it, so that scare tactic, popular for generations, now has a shelf life tied to the drastically-decreasing cost of getting stuff into orbit with reusable rockets.

The guys telling you the dollar's going to collapse and the US will fail never have any clue just how dominant the US military is versus any other world power in history. Credit ratings and financial metrics aren't the ultimate source of the current order of things. They are only made possible by big guns and nuclear warheads keeping the peace.

Will there be inflation? Sure. Are gold prices rigged by large orders from national goverments working in secret collusion? Most definitely. Is any of that going to change in the foreseeable future and an army cross the Volga in anger to end the Long Peace? No.

Will the shenanigans of the HFT traders heighten market fluctuations worldwide? Sure. Will this lead to a financial panic? Inevitably. Will that be the straw that breaks the camel's back and sinks the US economy for good and all? No.

We've got 10 more years unless the alien space bats touch down. That's what my crystal ball says. So no Kalashnikovs in the basement, no seed stocks, no Nigerian dwarf goats for milk sustenance production on a hidden homestead, no group bunker membership, no sperm on ice for future cloning. I'll reassess in a few years.

Greg Scott · Answer

Interesting discussion.  I suppose it depends on how you define risk.

When I hit 45 I realized that, even though I worked for a large corporation with good benefits, it became apparent that I couldn't hit my financial goals.  Even worse, if I was lucky enough to live a very long time, there was a good chance I would run out of money before I died.   So, doing nothing seemed a very risky proposition.

People seem to be afraid of debt, but it is important to distinguish between consumer debt, such as credit cards and student loans, versus debt used to acquire an asset.  When I buy a property (using debt) it has significant positive cash flow.  Of course, I keep reserves on hand in case I have a problem such as a needing a new roof or furnace.

A rent property with strong cash flow is anything but risky.  Even better once you have several properties, something like a furnace replacement can often be covered by all the other properties.   This scenario is MUCH safer than buying stocks.  I don't see how you could possibly call it a gamble.

In contrast, it would appear that you are gambling you will die before you run out of money.   That seems a very risky gamble to me!

So.....what is your bet?

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