073: It’s Possible to Wipe Out Your Debt Using Inflation: Here’s How
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Can you imagine wiping out your debt using inflation? Can you picture using inflation to your advantage for real? 🤔🤔
Sam Ewing once said, “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
Today we’re talking about how it’s possible to wipe out your debt using inflation. Whether you are the person in debt or the person who’s out of debt, our goal in this episode is to expand your mind to see what’s possible.
You see 👀 we’re in the high inflationary period. Which, for most people, they aren’t just hearing about, but they’re also feeling. Like in their pocketbooks. And everyone has “growing” debt– the government included.
Everyone’s growing debt that we’re talking about here means credit card 💳 debt, homeowner 🏡 debt, and student 👩🎓 debt. For the Fed, we’re talking about the trillions of dollars they have pumped into the economy in the form of debt.
We’re in a period of economic winter and winter can mean a lot of things. Cozy sweaters, hot cocoa, spending time with family. But for the economy, winter can also mean uncertainty.
We may not be able to control what the government does when it comes to the trillions of dollars they’re printing, but we do have control over things you can do right now to be on the right side of this economy.
AKA not breaking the piggy bank 🐽 account as opposed to eroding whatever money you might have.
So, let’s talk about everyone’s favorite subject, debt.
Good debt is when you leverage debt to build your long-term wealth. But, that’s actually not the debt we’ll be talking about either. Today we’re actually talking about good debts evil twin, bad debt, the type that people are racking up right now– and in droves.
The average credit card debt per household is $14,241. In student loans, the average is $58,112.
The auto loan average is $31,142 and the average mortgage loan is $202,454. All this to say, Americans are getting into massive debts– from students to homeowners. And the Federal Government is not setting a good example by getting into hot debt water themselves.
If you look back at the great financial crisis of 2008, you saw it manifest in the credit markets because subprime borrowers defaulted, and that caused the mortgage-backed securities to underperform.
This caused the market to go into a freefall that nearly took down the entire credit market.
The result? The Fed took its balance sheet from $800 billion– which is what it was during the 2008 crisis– and took it all the way up to $4.5 trillion which is a mega expansion of the amount of money in the system being circulated.
Why did they do this? The primary purpose was to reflate the stock, bond, and real estate market. They pumped the money into the market by making monthly purchases, to the tune of $80 billion a month or a trillion dollars a year of treasuries. Then they took another $40 billion a month or half a trillion dollars a year in mortgage-backed securities. And this has been going on for a long long time.
Cue the Fed printing money to prop up the financial system, diluting the dollar and took on a new form that we’re seeing today with inflation.
And if we look at how much money was printed during the height of the COVID-19 pandemic, you will see a startling set of numbers…
According to NASDAQ.com, “As of March 2021, COVID costs totaled $5.2 trillion. World War II cost $4.7 trillion (in today’s dollars). All-in money printing totaled $13 trillion: $5.2 for COVID + $4.5 for quantitative easing + $3 for infrastructure. Mountains of money cause inflation”
So now let’s look at the US debt clock. Heads up, it’s moving– which should come as no surprise. The US government has been racking up more and more debt rapidly. $30.6 trillion in US National debt, and in US unfunded liabilities over $170 trillion at the time of this recording.
Here’s a not-so-fun fact for ya 80% of all US dollars in existence were printed in the last 22 months (from $4 trillion in January 2020 to $20 trillion in October 2021). Yikes! 😨😨
The Fed’s money printing–sorry we mean quantitative easing –has accelerated. And the reason for this is to increase the liquidity of US banks and inject trillions of dollars into the economy by purchasing Federal assets and bonds and sending out stimulus checks to millions of Americans.
But where did this money come from? Well, the Fed had to borrow by selling its debt in the form of U.S. Treasury bonds and other types of securities. Then after the bonds are sold, the Federal Reserve gets to work and starts printing money.
As in Control P, print.
The bottom line is we are hemorrhaging cash at the federal level to keep businesses afloat and create income for the people so that they can live, work, and eat. And as a result, it’s creating more and more debt.
