WSJ: Mega-Banks and the Next Financial Crisis

Please see the following article: Mega-Banks and the Next Financial Crisis In the article, fund manager Paul Singer argues that we may be headed for substantial inflation. The Fed "is treating confidence in fiat money--paper money--as inexhaustible." Loose monetary policy is being used as "virtually a complete substitute for sound fiscal, regulatory and taxing policy."

Mr. Singer has a point. Listening to the discussion and debate in Washington D.C. and Sacramento, one can't help but notice how far removed our elected officials are from the rules that govern a typical family's finances. Worse still, there seems to be very little resolve to tackle the tough issues, such as bloated pension promises, ever-rising government health care costs and raising the retirement age.

If Mr. Singer is correct, what does that mean for real estate investors? Here are a few observations about investing in an inflationary world:

* Owning real estate is a pretty good inflation hedge. Like gold, it is a hard asset and the supply is fixed. * Borrowing money for a long period of time at a low fixed rate is a good idea. The real value of the debt and the interest payments will shrink over time. * Lending money for long periods at fixed rates is a terrible idea. Avoid investing in long-maturity bonds because their real value will plummet if inflation comes back strongly. * In addition, any investment that is premised on the unlimited good credit of the U.S. or state governments, or on the credit of giant financial institutions, is risky.

What does all this mean for our program of making short-term real estate loans? Inflation would reduce the real return of these investments. However, because they are typically due in 6 to 24 months, they will fare much better than long-dated debt investments.