With the lowering of interest rates and the current state of the economy, it's widely believed that we will have inflation eroding at the value of the dollars we're all trying to earn and save.
I'd like to use this topic for a discussion of different ways to hedge against inflation.
I'll start off with one strategy that I've seen mentioned before here on the forums, but hasn't been discussed in depth.
Using Real Estate as a Hedge Against Inflation.
It would seem that property is going to hold it's value against inflation. If the value of the dollar is rising, then property becomes more expensive. If the dollar sinks in value, so does the value of the property that is bought with dollars. So, the physical asset of real estate should be a good hedge against inflation, right? Not necessarily.
An inflation hedge is an asset that loses little value in periods of rising prices. Thus, it holds its value and purchasing power during inflation.
According to economists, there are 4 properties of a good inflation hedge.
1. Retention of Value - People should always desire these things. Examples of this include land, artwork, metals. There is always a want/need.
2. Marketability - If you can't easily convert your asset into cash, it may be worthless no matter what its value. Examples include corn or jewelry.
3. Divisibility - Cut it in half and it should be worth half. Ex. - rice, oil, gold.
4. Financing - Assets bought on credit are subject to speculation and bubbles. Good inflation hedges are bought with cash, not loans. Real estate fails this test horribly.
So, real estate doesn't pass the 4 properties of a good inflation hedge. It meets some of them to different degrees, but won't pass the test perfectly.
What other inflation hedges can you think of?
