Real Estate News & Commentary

What Every Investor Should Understand About Inflation

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Flipping Houses, Mortgages & Creative Financing
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I've been hearing a lot of talk about inflation recently, including a lot of bad information. Is inflation good? That's a hard question to answer. Real estate investors want to know whether we're likely to see inflation in the near future and the impacts on our businesses.

It’s important to understand exactly how inflation affects the economy in order to make smart decisions. Here, I’m not looking to make predictions here—what’s important is understanding how inflation works and any associated pros and cons. Once you understand inflation’s mechanism, investors can make smart predictions and understand what’s going on and where things are headed.

What Is Inflation?

First, let’s define inflation. There are very formal and academic definitions, but I’m going to ignore those for now. In short, inflation is simply the increase in the prices of goods and services. When the same things cost more than they did previously, that’s inflation. And when they cost less, that’s deflation.

The United States's Bureau of Labor Statistics regularly calculates the inflation rate using a number of different measures, including the Consumer Price Index. (They actually have a pretty cool tool designed to compare prices between different years.) Recently, the Consumer Price Index rose 0.4 percent in August 2020—however, that doesn’t necessarily mean that inflation will rise, too.

And if it does? One big myth I want to dispel right off the bat is the idea that all inflation is bad. Obviously, there are aspects of inflation that negatively impact us—if it costs more to buy stuff, that reduces our purchasing power, essentially making us poorer relative to when things were cheaper. Our money doesn’t “go as far” as it used to.

Related: Why Fears About Looming Inflation Are NOT Overblown (& a Heckuva Silver Lining for Buy and Hold Investors)

Businesswoman hand placing or pulling wooden block on the tower. Business planning, Risk Management, Solution and strategy Concepts

Is Inflation Good? Here Are the Benefits

This isn’t necessarily a bad thing in all cases. First off: The Federal Reserve actually targets a specific inflation rate—two percent. So, clearly, moderate inflation is expected. In fact, zero inflation is bad. Here are other ways inflation can benefit you.

Wages increase

Inflation in the cost of goods and services usually comes with higher wages, too. As things go up in price, income goes up, too. If income keeps pace with inflation, things aren’t bad. It’s when income doesn’t keep pace with inflation (prices go up faster than wages) that we have an issue.

Businesses grow

Second, inflation is important because it increases economic activity. While the price of things going up is bad for consumers, the price of things going down (or even staying the same) is bad for businesses. When business are selling things for less, this means less profit, less purchasing, less expansion, less growth.

Related: Warning: 5 Reasons the 2020 Recession Will Be Far Worse Than 2008

The economy is just a reflection of business growth, so if businesses aren’t growing, the economy isn’t growing. Growth in the economy is directly related to inflation. And—at least according to those defining monetary policy—it’s more important for businesses to be growing than for consumers to be getting things for cheaper (and I agree).

Prevents deflation

Finally, there are some natural forces that usually keep in inflation in check. Forces that tend to lower prices. And there are things that the government/Fed can generally do to slow inflation if it starts to get out of control. So, runaway inflation usually isn’t an issue.

But the opposite isn’t necessarily true. It’s much harder to control deflation when it takes hold, and deflation can quickly start to snowball out of control once it starts. It’s better to have a bit more inflation than is desirable than to risk not having enough inflation and everything spiraling downward (“deflationary spiral”).

Long story short, the right amount of inflation is a good thing that will keep the economy humming along (growing) and keep things from spiraling downward.

The Fed’s Current Inflation Expectations

Historically (over the past decade), the Federal Reserve has targeted about two percent inflation per year. Meaning, price levels for goods and services should rise about two percent per year to make the Fed happy with our economic growth. To most consumers, that should feel like pretty stable prices.

Now, there is a lot of debate about what actual inflation is—some would say that the price of some essentials is increasing much higher than two percent these days. But the formal government measurements put annual inflation at between one and two percent for much of the past decade. In other words, lower than the Fed target.

There was an announcement by the Federal Reserve last week, essentially saying that the new inflation target is “average inflation of two percent” over time. Doesn’t sound much different than the old policy of “two percent inflation,” but it actually is. This new target means that after times where we run less than two percent inflation, the Fed will do things to try to get inflation above two percent, thus creating an average two percent inflation over time.

