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Inflation

September 23, 2021   ·   0 Comments

Sir:

Columnist Madsen (16 September) is one of the few in media who warn of inflation, which threatens to become very serious.  Let me tell you about this consumer’s naive approach to inflation.

My typical Army move, this time from Montreal to a US Army post where I would reside in rented military accommodation, obliged me to sell the home I partly owned.  Inflation under PM Pierre (the borrower) Trudeau was causing house prices in Toronto and elsewhere to rise dramatically; so I decided to buy a home in my likely next city (Ottawa) and rent it to friends.  The mortgage interest rate for me flew from 10% to 21% as the government and I went deeper into debt.  (The national debt was around $200 billion; mine wasn’t far behind.)

Professional lenders must make a living; so they need an average annual return of around 7 to 10% on their money.  They don’t lend to nations that borrow a lot without demanding a higher rate in return for the extra risk of failure.  So rates rise.  In 1981, smart people stopped buying homes and instead invested their nest eggs at the high rate; so home prices stabilized and mortgage rates fell – after I had made my purchase.

“Day traders” who sit on their computers and trade penny and gold stocks all day can make money at such times, but not the average Jane or Joe.  All we can do is try not to lose too much to the professional winners.  One of my acquaintances was buying and flipping houses with great profit.

My advice to Joe now would be to pay down debt as interest rates rise, buy whatever staples (refrigerator, stove, car) he needs without borrowing, invest in short-term GICs and re-invest them as they come due at the rising higher rates.  At some magical date the house of cards will crash down, the high-rate GICs of longer terms will prove profitable and the big purchases will not need replacement for some years.  The trick to making money is knowing in advance when the collapse will occur.

But here’s a caution, Joe.  I was wrong in 1981.  I can be wrong again.

Charles Hooker

East Garafraxa



         


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