Beating Inflation With Debt, The Anti-money

AmericanMonetaryAssociation.orgIf inflation describes the process of money becoming less valuable, then the solution is to own as little of it as possible, right? Not exactly. The opposite of money is not lack of money but rather debt. When you owe money to someone, you have created a sort of anti-money which exists as the polar opposite to money. This is a bad thing, right? Not always. When the money of a country is being continually devalued by government policies, then the way to create wealth is to collect more of the anti-money, which is debt.

Sounds like you’re starting to catch on, even though we wouldn’t be surprised if you had a hard time believing your eyes. It doesn’t make sense at first glance. Is the American Monetary Association actually suggesting that Joe Average Citizen stock up on debt to create wealth? That’s exactly what we’re saying, though keep in mind it must the right sort of debt. Maxing out credit cards or taking on usurious car loans is not what we had in mind.

To grow wealthy in these inflationary times requires a different approach to thinking about investing. Obviously, money based assets are going to continue to decline in value if the present economic conditions continue as they have since we were taken off the gold standard in 1971. That means you can forget about stocks, bonds, certificates of deposit and the like. What’s left? We’re here to suggest you consider the effect of taking out a long-term, fixed-rate mortgage tied to a piece of property with a rental house on it. While real estate tax benefits are second to none and the tenant’s monthly payment should cover your loan payment, that’s not even the best part.

Think about the money you owe as principal. Today you owe the bank $100,000 but next year that sum has shrunk to approximately $90,000 (considering the realistic prospect of 10% annual inflation) when expressed real terms of what money can buy. Tack on another year of double digit inflation and the real term value of the principal is now $81,000. If it sounds like the bank is being shafted in this scenario, you’re right. They’re putting up the money to buy the asset (rental property) while the tenant pays the loan and you own the thing at the end of the mortgage term, all the while the principal is devaluing.

That’s how you profit from debt.

The American Monetary Association Team

Flickr / TheAlieness GiselaGiardino

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