Related: Pandemic-Fueled Supply Chain Woes Causing Big Problems for Builders

What inflation rate will the Fed target?

Well, if we assume that inflation leading up to 2020 has been less than two percent, and inflation during 2020 (due to the economic shutdown) will be much less than two percent—perhaps around 0.8 percent—that means that the Fed could target 2.5 percent, three percent, or even more over the next couple years. This is a huge departure from the two percent target the Fed previously set, and it means that we could see much higher inflation over the next couple years if the Fed gets its way (and they usually do).

Now, here’s a key point: While it’s not clear exactly how the Fed will achieve higher inflation, we can make an educated guess.

Typically, there are two ways to do this: lower interest rates (which encourages spending instead of saving and drives the economy) or printing money (which puts more money in the hands of consumers and drives the economy). With interest rates at zero percent, there isn't much lowering that's likely to happen short-term (whether we're going to see negative rates is debatable, but I don't think that will be an easy decision for the Fed).

So, that leaves printing more money. Let’s assume that this is the preferred method by which the Fed decides to increase inflation. How will that impact us as both consumers and real estate investors?

The Impact of Printing Money

Short-term, nobody has any idea where the market(s) are headed, but assuming we trust the Fed when they say they are targeting higher inflation and assuming we believe they will attempt to achieve this through stimulus and increased money supplies, we can draw some conclusions and takeaways.

Cash isn’t king

Inflation and increased monetary supply will likely lead to a reduction in the spending power of our currency. So, my first takeaway here is that holding cash long-term will probably eat away at your net worth. Not saying that keeping some cash is bad, but we probably won't want to be doing it as an investment strategy.

Interest rates remain low

There are some monetary theories that argue that with low enough interest rates, the federal government can print a ridiculous amount of money without concerns of default. There is reason to believe this is true, and the most obvious conclusion stemming from that is that the Fed will likely want to (have to) keep rates low for as long as our debt is increasing. Unless you think we're somehow going to start paying down our debt, this likely means that interest rates could be low for a long time.

Related: Refi Madness: With Historic Low Rates, Homeowners Scramble to Refinance Mortgages

The facade of the Federal Reserve Bank.

Real estate is a good hedge

The nice thing about owning real estate during an inflationary period is that hard asset values (the value of the properties) and rental rates will often keep pace with the broader inflation. If things cost twice as much, that cash you have in the bank is now worth half as much, but your real estate is likely going to be more and your rental income is likely to have increased.

Real estate (and other hard assets) tends to do well during inflationary periods.

…But debt will be the best hedge

The best hedge against inflation is debt. The reason being is that during an inflationary period, wages and income tend to rise. But your debt stays the same. If you are making $100,000 this year and have a $1,000 per month mortgage payment on your rental property, you are spending one percent of your income paying your debt service. But if due to inflation, you're making $200,000 next year, that $1,000 per month mortgage payment won't have changed. Your debt service is now 0.5 percent of your income!

If there’s enough inflation, you might earn enough to pay off your debt with a single paycheck. (Although obviously we don’t want that much inflation).

Risks Associated With Printing Money

Now, any time we’re talking about inflation and printing lots of money, there are some big risks—not just to us as investors but to the economy/currency overall. And I’d be remiss not at least touching on some of those risks.

Here are the big five that I see.

1. Stagflation

The biggest risk I see with the current situation is what is known as stagflation. That’s essentially an economic situation where we see inflation, but we don’t get the typical benefits of that inflation. Prices are increasing, but we don’t get economic growth to offset those increased prices.

It’s not well understood what causes stagflation. However, pushing inflation during times of economic turmoil may result in stagflation. If history is any indication, that can destroy an economy for decades.

2. Hyperinflation

The next potential risk is hyperinflation, which is simply runaway inflation. While two percent inflation might be good for the economy, 10 percent (or much more) can be devastating. Imagine a gallon of milk costing $50—that’s hyperinflation.

Much like deflation can spiral out of control, under the right conditions, so can inflation. If that hyperinflation is coupled with economic growth, there are things the Fed can do to slow the economy down and control that inflation. But if hyperinflation is a result of stagflation, things can get ugly—quickly.

