If you’re still employed and you have some cash, now could be the time to invest in real estate. And not just because it’s cheap. The better reason is that when inflation happens, the real cost of interest on a loan drops. Let’s say you have a loan at 6 percent. If the inflation rate is at 3 percent, the “real” interest rate you pay is 3 percent (6% – 3%). But if inflation jumped to 20 percent, then your real interest rate would be -14 percent (6% – 20%).¹
In the near future, we’ll be seeing some serious inflation. This will come about because of the huge amount of money the government is minting and pouring into the economy. Dollars will be worth less—possibly lots less—and so we should be positioning ourselves to get into investments that will have some value.
SDXB sends a report that appeared in the Financial Times to the effect that China has proposed replacing the dollar as the international reserve currency; this is interpreted as a sign of China’s fear of the inflation that will likely result as the Federal Reserve prints money with abandon.
On a submicroscopic level, we’ve hit upon the very reason I bought a freezer, planted a garden, and started stocking up food and household goods. Prices may very well go haywire in the next few months. If I were living on a fixed income but still could dodder out to the workplace, I’d be looking for a part-time job. Now, not later.
Not since the American Revolution have Americans seen extreme inflation of the sort that occurred in Germany before World War II or, more recently, in Argentina and various Eastern European nations. Probably we won’t see it this time, either, because we have some mechanisms intended to keep this sort of thing under control.
However, I lived through the double-digit inflation of the 1970s. While it was not a period of hyperinflation, it still wrought plenty of harm for many Americans. My husband earned a good living as a corporate lawyer, and so we were not seriously affected. But I saw what happened to my father, who by then had retired on what he thought was enough to keep him comfortably set for the rest of his life: $100,000.
In the 1960s, a hundred grand was a lot of money. By the end of the ’70s, it wasn’t enough, combined with his union pension and Social Security, to keep him out of poverty. Having been burned some years before when the bottom fell out of the insurance securities market (in which he was overinvested), he stashed everything in CDs, which did not keep up with inflation. So, by the time he paid for his room and board at the life-care community where he moved after my mother died, he had no disposable income left. He and his wife didn’t travel, they didn’t go out, they didn’t buy anything more than the bare necessities for existence. Because the two of them had managed to get into the life-care place, they were safe and well cared for. But they were stuck there: they didn’t have much of a life during their last years.
This is why, I think, it’s necessary to accumulate lots more than you think you will need in retirement. Investments should be spread between conservative instruments that do not keep up with inflation but at least don’t go down the drain and somewhat riskier ventures, such as equities and certain kinds of real estate, that are likely to gain enough to keep you out of poverty in the event the value of the dollar drops significantly.
Cultivating frugal habits and staying flexible can’t hurt, either.
¹Formula from Wikipedia, “Inflation.”
Disclaimer: I am NOT a financial advisor! I’m a little old lady with a blog. I have a Ph.D. in English, not an MBA! If anything you read here looks to you like advice, don’t buy it.
