Is inflation inapplicable in a comparison of paying off debt vs investing?
"Debt is nominal, which means when inflation happens, the value of the money owed goes down.  This is great for the borrower and bad for the lender. ""Investing"" can mean a lot of different things.  Frequently it is used to describe buying common stock, which is an ownership claim on a company.  A company is not a nominally fixed asset, by which I mean if there was a bunch of inflation and nothing else happened (i.e., the inflation was not the cause or result of some other economic change) then the nominal value of the company will go up along with the prices of other things. Based on the above, I'd say you are incorrect to treat debt and investment returns the same way with respect to inflation.  When we say equity returns 9%, we mean it returns a real 7% plus 2% inflation or whatever.  If the rate of inflation increased to 10% and nothing else happened in the economy, the same equity would be expected to return 17%.  In fact, the company's (nominally fixed) debts would be worth less, increasing the real value of the company at the expense of their debt-holders. On the other hand, if we entered a period of high inflation, your debt liability would go way down and you would have benefited greatly from borrowing and investing at the same time.   If you are expecting inflation in the abstract sense, then borrowing and investing in common stock is a great idea. Inflation is frequently the result (or cause) of a period of economic trouble, so please be aware that the above makes sense if we treat inflation as the only thing that changed.  If inflation came about because OPEC makes oil crazy expensive, millennials just stop working, all of our factories got bombed to hades, or trade wars have shut down international commerce, then the value of stocks would most definitely be affected.  In that case it's not really ""inflation"" that affected the stock returns, though." I'd agree, inflation affects the value of the dollar you measure anything in. So, it makes your debt fade away at the same rate it eats away at dollar denominated assets. I'd suggest that one should also look at the tax effect of the debt or assets as well.  For example, my 3.5% mortgage costs me 2.625% after tax. But a 4% long term cap gain in stocks, costs me .6% in tax for a net 3.4%.
Yes, there's a difference. If you've borrowed $100, then under inflation your salary will (presumably) increase, and tomorrow your debt will only be worth $99. But under demurrage, you'll still owe $100. "You could use any of various financial APIs (e.g., Yahoo finance) to get prices of some reference stock and bond index funds.  That would be a reasonable approximation to market performance over a given time span. As for inflation data, just googling ""monthly inflation data"" gave me two pages with numbers that seem to agree and go back to 1914.  If you want to double-check their numbers you could go to the source at the BLS. As for whether any existing analysis exists, I'm not sure exactly what you mean.  I don't think you need to do much analysis to show that stock returns are different over different time periods." From Wikipedia: Investment has different meanings in finance and economics. In Finance   investment is putting money into something with the expectation of   gain, that upon thorough analysis, has a high degree of security for   the principal amount, as well as security of return, within an   expected period of time. In contrast putting money into something with   an expectation of gain without thorough analysis, without security of   principal, and without security of return is speculation or gambling. The second part of the question can be addressed by analyzing the change in gold price vs inflation year by year over the long term. As Chuck mentioned, there are periods in which it didn't exceed inflation. More important, over any sufficiently long length of time the US stock market will outperform. Those who bought at the '87 peak aren't doing too bad, yet those who bought in the last gold bubble haven't kept up with inflation. $850 put into gold at the '80 top would inflate today to $2220 per the inflation calculator. You can find with a bit of charting some periods where gold outpaced inflation, and some where it missed. Back to the definition of investment. I think gold fits speculation far better than it does investment. I've heard the word used in ways I'd disagree with, spend what you will on the shoes, but no, they aren't an investment, I tell my wife. The treadmill purchase may improve my health, and people may use the word colloquially, but it's not an investment. Yes, in 2 ways: As you mention, the price of a home generally grows with inflation - along with other factors (supply and demand in local markets, etc.). Through financing. If you finance 80% of your purchase today, in 2014 dollars, you will pay back in future dollars. Those future dollars are worth less, because of inflation. Whether or not it is logical probably depends on individual circumstance.  When you take on (or maintain) debt, you are choosing to do two things: The first is clear. This is what you describe very well in your answer. It is a straightforward analysis of interest rates. The fixed cost of the debt can then be directly compared to expected return on investments that are made with the newly available cash flow. If you can reasonably expect to beat your debt interest rate, this is an argument to borrow and invest. Add to this equation an overwhelming upside, such as a 401k match, and the argument becomes very compelling. The second cost listed is more speculative in nature, but just as important. When you acquire debt, you are committing your future cash flow to payments. This exposes you to the risk of too little financial margin in the future. It also exposes you to the risk of any negatives that come with non-payment of debt (repossession, foreclosure, credit hit, sleeping at night, family tension, worst-case bankruptcy) Since the future tends to be difficult to predict, this risk is not so easy to quantify. Clearly the amount and nature of the debt is a large factor here.  This would seem to be highly personal, with different individuals having unique financial or personal resources or income earning power.  I will never say someone is illogical for choosing to repay their debts before investing in a 401k. I can see why some would always choose to invest to the match. I concur that you should probably go with option 1.  And that is coming from a guy that refinanced all three of his properties with down to 20% equity 3 years ago to lock in either 4% 30 year fixed or 2.75% 15 year mortgage.  And I will not pay them off early because I do think I can do better than that in the market even if inflation is 0% for the next 30 years.  Just imagine when the fed stops manipulating tax rates.  I could be making more than 4% just in a checking account. Hmm, looking at the macro economy, hoarding money will decrease the monetary supply, so the Fed will offset that with increases to the monetary supply to achieve target interest rates.  Which will lead to higher inflation, hurting your savings minus debt.  Exactly what's going on in the rest of the economy.  