I don’t see this as a huge risk short-term, but any time a central bank is printing a lot of money, it’s a risk.

Related: Recession Survival: Everything You Need to Know Is in These Books

3. Currency reset

The last time we saw a global currency reset was during WWII (do a search for “Bretton Woods”). Many of the largest economic superpowers banded together and defined new rules for rebuilding the international economy. Given the amount of worldwide debt among large nations, it’s not far-fetched to think we may be closing in on the point where this may need some sort of “reset” in currencies and a revision of international economic rules.

What would this look like? Where would it leave the U.S. in terms of economic superiority? How would it affect us as investors? Nobody knows, and that’s the scary part of this.

4. U.S. dollar at risk

The U.S. has the “reserve currency” of the world. The U.S. dollar is supreme, as it’s the most commonly used currency for international trade. There are big risks to printing money and increasing national debt. Those who buy our debt—like China—may lose faith in our ability (or willingness) to pay back interest.

When creditors start losing faith in borrowers, they start cashing in their debt and they stop lending. If China and Japan decide to stop buying our debt, that will impact interest rates and it will impact our entire economic strategy and future.

5. World’s reserve currency changes

The other risk to our currency is if other major economic superpowers around the world decide that they want to organize a massive coup against the U.S. dollar. If enough large nations with a big enough percentage of international trade decide that they want to start trading in some other currency, the U.S. dollar could quickly be overthrown as the world’s reserve currency.

Already, China and Russia have started to band together to trade without the U.S. dollar. If they can bring a few more major players into the fold to start using the Yuan or some other currency, the U.S. dollar could go away as the world’s reserve.

Whew! That’s a lot to get our heads around. And that’s only one part of the equation that will factor into what’s to come for the U.S. economy over the next several months, years, and perhaps decades.

If you want to learn more about how the economy works, how economic cycles work, and how they impact real estate investors, check out the BiggerPockets book Recession-Proof Real Estate: How to Survive (and Thrive) During Any Phase of the Economic Cycle.

