- Mitchell England
Inflation and Debt as an Asset
Updated: Jun 30, 2022
This is my second post on the concept of inflation and unfortunately, I don’t think it will be my last. As I continue to research the subject, as well as monitor my own spending... it’s
becoming more and more obvious that we, as a country, have a big problem.
When a handful of groceries costs more than a full days wage (for many people), it’s worth questioning where we are headed. How is it that we continue to work hard, but feel like we are getting poorer? The answer, again points to the ugly bi-product of today's inflationary environment.
As the dollar devalues (buys less and less), so does the power of each of our bank balances, our salaries, social security, etc. And the force of inflation is only getting stronger. Several trillions of dollars are earmarked for infrastructure, increased unemployment benefits, COVID stimulus checks, social security, and more. And these initiatives are not funded through a reasonable tax strategy. Instead, they are funded by adding more money to the current supply... or said another way - printing more cash.
When the supply of money increases, the value of each dollar in circulation decreases, money doesn't go as far, and yes most of us get poorer.
Think of playing Monopoly. Let's say in the first couple rounds each property is selling between $1-$2k. But then, the banker introduces a plan to inject $100,000 into the current money supply. After a couple rounds, each player becomes "richer" and holds more cash. But because there is the same supply of properties, and more cash on hand, the demand now drives prices between $5-$10k. In other words, the introduction of more cash, simply devalued the cash already on hand, made the asset (land holders) richer and those without assets poorer. Unfortunately, this is exactly what is happening in our country today. Asset prices are shooting to the moon, while salary/hourly workers and renters are getting poorer.
This erosion of our purchasing power, while seemingly invisible to most, is actively pushing the middle class toward the lower class, while also launching the upper class (those who own assets) to new heights. While this may not sound fair, it's simply how it works. As the dollar devalues, assets increase in value and the rich tend to get richer. Look at what happened during the Covid crises. Those in real estate and the stock market made a killing, while the average working man/woman now has to put in more hours to maintain the same lifestyle. It's sad and unfair, but whether you like it or not, it's happening.
Two economies are emerging and we are all being forced in one of two directions. The path to the lower class is quickly growing, as most of the country marches swiftly in this direction. On the other side, the path to the upper class, is much less populated.
In other words, making it and remaining in the upper class in a high inflationary period does not/and will not happen by accident. It will happen by making moves to benefit from inflation vs be hurt by it.
So again we end up back at real estate as a hedge, as a shield and as a defense from the never ending erosion of our currency. But this time, instead of talking about rent increases and inflated labor and material costs which drive up asset prices, I want to focus on something else as a defensive/offensive strategy.
That is - Debt
**Note, I'm going to do my best at explaining this concept. You may have to read it twice! Of course, leave questions in the comments if need be.
Simply stated and for the purpose of this article, any given debt represents two things.
1. A dollar amount
2. A given amount of value which is owed
This is important, because as the value of the dollar changes, the dollar amount owed could theoretically stay the same, while the actual value owed decreases.
For example, if you were to take out $100,000,000 loan today, this debt would represent the value this money could purchase in today's dollars. But remember, in an inflationary environment, the value of money decreases. So a year later, while your balance in dollars may still be equal to $1,000,000 (considering you didn't pay down any principle) the value represented by this $1,000,000 is actually less.
So in essence, as money erodes in value, the actual value which is owed decreases and the holder of the debt wins. In other words, because the money supply is increasing and the value of money is decreasing, the value of debt (what you owe) also decreases even though the actual number may remain the same.
This is why securing responsible debt in an inflationary environment is one of the best investments one can make.
It's in this way that debt becomes a great asset and a great tool for winning in a world where printing money seems to be the unfortunate monetary strategy. In the end, I think it's safe to say that our government isn't going to stop printing money. In fact, today we are adding to the money supply faster than ever before. So this is exactly why those who get into good debt, will (over time) win the game of devaluation.
We have to be aggressive in our strategy to survive, thrive and join the path less traveled. Good debt is one of the tools which will get us there.