So there are two things happening at the same time. #️⃣1️⃣ the government is creating a bunch of debt, and #️⃣2️⃣ families are creating lots of debt for themselves. Now let’s look at inflation.
Inflation touches practically every part of people’s lives – including gas, groceries, and rent, and has cemented a belief for many families that the economy is not working for them.
Here’s what the Washington Post said about inflation.“Inflation reached a new peak in May 2022 — with prices climbing 8.6 percent, compared with prices the year before — in the latest bleak sign that the Fed’s policies to slow the economy are not working well.”
In June 2022 the Fed hiked interest rates by three-quarters of a percentage point. What does this mean? This is the Government’s attempt to cool off an overheated economy by dampening consumer spending so that demand for goods and services falls and prices simmer down.
This move is aggressive in fact, it’s the Central Bank’s most aggressive move to slow the economy down since 1994. No one is walking away from this inflation hike unscathed. From high-interest rates to mortgages, auto loans, and student loans this inflation is causing all of us to hold our wallets close.
After the interest rate hike decision was made, Chair of the Federal Reserve, Jerome Powell is quoted saying “We thought that strong action was warranted at this meeting, and we delivered on that. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all… The current picture is plain to see: The labor market is extremely tight, and inflation is much too high.”
Aaaand it may not be over, Powell also said he expects more hikes of three-quarters of a percentage point, but it’s unclear exactly when or how many.
Reaganomics himself, Ronald Reagan said, “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”
Not exactly the most comforting quote but inflation doesn’t have to be scary– as long as you’re on the right side of things. Inflation steals a lot of things, such as your confidence, and security… but it doesn’t have to steal away your savings. 😇😇
Buuuuut inflation can also wipe away not only your debt, and the public debt as well.
We’re already seeing more expensive essentials like food 🥓🧀🥚, gas ⛽, lumber, etc. And it starts innocently, the applesauce you used to buy for your kids hiked up 20 cents in a couple of days– some of us barely notice.
But over time, that 20 cents turned into a $3 hike over two years of gradual increases. Over applesauce. So necessities are going up, that should mean our wages go up too, right? Not necessarily.
If you’re getting a 2%-3% raise in your annual salary, and inflation is at 8.5%, you’re losing money. Your paycheck might be 2%-3% higher, but you have no chance of “catching up” to inflation when it’s leaving you in the dust skyrocketing to 9.1% annually.
You’re going to need to take notice of these things when you’re negotiating your salary. If your wages are trending less than inflation then you’re playing a game on enemy territory and you’re losing… badly. The same can be said for variable interest– it’s also rising with inflation and leaving you behind.
However, if your loan has fixed interest, you’re probably gaining ground and we’ll talk about that in a second. But you don’t have to be stuck in the doom and gloom. There are actionable, tangible steps that you could do right now to make sure that you’re beating inflation as we move forward.
Whether you like it or not, inflation – above 6%-7%-or even 9% is bound to happen. But your strategy in how you get around it can out-best even the most aggressive inflation hike.
And for those of you who might think this is crazy, you wouldn’t be wrong! Most of us never really experienced a market like this because in the 70s and 80s before most of us were born.
We all love nostalgia, and for good reason. Back in the 70s, 80s, and 90s people were making money… and a lot of it. They were on the right side of things– they understood where society and the economy were headed and they put themselves in a position where they could move with inflation, not against it.
So what did they know then that we’re trying to figure out now? Here’s how we get on the right side of inflation.
The LRR Low Down
First things first, bad news for our friends who save every cent. You know the type, they won’t throw away toothpaste until the last squeeze is squeeeeezed. And in this economy, those same savers will lose. Let’s break it down. 🤓🤓
Let’s say you have $100,000 in the bank, and inflation is now 8%.
If the bank’s paying you 1%, –which we doubt they are, and inflation is rising to 8%, you’re losing 8% a year on the purchasing power of that money. It’s not like the $100,000 is disappearing from your account, it’s that inflation that is wiping out the value of the dollar. You’ll have the same amount of money it’ll just be worth less.
This is why we say that inflation is the silent robber of your wealth.
Do you want your cash to be sitting around and accumulating dry powder? Yeah, neither do we. Cash is trash but assets are forever.
