The dollar value

A reader challenge is always hard to ignore especially when it involves an old cliché. It is even more valuable when the testing forces us to get real about the world of investing and wealth building.

Tomorrow's price
One Yahoo! reader asked me if I agreed with the old cliché: "That expensive money today is cheap money tomorrow." My answer is that under many situations the cliché holds water, to use a cliché.

Economics always warns that inflation suits debtors but hurts creditors. It's also better for borrowers than savers but there are some qualifications.

The inflation effect
Inflation reduces the value of repayments as the purchasing power of those dollars used to make repayments fall. Meanwhile, the creditor cops dollars that are less valuable and that's why we say lenders or creditors lose out.

However, with flexible interest rates the banks eventually catch up with most of us when the Reserve Bank jacks up the cash rate. On the other hand, those who fixed their loans on relatively lower rates would be in the winners are grinners camp right now.

A property pay-off
On the flipside, those who borrowed, say three years ago for a property might have got cheap money, which is much is dearer now. At the same time the value of the property would have declined unless it was in WA, Queensland, Northern Territory or in the ritzy areas in Sydney. Great houses in these trendy suburbs have bucked the general price fall trend in the New South Wales capital. Therefore, many property buyers might disagree with the cliché that expensive money eventually turns cheap.

On a cycle
Interest rate cycles tell us that interest rates go up and down and other cyclical histories on the assets we buy also have ups and downs, but the trend for property and shares is generally up. Earlier this year, I asked Macquarie Bank to test out the eternal battle between property and shares on a five-, 10-, 15- and 20-year basis.

Using the All Ords for an average of share prices, Mac Bank and some other number crunchers found shares returned 11.4%, 12.2%, 12.4% and 12.2% per annum for those time brackets mentioned above.

Only on a 15-year basis did shares beat average property price rises and then it was a close thing. By the way, ACT property prices beat the All Ords every time, on these figurings.

The 'i' in investing
This article is not about property versus shares because they are both great assets, if you buy the right ones. And that's an important "if"!

And what does this all mean in terms of the cliché?

Well, if you buy well over time both the interest rate cycle and the asset value cycle will work to make expensive money today, become a lot cheaper tomorrow. That said, there are other variables that can frustrate the cliché's fundamental veracity.

The cliché also assumes improving real incomes for the borrowers. So as long as you can expect better income from employment or from a growing business you own, then the relative pain endured when you pay back money to a lender should ease. Inheritance can even add to the relative cheapening of once expensive money borrowed but alternatively losing a job or losing a contract can have the opposite effect.

Beware the X-factor
I don't like generalising too much because the best and most reliable generality can be undone by an X-factor such as a September 11, a currency crisis, a bird flu pandemic or the one thing that really worries me - a Great Depression!

Can't see this one happening yet but it has been a long time since we had one and big booms can result in big economic declines. Mind you, I believe international economic management is miles better nowadays but you can never rule out a nasty recession that could test out a pretty sound cliché, at least for a worrying length of time.

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