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By J Scott
J Scott runs a real estate company that invests in several parts of the country and that specializes in new construction, as well as purchasing, rehabbing and reselling distressed properties. J is ...
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    J. Daniel Glagola
    Replied 12 days ago
    Good morning, J. I have listened to several podcasts with Richard Duncan as a guest. He seems to make sense when he makes an argument that our economic system is no longer "Capitalism," but it should be called "Creditism." I have just received and started reading his newest book, "The New Depression." Are you familiar with his concepts and what is your opinion?
    J Scott Developer from Sarasota, FL
    Replied 11 days ago
    I'm not familiar with him or his book. Sorry...
    Caleb Webster Developer from Portland, OR
    Replied 11 days ago
    Great article Jay! Will holding cash eat away at your net worth or will it just keep your net worth the same but but the value of your worth is less because of inflation?
    J Scott Developer from Sarasota, FL
    Replied 11 days ago
    Technically, your net worth won't change. But, the average net worth will start to rise. People will have more money, in general. So, relatively speaking, your net worth will diminish.
    Terrence Arth Investor from Scottsdale, Arizona
    Replied 11 days ago
    J, thanx for the insight. Interesting questions arise when viewed from so many perspectives. Can I assume a Part II that you so subtly um, hinted at is on the way? Hopefully? Great stuff.
    J Scott Developer from Sarasota, FL
    Replied 11 days ago
    Is there something specific you'd like covered in a Part 2?
    Fred Castro from Torrance, California
    Replied 11 days ago
    Respectfully, there are tons of myths, mistakes and incorrect information regarding inflation in this very article. I'll start with correcting the first and most important piece of incorrect information from this article which is your incorrect definition of inflation. The correct definition of inflation is = an increase or expansion of the money supply. Price increases are a RESULT of inflation, not the definition. Big difference. And because you made this huge mistake in defining inflation, the entire article is respectfully wrong. The only thing correct about this article regarding inflation is that it helps debtors like us by making our debt easier to pay or capitalize off the spread between debts and rents. This quick video of the common misconception of the definition of inflation can be seen here: https://youtu.be/K0VKzNtZupA
    Sonja Sevcik
    Replied 11 days ago
    Thank you Fred - I agree! I think our nation has been experiencing significant inflation - the increase in money supply - through individual, corporate, and government debt since at least Y2K and we have been experiencing stagflation since around 2008. I follow economists and the FED fire hydrant very closely and I believe (beginning with FED interventions that began Oct. 2019 and following the past month's FED announcement and economist discussions) that they are completely out to lunch and drinking Martinis on IOUs to US. The cost of housing (outside of some geographical exceptions), healthcare, and education to name the three biggies have inflated like the Goodyear Blimp; while, wages (and what they can buy after very basic needs like bread and a phone) have been stagnant like the smell from slowly rotting road kill for over a decade. The only good news is that food and shampoo are fairly affordable - - yippee - - - 0% to 3% inflation! Everyone is working harder for less, with the exception, being those that have bought into or who are paid in capital - - not profits. But as the dot.com bubble, energy bubble, and housing bubble all foreshadowed; capital growth only goes so far before some growth in the money supply must come from increases in and efficient allocation of profits - - - or all that beautiful capital just evaporates like the air from a balloon. This is the virtuous cycle that every "new age" MMT economist skips over. Only this time, unlike the last three times, the money supply bubble isn't a sector, it's the government. Keep your debt very low, grow your cash flow any way you can, make sure you have 12 months savings, and hold on. Let's hope the FAANG will be flush enough to bail US out like JP Morgan did in the 1930s or that a quick end to COVID causes those who have capital to hire and pay higher wages to employees very fast ... so that air can be released from this Hiddenburg before the debt burden pops a great nation. Make American Strong Again ... fast!
    Daniel Buck Rental Property Investor from Manchester, NH
    Replied 10 days ago
    For someone with such a long-winded reply, you should probably know that air doesn't evaporate....
    J Scott Developer from Sarasota, FL
    Replied 11 days ago
    I pointed out at the beginning of the article that from an academic standpoint, the definition is subject to discussion. And suggested that being pedantic about it isn't very useful. I speak with plenty of economists, and few of them care about these types of academic distinctions when it comes to real world application. Sure, I could have written an academic discussion, but at the end of the day, BP readers are interested in how this issue affects them, not academic semantics. If you think my conclusions in the article says wrong, let's debate. If you just want to be pedantic, I'm not your guy. The academic discussions have bored me all the way back to business school. I'd rather how we can use the information to make money.
