The worst person to be with inflation looming is the bank! The catbird seat is occupied by, you guessed it, the borrower. Why do we say this and are we just full of rotten beans when we do? No. It all comes down to purchasing power and the decreasing real value of the dollar over time.
Here’s a quick, and hopefully clear, example.
Today, in 2009, your banker loans you $1 million dollars to buy income property. From his perspective, your banker could also take that $1 million and buy one million candy bars at a buck apiece. Let’s also say inflation will be 10% the year after the candy bar purchase. This means the real world purchasing power of that $1 million will decrease by 10% during the coming year so that, at the end of 2010, the $1 million in 2009 dollars will only buy about 900,000 candy bars.
The real world result is that the banker loses purchasing power when he lends you money! It’s better to be a borrower because then it’s your mortgage debt that is losing real value as time passes. That’s a good thing.
But don’t just run out willy-nilly and borrow for the sake of borrowing. You should only incur good debt attached to income producing property. If more people really understood what a great investment strategy this is, the banks would be in serious trouble.
