Originally Posted by
ercchry
Alright... let’s try this another way.
Inflation: money is worth less tomorrow than it is today, equities and assets increase in value with this, something that cost $1 now is $2 then, right? Good...
If inflation outpaces wages, money earned is worth less tomorrow than it is today
As money is less valuable, the cost to borrow increases. Increasing the barriers of entry
How do you combat the above?
You borrow today, when rates are low, and your earned dollars are worth the most they ever will be, you acquire the assets to track or outpace inflation, as your labour will not be worth as much
As you have secured that leverage in today’s market, it will carry into the future inflated market, locked in at the low dollar value of today
You now have created wealth, while your labour is worth less, your assets are generating wealth at tomorrow’s inflated values, offsetting your lessening buying power
If you did not do the above, you can now not afford tomorrow what you did today, as your buying power has not kept up to the inflation, you cannot afford to borrow enough to offset the increase in asset value
Bubble:
Temporary... not a 30yr, ever inflating economy. example: China cracks down on the rich, money leaves the country, investing in Canadian RE, creates a frenzy, bidding wars ensue as everyone panics to buy in... Chinese money dries up, world economies have not experienced excessive inflation, prices now drop, current buyers are left holding the bag, defaults on loans increase, further driving down prices triggering a decade long recession
Edit:
Simplification:
At the end of the day it’s all cyclical, inflation, followed by recession, repeat.
Just like anything, buy low, sell high. Load up on asset when cheap and money is easy to borrow, sell when they inflate and it’s cost prohibitive to maintain the leverage (expensive to borrow), survive the next recession with a couple bucks, load up again for the next bout of inflation