    Darin Anderson Investor from Victoria, MN
    Replied 11 days ago
    You are monetarist Fred and your definition of inflation has been wrong for the past 30 years. There has been a huge increase in the money supply and no significant change in prices. If your definition of inflation is correct then bring it on because the consequences of it are zero. Monetarists always harp on their one string which is the money supply and claim that is the true definition of inflation. But you can google the definition of inflation: "a general increase in prices and fall in the purchasing value of money." As to your preferred definition, again, no one actually cares about that definition because it has no impact on people if the prices of goods don't change. It is amazing how many people keep holding to this discredited idea of inflation. Monetarist inflation theory is long since dead and good riddance to its over-simplified incorrect view of the way monetary phenomena and economies actually function.
    Christian Carson from Cleveland, Ohio
    Replied 11 days ago
    Prices are nothing more than the level at which the market clears between supply and demand. If there is more money chasing fewer goods, prices go up. It is critically important to understand that the "money supply" as we know it is not just the total number of dollars physically printed by the Fed. Higher-order elements of the money supply includes credit, which dwarfs the base money supply of dollars in your pocket. When credit contracts, part of the money supply is destroyed, and prices tend to fall. So yes, the Fed can theoretically print with reckless abandon into a credit crunch without consequence, which is exactly what they did after the 2008 crash. Think of it this way: if the bank offers a $1,000,000 credit line to a business to fund an expansion, that borrower will buy more, increasing demand, which puts upward pressure on prices. The bank didn't have to do anything to offer you this line other than respect its required reserve ratio; they essentially "printed" this money into existence by crediting the account with this money. The bank can just as easily terminate that line of credit, which would cause the business to reduce its consumption. It is when the bank loans to riskier and riskier clients when the crash and contraction occurs. This is not a zero-sum game where there is a fixed number of gold ingots in the economy and that's the only money anyone can use. Credit has existed since the beginning of civilization, even prior to coinage, and credit expansions and contractions largely drive price level changes. What's the best way for the shoemaker to increase demand for his products, so he can raise prices? Offer easy credit. Offer too much and you might not be paid back.
    Mike Arman
    Replied 11 days ago
    The statement "Increase in the money supply leads to inflation" is incomplete. There's more money now than there was in the past simply because the total economy is larger (we have more "things" and we also have more people). I think a better way to define it would be the supply of money outrunning the supply of "things" to spend it on. The Fed has to do a careful balancing act - there has to be enough money so the economy can expand, but not so much that everyone's coffers are overflowing (which leads to "too much money chasing too few things, so the prices of the things increase because the value of each monetary unit is diluted because there are just so darn many of them floating around). Nobody said this was simple . . .
    Mike Arman
    Replied 11 days ago
    Reply to Caleb - Yes, holding cash will eat away at your net worth in an inflationary scenario. While you may have the same number of dollars, each one purchases less than it did last year, or the year before, etc. Unfortunately, wage increases often lag behind inflation, so wage earners are disproportionately hurt. Their purchasing power goes down year after year. We are about at the end of the "WalMart" effect, which is that increasingly inexpensive goods have allowed people to maintain or even raise their standard of living despite no or low-growth wages. Look how the prices of flat-screen TVs have gone down, for example. (An overseas visitor once said to me "America is an amazing country. Even poor people have flat-screen televisions!) One seductive trap to beware of is "Due to inflation, my house is now worth three times what I paid for it!" Problem there is that if you sell and "reap the rewards", your replacement house will also have tripled in price (note I didn't say value), so you have no net gain, and you pay Realtor fees, closing costs, etc. Be very careful here, remember that if all the economists in the world were laid end to end, they would not reach an agreement. Best bet in inflationary situations is buying and holding income producing assets. Inflation makes money you borrowed years ago very easy to pay off. This tells me that if serious inflation is a prospect, go buy appreciating assets NOW and pay the loans back later with depreciated dollars. Forget the new BMW, that depreciates like a rock, buy a duplex instead and rent it out. Your rents will go up with inflation but your mortgage stays the same.
    Sisai Birhanu Rental Property Investor from Ashburn, VA
    Replied 11 days ago
    Great extensive artcle. It would be great if you explained a little more about your thesis of low-risk for hyperflation in the short term. The Fed printed four years' worth of tax revenue in a couple of months. I incline to agree with those who think this risk higher.
    Dev Horn Flipper/Rehabber from Arlington, TX
