Reflexions on how to invest in an inflationary environment using leverage

The clear winners during the Weimar inflation were debtors.  This according to historian Adam Fergusson, author of When Money Dies (pdf link).  Indeed, it pays to owe money during inflation and even 2% inflation is theft–stealing from anyone who has lent money.

I have said in previous posts that the only reason that home owners win is because they enjoy a cheap debt product, a mortgage, and that as time passes, inflation reduces the value of the mortgage, while it appears in nominal dollar terms that their house has increased in value.  But if measured in something more stable, like gold, real estate hasn’t really improved in value over the course of the last 100 years.  It is just the dollar that has fizzled out.

Thus, I conclude that leverage that is under control and manageable, is the best weapon against inflation.  What is leverage that is under control?  (1) Keep debt to equity near or below 1:1; (2) Use debt to  purchase of a cash-flow producing investment, such as a dividend paying stock or rental housing, which in covers the interest payments and creates income;  (3) Avoid consumer debt.

In any case, here is the video in which Adam Fergusson explains how debtors win:  they pay off mortgages with “postage stamps” (i.e., eventually, the cost of postage stamps is similar to the total mortgage debt).

Hat tip:  Zero Hedge

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