Why is it that the rich get richer? Well, for one thing, they have money to invest. Think of how many people out there live paycheck to paycheck. Meanwhile, people with money like you and me are able to invest our money and get it working for us.
Remember the mathematical Wealth Formula?
Velocity is the rate that you get your invested capital back in your pocket to redeploy. Leverage is good debt. These variables are critical to the Wealth Formula but meaningless without Mass: the amount of money you actually invest.
If you are able to invest 90 percent of your income, you’re going to grow your money a lot faster than if you can invest only 10 percent of it. You get the idea.
These days, there are variables beyond the Wealth Formula that are helping the investor class to pull away from the pack. The Federal Reserve Bank is fueling the growth in value of those assets in which we invest whether it be equities or real estate. Easy money is rewarding those of us who invest our money by giving those assets a higher price.
And of course as real estate investors, we are not only benefiting from the growth in asset prices, but we are also benefitting from inflation that washes away the value of our mortgage debt. If you have a million dollar mortgage and inflation is 6 percent per year, the value of what you owe is decreasing by 6 percent per year as well. Not a bad deal for us, right?
But now the Fed is getting a little nervous because inflation is pretty darn high and they don’t want to let it get out of control. Hopefully the eventual improvement in the post covid supply chain will make the supply side more favorable and bring inflation down itself.
If not, the Fed will have to figure out how to get itself out of the mess. My guest on Wealth Formula Podcast this week explains how this mess was created in the first place by the Federal Reserve over the past decade or so and what it can potentially do to reverse it.
Christopher Leonard is a business reporter whose work has appeared in The Washington Post, The Wall Street Journal, Fortune, and Bloomberg Businessweek. He is the author of The Lords of Easy Money, The Meat Racket and Kochland, which won the J. Anthony Lukas Work-in-Progress Award.
- How does the Fed escape the money-printing quagmire that it is currently stuck in?
- Is there a way to soften the economic impact as the Fed pivots away from money-printing?
- The Lords of Easy Money
- How does Fed policy result in income inequality?