    Replied 11 days ago
    Excellent article! Great info and perspective on this.
    Justin Dibs
    Replied 11 days ago
    Check out shadowstats.com to see "real" inflation numbers...
    J Scott Developer from Sarasota, FL
    Replied 11 days ago
    Yes, love it!
    Steve Hodgdon Investor from Novato, California
    Replied 11 days ago
    One of my favorite hardly known sites. Good call.
    Allen Pope from Indianapolis, Indiana
    Replied 11 days ago
    Good article. I appreciate that you don’t want to use a technical definition for “inflation,” and it’s good that you noted it has multiple definitions. That’s one of the reasons the concept is so difficult to understand. We use the same term to mean so many different things. The logical solution would be to use a different word for each sense of “inflation.” The inflation you’re talking about is what could be called “dollar devaluation.” And instead of “inflating the dollar,” we could say “devaluing the dollar.” For example, it is much clearer to say, “The Federal Reserve now has a policy of devaluing the dollar at an average rate of 2% per year.” Now, I know better than to hope this more accurate term will ever be used, because “devaluation” sounds bad, while “inflation” sounds good. But I have found that if I think “devaluation” (or better yet “dollar devaluation”) every time I read “inflation,” I’m generally better able to evaluate a writer’s argument.
    J Scott Developer from Sarasota, FL
    Replied 11 days ago
    Exactly. Personally, i like the term "Price Inflation"...
    Mike Arman
    Replied 11 days ago
    Workable definition of inflation: Too many dollars chasing too few things. Sellers will raise their prices (because they can) until people stop buying. If everyone is swimming in money, they won't be price sensitive or pinching pennies. Have you ever seen a "clearance sale" at a Rolls-Royce or Porsche dealer? Be especially wary of politicians, they are only interested in getting elected and often know zilch about much of anything else, let alone arcane subjects like economics, on which even the experts disagree (and we are the Petri dish).
    George Lui Investor from Palo Alto, CA
    Replied 11 days ago
    Many Austrian economists have predicted this and it's scary for sure the different scenarios that can play out. No way the Fed stops printing money (runaway train). A debt jubilee is scary, but other world powers removing the US dollar as world reserve currency leaves the US in a very vulnerable state.
    Tim Parker Investor from Bremerton, Washington
    Replied 11 days ago
    The federal reserve can do as well controling the economy as a bunch of chimps with wrenches can fix a computer. The fed is totally ignorant. They can control the situation as long as things don't get hairy. When things go bad they will make things much worse. There has been no honest price discovery for many years. No one has any idea of what things are really worth. Does any SANE person think Tesla is worth 100x annual income? Would any SANE RE investor accept a 1% cap rate? This is what we face because of the fed. Real estate is good because dirt is real and people need houses to live in. Gold is good because it doesn't appreciate or depreciate. It just measures what things are really worth.
    J Scott Developer from Sarasota, FL
    Replied 11 days ago
    I wish I believed that the Federal reserve was just ignorant. I actually think that they just have bad intentions.
    Bob Evans from Greenville, South Carolina
    Replied 11 days ago
    I find it interesting that prior "stimulus" programs are usually around government programs (i.e. infrastructure) which are tied to creating demand for businesses to fulfill. That demand will then result in goods and services provided to the government via employees hired to do the work. Now a large amount of stimulus is going directly to consumers in the form of direct payments. Now the consumer gets to decide what goods and services they will spend the extra money on (if they have a job). That is the wild card that has not been played to this level before. Will be interesting to see what the results are going to be. Will the extra money create demand, or will consumers pay down debt? I think the government would like the consumer to leverage the additional money (i.e. take the $1000 and borrow $9000) to create $10,000 in demand.
    Chris S.
    Replied 11 days ago
    Ray Dalio recently published a study on this topic which discusses the history of the debt cycle: https://www.linkedin.com/pulse/changing-value-money-ray-dalio/ Also, I'm not sure most people are experiencing the increase in their wages that would be needed to offset the impact of inflation on cost of living and savings.
    Chris Shepard Investor from Portland, Oregon
    Replied 10 days ago
    Ray Dalio has a great video on how credit and transactions affect the debt cycle which can lead to inflation or deflation https://www.youtube.com/watch?v=PHe0bXAIuk0
    Michael Isaac
    Replied 10 days ago
    Love it! Ray breaks things down in a really helpful way. Here is another video by him that breaks down the basics of our economy: https://economicprinciples.org/. This helped me gain a bit of clarity on such a vast subject.
    Steve Hodgdon Investor from Novato, California
    Replied 11 days ago
    If you had a 2% constant (Fed stated goal) and $1000 then in 30 years that $1000 would be worth $548.54. Much easier to pay off $25 trillion in US debt that way.
    Colin March Rental Property Investor from Portland, ME
    Replied 11 days ago
    Why would the govt "pay off" the debt? That's not a thing. They need to pay the interest expense and roll the principal.