For investment sake, can't you find something with at least some sort of return, rather than getting nothing with physical currency? "As you're saving up for an expenditure instead of investing for the long run, I would stay away from any sort of ""parking facility"" where you run the risk of not having the principal protected. The riskier investments that would potentially generate a bigger return also carry a bigger downside, ie you might not be able to get the money back that you put in. I'd shop around for a CD or a MMA/regular savings account with a half-decent interest rate. And yes, I'm aware that the return you might get is probably still less than inflation." There are two components to any non-trivial financial decision:  Assuming that all things remain equal, borrowing money at a low rate while investing for a higher return is a no-brainer. The problem is, all things do not remain equal. For example: I think that you need to assess your position and preferences. I'd err on the side of being in less debt. You're losing money. And a lot of it. Consider this: the inflation is 2-4% a year (officially, depending on your spending pattern your own rate might be quite higher). You earn about 1/2%. I.e.: You're losing 3% a year. Guaranteed. You can do much better without any additional risk. 0.1% on savings account? Why not 0.9%? On-line savings account (Ally, CapitalOne-360, American Express, E*Trade, etc) give much higher rates than what you have. Current Ally rates are 0.9% on a regular savings account. 9 times more than what you have, with no additional risk: its a FDIC insured deposit. You can get a slightly higher rate with CDs (0.97% at the same bank for 12 months deposit). IRA - why is it in CD's? Its the longest term investment you have, that's where you can and should take risks, to maximize your compounding returns. Not doing that is actually more risky to you because you're guaranteeing compounding loss, of the said 3% a year. On average, more volatile stock investments have shown to be not losing money over periods of decades, even if they do lose money over shorter periods. Rental - if you can buy a property that you would pay the same amount of money for as for a comparable rental - you should definitely buy. Your debt will be secured by the property, and since you're paying the same amount or less - you're earning the equity. There's no risk here, just benefits, which again you chose to forgo. In the worst case if you default and walk away from the property you lost exactly (or less) what you would have paid for a rental anyway. 14 years old car may be cheaper than 4 years old to buy, but consider the maintenance, licensing and repairs - will it not some up to more than the difference? In my experience - it is likely to. Bottom line - you think you're risk averse, but you're exactly the opposite of that. Line one shows your 1M, a return with a given rate, and year end withdrawal starting at 25,000.  So Line 2 starts with that balance, applies the rate again, and shows the higher withdrawal, by 3%/yr.  In Column one, I show the cumulative effect of the 3% inflation, and the last number in this column is the final balance (903K) but divided by the cumulative inflation.  To summarize - if you simply get the return of inflation, and start by spending just that amount, you'll find that after 20 years, you have half your real value.  The 1.029 is a trial and error method, as I don't know how a finance calculator would handle such a payment flow. I can load the sheet somewhere if you'd like.  Note: This is not exactly what the OP was looking for. If the concept is useful, I'll let it stand. If not, downvotes are welcome and I'll delete. Huh? I don't see how this effects inflation in practice.... (only in theory)  Basically, I sell short end bonds and buy longer end bonds pocketing the difference in yield and increasing my duration.  GLD and mining are hedges against inflation, markets are stupidly short term looking and care only about current expectations, if the current macro situation deteoriates we see prices fall. What you are seeing is the effects of inflation. As money becomes less valuable it takes more of it to buy physical things, be they commodities, shares in a company's stock, and peoples time (salaries).  Just about the only thing that doesn't track inflation to some degree is cash itself or money in an account since that is itself what is being devalued.  So the point of all this is, buying anything (a house, gold, stocks) that doesn't depreciate (a car) is something of a hedge against inflation. However, don't be tricked (as many are) into thinking that house just made you a tidy sum just because it went up in value so much over x years. Remember 1) All the other houses and things you'd spend the money on are a lot more expensive now too; and 2) You put a lot more money into a house than the mortgage payment (taxes, insurance, maintenance, etc.) I'm with the others though. Don't get caught up in the gold bubble. Doing so now is just speculation and has a lot of risk associated with it. I think you're missing Simon Moore's point. His point is that, due to low inflation, the returns on almost all asset classes should be less than they have been historically, so we shouldn't rebalance our portfolio or withdraw from the market and hold cash based on the assumption that stocks (or any other asset) seem to be underperforming relative to historical trends.  His last paragraph is written in case someone might misunderstand him, he is not advocating to hold cash, just that investors should not expect as good returns as has happened historically, since those happened in higher inflation environments. To explain: If the inflation rate historically has been 5% and now it's 2%, and the risk-free-market return should be about 2%, then historically the return on a risk-free asset would be 7% (2%+5%), and now it should be expected to be 4% (2%+2%). So, if you have had a portfolio over some time you might be concerned that the rate of return is worsening, but Simon's point is that before you sell off your stocks / switch investment brokers, you should try to figure out if inflation is the cause of the performance loss. On the subject  of cash: cash always loses value over time from inflation, since inflation is a measure of the increase in prices over time-- it's a part of the definition of what inflation is.  That said, cash holdings lose value more slowly when inflation is lower, so they are relatively less worse than before. The future value of cash doesn't go up in low inflation (you'd need deflation for that), it just decreases at a lower rate, that is, it becomes less expensive to hold- but there still is a price. As an addendum, unless a completely new economic paradigm is adopted by world leaders, we will always see cash holdings decrease in value over time, since modern economics holds that deflation is one of the worst things that can happen to an economy. "If you haven't been a US resident (not citizen, different rules apply) at the time you sold the stock in Europe but it was inside the same tax year that you moved to the US, you might want to have a look at the ""Dual Status"" part in IRS publication 519."