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


Hyperinflation is now here II: Food prices

Bruce Walker writes today at the American Thinker that food prices are what is going to do in President Obama’s chances in the next election.  One of the signs of hyperinflation is spiraling out of control food prices, and Walker points out that the food commodities are up 27% over the last six months.  I don’t know about you, but a 54% annualized increase in food commodities looks a lot like hyperinflation to me.  I wrote a post in August 2010 that dealt with food prices, which I reproduce here:

August 3, 2010

What’s wrong with inflation? Do you have enough to eat?

Monty Pelerin has a excellent article on inflation this morning.  He maintains that the great temptation for government will be to try to solve the problem of debt and unfunded obligations by inflating it away, and that, since politicians are cowards, they will not make the tough decisions to avoid inflation.  He writes, however, about the consequences of inflation:  “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

I believe that the real danger of inflation may lie in the consequences it will  have on the food supply.  Never mind that food shortages have never been a problem in the living memory of most North Americans (unless they are over 75 or immigrated here from a war zone or something).  Today, obesity in developed countries is feared more than starvation.  So I made the following comment on Pelerin’s blog:

I am reading Adam Ferguson, When Money Dies (1975). He tells the story of Frau Eisenmenger, an Austrian who at the end of WWI had sufficient investments to live on and care for her family (31). She went into her bank in 1918 to withdraw some funds and her banker advised her to buy Swiss Francs, but it was illegal to hoard foreign currencies, and so she declined. Eventually, her savings became worthless. Her situation was greatly helped by her daughter working in the “American mission” paid in dollars, renting a room in her apartment to an American, and speculative investments in the Austrian stock market.

I fear that what will happen is similar to Europe in that period, when food was scarce and required a large percentage of income to procure. Eventually, the price of food will sky rocket and so more dollars will be created ex nihilo. Then the farmers will refuse to supply their food to people for worthless dollars and food stamps from the government, and they will have to stop producing–because their costs have to be covered too. Then, we will see shortages like never before. A farmer offered Frau Eisenmenger three month’s provision for her grand piano (33); and an acquaintance of hers sold her own piano for a sack of wheat flour.