    Mike Arman
    Replied 11 days ago
    Time value of money . . . (Money now is worth more than money later). Add inflation, and money now is worth a LOT more than money later!
    Dan Gertler Investor from San Diego, CA
    Replied 11 days ago
    Inflation is not necessary despite what the Keynesian worshipers would have you believe. The average annual inflation rate in the 19th century was -0.4% and the economy still cranked away. Also, China and Japan are not the biggest debt purchasers (and haven't been for some time). Americans are. Look it up.
    Gavin D. from South Carolina
    Replied 11 days ago
    Please, do not send me email notifications about articles like this. I appreciate the effort to encourage interaction on BP, and earn ad revenue, while educating people... but you are not educating anyone with this article.
    Dan Goeckel Rental Property Investor from Portland, MI
    Replied 10 days ago
    Beg to differ. These are the basics and it is very useful to understand how these topics can affect real estate values and what to do. If you read it for just what it is, yes, not helpful, but when you apply it to what occurs to wages (rent), food (reduction or increase in disposable income and potential rent markets), COGS (Cost Of Goods Sold) in respect to wages. All of this affects pricing of properties, rent rolls and how to even assess if a property is a good buy at the time.
    Colin March Rental Property Investor from Portland, ME
    Replied 11 days ago
    I find the "printing money" metaphor is a little tiring. Are we talking about expansion of credit transactions between the fed and banks or the mailing of stimulus checks to Americans? Monetary policy has been incredibly inflationary over the past decade (stock market, bond market, real estate, etc). I don't know why people get so excited about CPI hyperinflation these days. What are you waiting for to spike? Oil? Milk? Clothing? Also, if China were to stop buying US govt bonds, what will the Chinese do with all the dollars they accumulate from American exports? They have to put the dollars somewhere so if they don't buy US govt bonds, they will buy other assets like stock, corporate bonds, real estate...or maybe they have been all along?
    Mark F. Rental Property Investor from Bergen County, NJ
    Replied 11 days ago
    Jay, I've been reading and listening to you for a coulle years now and I just want to say, you seem like the type of guy I'd want to grab a beer with. Thanks for the article and all your contributions.
    J Scott Developer from Sarasota, FL
    Replied 10 days ago
    Mark - If you're ever near Sarasota, Florida, let me know. Would love to grab a beer!
    Mark F. Rental Property Investor from Bergen County, NJ
    Replied 9 days ago
    I've got family in St Pete so I will take you up on that offer!
    Michael Haynes Investor from Tampa, Florida
    Replied 11 days ago
    Hello Allen Pope. One thing that I don't see in this article on Inflation is the comparison with Global Currencies. Do you trade Forex? Have you studied Currency Pairs and see how they change in value against the Dollar? Just looking at the Dollar I think is nearsighted. The other thing is your using the term Devaluation. The majority of my Real Estate is in Brazil. Outside of the USA it is the thing to do when you wake up in the morning to look at how much that countries currency Increased or Devalued against the Dollar overnight. Overnight Risk is the greatest Risk for a Trader. Devaluation of the Currencies is a common term in all Foreign Countries. The third thing I have seen is that no one is pointing out the History of other Countries doing what "The Fed" is doing. Japan has been doing this for 21 years? What did it get them is a good discussion to start. The last thing is the Monetarists think that when you print money the value goes down and things like Gold go up...the end result is Hyper Inflation. Have you ever been through a period of Hyper Inflation? That is when the Currency Devalues every day for many months at a certain rate. Then, one day the "Fed" or Central Bank says that they are Devaluing that Currency by a certain amount, say, 50%. Then, you know you have trouble in River City. That is usually the time that they say the Currency you are holding is to be converted 2 for 1 with a new Currency. Pesos go to Reals or Old Reals go to New Reals etc. At that point everyone is on notice that the Debt cannot be paid and their Currency is going down the tubes until one morning you wake up like we did in Brazil and they Close the Banks to keep the Country from declaring Bankruptcy. The Central Bank told the President it was that or the Cruzeiro was going to "Deflate" 5000% the next day. People that could were buying "Hard Assets" which for poor people was refrigerators, washers, cars, furniture etc. that they could Sell after the reajustment of the Currency situation. Presidente Color at that time seized all Bank Accounts and issued Bonds at 3% to be Cashed after 3 years with the new Currency or Reals. He allowed certain "Essential Businesses" to draw from their accounts to pay salaries. I had my money in a joint account with a lady over 55 and we were able to withdraw all of our money in the new Currency. I have been through this in Chile and Argentina and in those countries it was Military Dictatorship time and there was Martial Law and then strict Curfews each night. Martin Armstrong with his extensive study of the History of World Currencies says that the changes will happen quickly for us, when they happen. That concerns the raising of Interest rates. He also points out that the other Countries like in the European Union are printing more money than we are and that keeps the value of the Dollar from Inflating the way you are talking about it. The Search for a Safe Haven is Not Government Bonds. You have to do a study of the History of Countries that have gone through the similar situation that we are going through to see what was the outcome in their similar efforts...like Japan.
