Inflation & housing

I am sure you have heard that the Fed (US Federal reserve bank) has opened the floodgates of new money to bolster the US economy.  All this in a bid to boost jobs in the US and help the US economy get out of the LONG slump.

The good news is that your stock portfolio should have seen a bump, and interest rates are likely to stay low.  The bad news is  all that money flowing around will have a real cost in the long term.
For the younger people out there inflation, I mean real inflation, might conjure vague memories from economics 101 or some article you might have read in the paper.  The real effect of inflation is significant for the average person.  I am not talking about the target inflation of 2%, I am referring to real double digit inflation.

High inflation means prices go up, but sometimes not everything goes up at the same rate and some things might even drop.  One example was in the US when oil jumped to an all time high of $148 a barrel and house prices dropped 31% in 2008.

So what?

1. Well, often wages do not increase at the same rate as prices for food and fuel so people have less money for discretionary spending, this further weakens the economy because we are not out there buying all the new tech if we need to feed the kids and it is getting harder. 
2. People's retirement plans get hammered.  People might be planning on retiring with a $60,000/year income and that was going to maintain their standard of living.  All of a sudden $60,000 won't cut it, so it is either back to work or significant changes to the plan.  If one is not yet retired it means putting off buying now to save for the more expensive future, either way consumption is down as is standard of living.

 These are other implications but these are significant to most people.

Let us take a real world example of high inflation and while I believe governments and banks will do everything to prevent this level of chaos it has happened before and as we know humanity seems destined at some point to repeat the mistakes. 

For every example out there i am sure there is a "Yeah, but..."  just remember how close the disaster was in 2008.

From wikipedia

Poland, 1989–1990

Poland experienced a second hyperinflation between 1989 and 1990. The highest denomination in 1989 was 200,000 zlotych. It was 1,000,000 zlotych in 1991 and 2,000,000 zlotych in 1992; the exchange rate was 9500 zlotych for 1 US dollar in January 1990 and 19600 zlotych at the end of August 1992. In the 1994 currency reform, 1 new zloty was exchanged for 10,000 old zlotych and 1 US$ exchange rate was ca. 2.5 zlotych (new).

Start and End Date: Oct. 1989- Jan. 1990

Peak Month and Rate of Inflation: Jan. 1990, 77.3%^[56]

 Even something less dramatic than this can have a real impact on people's lives.  We all know there is a cost to everything, or for the scientists, for every action there is an equal and opposite reaction.  It would be great to know what the reaction to all this bailing out is going to be, but quiet preparation is always good.

The Fed has kept up a consistent pace to feed this inflation first in the spring and then this week.  No one has put a date on when this "debt" is going to be paid for all the free money flowing into the European and US markets to bolster what is otherwise pretty depressing news, but most agree it will come.

The upside is we know it is coming and rates are low so what are the 3 big things you can do to protect yourself.   While gold is often talked about and certainly many people flock to gold in uncertain times it is not for everyone.  Number of sites have differing suggestions but here are three fairly common points, note that every strategy has an inherent risk:

1. Invest in the stock market.  Companies are motivated to get the best returns and to find ways to hedge themselves against inflation, just look at the markets post announcement. 
2. Buy a home and fix your expenses as much as possible.  People need a place to live and if they lock in rates before any major increases paying off the mortgage at the lower rate is actually a huge form of savings.  Getting the mortgage paid off before any major increase would be a huge bonus especially if we ever head back to 16% mortgage rates.  (Makes me cringe to think about it, personally I am weighing the idea that if it ever looks like I might actually have to pay anything close to that I will cash out some savings and pay my mortgage down as much as possible to reduce the impact that would have on my monthly cash flow.  Then hope to rebuild the savings from what I am not spending on interest costs.)
3. If you can find inflation adjusted securities you like. Or if you are a sophisticated investor or have one on the payroll follow their best advise, because a high interest savings account or T Bills etc. are not going to give you rates that will let you stay even with inflation let alone move you ahead on your savings goals.

I know the home one sounds self serving, but think about it.  Rents can increase but if you lock in a rate you have stability and savings built in and when the home is paid off other than the standard overhead, taxes, maintenance and utilities, your housing costs are limited.

Consider your options.  I would be happy to discuss how long term fixed rates can help some people and if you are bold we can discuss variable as I do not see any major increase this year or possibly next for the prime rate, some experts have even whispered about a drop, but I am not sure how they would ever manage that.