Good Debt=Long-Term Wealth
What do we mean when we say good debt can translate into long-term wealth? Let’s break it down with an example. 🧐🧐
Let’s say ➡️ you get a 5-year loan at 5% interest rate and inflation is also at a 5%. This translates into you borrowing money for free. That 5% is fixed, so is the principal amount owed if you have a $500,000 loan for 5 years ago is still $500,000 today if you pay it off today– now with cheaper dollars.
Valuable Assets are a Girls Best Friend
You’ve heard it said that diamonds 💎 are a girl’s best friend. Well, no one has asked us what we think of that. Our next point is real estate– a physical, hard asset is the best mode to hedge against inflation.
Real estate components such as the frame, the roof, the chiller, the concrete– all of that stuff is going to be more expensive to build later…. just like it was 5 years ago. Right now, for every rent dollar that increases, our apartment complexes increase in value. And that’s staying at a 5% cap rate, which is the average cap rate right now.
So if you invest in an asset class that yields an interest rate that is on par to the rate of inflation this is what we mean when we say “leverage good debt to grow your long-term wealth, and use real estate.” Real estate is a physical hard asset that can help you hedge against inflation and is the secret ingredient to wiping out your debt.
Okay, so that solves your debt problem, but what about the Fed? According to one resource, As the US debt-to-GDP ratio rises toward 100%, policymakers will be tempted to inflate away the debt.
According to a study done by Joshua Aizenman and Nancy Marion, “US inflation of 6% for four years would reduce the debt-to-GDP ratio by 20%, a scenario similar to what happened following WWII.”
Check out the graph we’re attaching here to get a better picture of what we were talking about. According to the study, both the federal debt and debt held by the public went up significantly during wartime. Though we’re not at war right now, the COVID-19 pandemic still has an effect on our everyday lives. What the government did was drive inflation up during that period, which resulted in increased debt. And what inflation did according to the study is reduce the government debt by 20%.
As the Fed is spending trillions and trillions of dollars on the economy, one way they could wipe out that debt is by letting inflation rise. And that’s why Powell said he expects more hikes of three-quarters of a percentage point.
But back to you, how does the government trying to sort itself out affect you? It means that you should be in debt too because this is not just going to affect government debt. Inflation doesn’t care if you have it, or the government has it. It does what it does.
And so if you buy one million in real estate, and you have $700,000 worth of loans on it, you are also going to pay off the debt with cheaper dollars. You’re going to not only get the cash flow but also all the benefits from borrowing fixed-rate real estate. ✨
You see, it’s the debt that gets wiped out – the money that you borrowed to buy the one million in real estate to begin with. So you don’t really have to pay it back. I mean, you could but what you’re paying them back with might as well be Monopoly money.
Here’s the thing, you want to be on the right side of things. Inflation or not it’s something you can’t control. We’re not really betting ladies 👯♀️ but if there is one thing we would bet on, it’s knowing inflation is only going to get worse.
We don’t know about you, but we’re here to say to be on the right side of economic history. You have to start using inflation to your advantage and get a fixed rate of 5%, while inflation is at 8.5%. When you do this, you’re actually beating inflation while using other people’s money to borrow. Plus you’re also enjoying inflation in rents, and in sales, as things become more expensive and appreciated over time.
Now before we leave we have one question for you Cashflow Multipliers. How can you secure your piece of the inflation pie?
AKA–, how are you going to profit during this season? In our opinion, debt is now an asset. Cash is a liability. Real estate will be the hedge against inflation moving forward.
Now is the time to carpe diem on real estate as it’s a big-time buyer’s market– not sellers market. We’ve been going full speed ahead since the beginning of COVID-19 🧫 and honestly? We’re still not moving fast enough.
In going back to the debt clock, as the government continues to have massive unfunded liabilities, they are going to be super motivated to have high inflation. Why? Because as they inflate, the debt they owe is going to be paid off course with cheaper dollars in the future.
Okay, I think we’ve made our points pretty clear here in this episode. Do not sleep during this time in our economic history, now is your chance to get on the right side of it! 😘🙌
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