    James Mauck Rental Property Investor from Portland, OR
    Replied 3 days ago
    Michael, I really appreciate your practical, big picture perspective.
    Michael Isaac
    Replied 10 days ago
    I have read up quite a bit on this and it seems that the two major factors that individuals can control are to increase knowledge and increase productivity. Knowledge is where you start and productivity allows you to multiply.
    Dan M. Real Estate Investor from Walden, NY
    Replied 10 days ago
    Just my two cents many other countries/wealth are attempting to hedge their risk by moving to the dollar right now, supposedly it is the new gold standard to bonds in this day and age.
    Dan Goeckel Rental Property Investor from Portland, MI
    Replied 10 days ago
    Fantastic explanation! Love it. Reading your book "Recession-Proof Real Estate Investing". Great simple book for understanding market conditions. I like following economics so this book is right up my alley.
    Chris Shepard Investor from Portland, Oregon
    Replied 10 days ago
    Ray Dalio also has a new book that he is releasing chapters to which touches on the history of the rise and falls of economies. Here's the link! https://www.principles.com/the-changing-world-order/
    Cole Kinsey from Phoenix, AZ
    Replied 10 days ago
    Great Article J. Thanks for the content. In regards to "When business are selling things for less, this means less profit, less purchasing, less expansion, less growth." Whenever a new product comes out it costs more. ie TV's, Cell Phones etc. The cell companies make way more money selling the phones for 1/5 of the price than they did 25 years ago. Falling prices in economics = more sales. More sales at a lower price often
    J Scott Developer from Sarasota, FL
    Replied 10 days ago
    Over time, prices do tend to drop, as technology and automation improve. Nothing wrong with this, as long as profit margins are maintained, and business owners continue to see overall growth.
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied 9 days ago
    Don't know if it was said yet, but the quote "If you are making $100,000 this year and have a $1,000/month mortgage payment on your rental property, you are spending 1% of your income paying your debt service." is wrong. If you make $100K per YEAR and your mortgage payment is $1,000 per month [or $12,000 per YEAR], then you are spending 12% of your income on servicing the debt, not 1%. If you want to do monthly , then you bring in $8,333.33 per Month and spend $1,000 per Month on debt...that is 12% of income towards debt. The same adjustment needs to happen for " you're making $200,000 next year, that $1,000/month mortgage payment won't have changed. Your debt service is now 0.5% of your income! " You would be at 6% of income for debt service. Keep Year to Year and Month to Month when using calculations. Just saying...otherwise a nice article.
    J Scott Developer from Sarasota, FL
    Replied 9 days ago
    Yes, meant to say "1% per month" instead of just "1%"... Sometimes my fingers type faster than my brain... Thanks for the correction...
    Brad Hammond Real Estate Agent from Portland, OR
    Replied 8 days ago
    Thanks for this J, great info! Do you foresee the world replacing the dollar with gold as the reserve currency?
    J Scott Developer from Sarasota, FL
    Replied 8 days ago
    I foresee the US dollar being replaced over the next 10-20 years, but not by gold. The problem with gold is that there is a finite amount of it, and the ability to print money is important. I know that goes against common sense, but imagine had the US been on the gold standard during WWII? We wouldn't have had enough money to fight the war, and result would likely have been an allied loss to Germany. The reason we were able to finance that war was that our central bank -- and other central banks around the world -- were able to create money out of thin air. I think the most likely option for the next reserve currency is something that doesn't exist yet. It could be a US dollar replacement that the US government creates (we've had a lot of currencies over the past 250 years) or it could be an international currency that (hopefully) we play a part in brokering. Just my $.02...
    Jerry W. Investor from Thermopolis, Wyoming
    Replied 7 days ago
    J. Scott , thanks for taking the time to share this article. We can get focused on real estate and forget how many government policies can massively affect our investments. Keeping a rounded view is important. When it comes to understanding the economy and things like inflation, some folks take one course, some take multiple, some read one book, some read dozens, and some get PHDs and write books. I cannot believe you couldn't write an article that satisfied every reader in depth and theory in a few paragraphs. Quit being a slacker and please everyone. If drop by Thermopolis WY I'll buy you a beer. Thanks again bud. We all need to keep economics in mind and often forget about it.
    Robert Larue Investor from St. Louis, MO
    Replied 7 days ago
    Thanks J, very interesting and helpful article for me- love your take on how this effects real world investors. -Rob