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What happens to mortgages during high inflation?
Since the rules of our financial world are changing and I’m not too good at thinking through major changes in an economy, I have to ask the question to others who understand more than I about a currency collapse. Let’s say I have a house in the US with a $200,000 mortgage. If very high inflation hits the US, the dollar would lose a lot of value and gold would soar. Let’s say the price of gold goes to $20,000/oz so I could sell ten gold coins and buy off the house. If I originally bought these gold coins at $1,000/oz then I’ve essentially bought a house for $10,000. (Note, I’m using an absurdly high number for gold just to have round numbers.)
Now, what if a new currency is issued? Let’s say $10,000 is now equal to 1 FRI ( I always wanted to have my face on the currency…). Does that mean my mortgage gets converted to 20 FRIs? Is that what happens, does everything get converted the new currency? I guess that would mean I’d have a job that would pay about 5 FRIs per year, or 0.1 FRI a week. I’m sure a lot of other major things would be going on at this time of turmoil but does a straight exchange of new money for old take place across the board?
Somewhere there has to be a flaw in my thinking because getting a $200,000 house (in today’s dollars) for only $10,000 worth of gold doesn’t seem right. The banks are pretty smart and I doubt I’m going to be able to beat them at their own game.
Read the story about my avatar at this post: http://www.chrismartenson.com/forum/germ...
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The way Washington's been acting over time, if we had high inflation, they'd probably just change the rules on you ex-post facto, breech your mortgage contract, and jack up your interest rate.
Gotta save the "too big to fails" you know.
The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it.~ Morpheus
Located in Ft. Lauderdale, FL. PM me.
Hyperinflation is super for fixed debt. Awful for consumer staples, fuel, heating.
PMs will offer a strong conversion into the new currency. If you Google Mexico's Peso crisis you should be able to read about how old debt was scheduled using their new Peso.
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That's exactly what I have been wondering too.
I am gearing up for deflation but I figure I can put away a couple of 50 pound sacks of rice to take into my bank when the mortgage comes up for renewal, in case I am wrong.
It seems to me that hyper-inflation would just reward those with too much debt (mortgage, car loans, HELOCs etc...) and hurt those who have saved and maintained manageable debt. Wouldn't deflation be the greater worry here?
Also, when the Fed "prints" money and it is used on a banks balance sheet to make up for the value lost on assets (mortgages) is it really putting more money into the system? That same system, at one time, had a much greater value put on real estate but it disappeared. Isn't the new money just replacing that "value"? I just don't get how that new money would create hyper inflation laying on a balance sheet. If housing prices came back, however.........
I know, just an economics ignoramous........
This is a topic upon which I have written many words.
One thing I think we should all try and avoid as thinking about it as an "either/or" situation as in "will we have inflation or deflation?" The answer, most likely, is "yes."
We will have inflation in some things, I am pretty sure in energy costs rising over time (and everything linked to them), even as some assets are deflating and others are inflating.
As astutely pointed out above, inflation only works to your favor if your income and/or assets are rising along side it, otherwise it's a killer. Here's a handy way to look at it.
Inflation = 'good'
- Income rising faster than inflation
- You have large debts held at a fixed rate of interest that is below the rate of inflation
Inflation = 'bad'
- Income rising slower than rate of inflation
- You have large debts at a fixed rate above the rate of inflation
Inflation = 'disaster'
- Your income shrinks or disappears
- You have large debts at a floating rate of interest
Of course there are other combinations of these elements but I think the point has been made. There are a wide variety of possible outcomes here.
For my money, I vastly prefer to not hold debt at this time because I am uncertain about my income stream, because I am uncertain about monetary and fiscal policy going forward, and because I do not trust the sanctity of contract law which my government has proven (again and again recently) means nothing if/when favored special interests ask for it to be suspended to "save the system" or whatever other hokey excuse is trotted out to justify a blatant theft.
My confidence is very low in the system right now and trust is one of those things that takes a long, long time to rebuild. This is one of the reasons I was so annoyed with the cavalier attitude of Paulson/Geithner/Bernenke et al. when they rode roughshod over the most primary and basic tenets of our legal and financial frameworks. It's as if they had no appreciation for the importance of the appearance, if not the reality, of basic fairness and justice in our larger social contract. Penny wise, pound foolish comes to mind.
It seems to me that hyper-inflation would just reward those with too much debt (mortgage, car loans, HELOCs etc...) and hurt those who have saved and maintained manageable debt. Wouldn't deflation be the greater worry here?
Also, when the Fed "prints" money and it is used on a banks balance sheet to make up for the value lost on assets (mortgages) is it really putting more money into the system? That same system, at one time, had a much greater value put on real estate but it disappeared. Isn't the new money just replacing that "value"? I just don't get how that new money would create hyper inflation laying on a balance sheet. If housing prices came back, however.........
I know, just an economics ignoramous........
As for where the money is sitting: I don't look at it that way. You may want to simplify it by: We take in 2.2 trillion we pay out 4.4 trillion (over 8 trillion if you use John Williams Shadow Statistics GAAP).
They can't borrow via bond sales to foreigners and investors. They "print" the difference. They have threatened to stop QE (Quantitative Easing - fancy name for monetizing debt / printing / counterfeiting). If they do that we default. OR they will steal your 401k and IRA and buy bonds to finance this insane deficit with your money, or there will be a crash in equities (stocks) and people fly to "perceived safety" of bonds. OR they will cut government and do away with your mother's social security and tell China and every other bond holder foreign and domestic to go scr*w.
There are only 3 ways out: 1.) Default and shaft everyone, 2.) Balance the budget (HA there would be a massive revolt since a lot of this is entitlement programs or 3.) debase Uncle Buck making entitlements worthless but paying entitlements.
Our spineless leaders who looted entitlements and created mountains of debt for their bread and circus elections will take door 3. They are inept, in trying a controlled crash into the terrain they will auger it in destroying Uncle Buck and blasting us into Zimbabwe USA.
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They are inept, in trying a controlled crash into the terrain they will auger it in.
Yes. What the h*ll is it with the Keynesians and their belief that they can 'control' the market. Has there ever been any precedent for that? Why do so many people still believe in that nonsense?
I suppose if by 'control' they mean steer it into the ground then there is plenty of precedent for that.
Yes my whole post is rhetorical. 
"Even if we are occupied with important things and even if we attain honor or fall into misfortune, still let us remember how good it once was here, when we were all together, united by a good and kind feeling which made us perhaps better than we are." - Fyodor Dostovevsky
When looking at current home values, and what might happen, I think Patrick Killelea's site makes some very strong points. The 10 items listed on the left of his front page make lots of sense: http://patrick.net/housing/crash.html
Chris. This is why you have a major website and I don't. 
The last paragraph pretty much sums up what I meant. And I wasn't kidding about changing the last post-facto. What I believe COULD happen is that they government would step in as an enforcer of debt to the banking system, and rewrite contract law under the pretense of "saving the system from apocalypse", then scale up everyone's fixed rates in proportion to inflation. It's the most frustrating part of watching Washington work these days. They seem to take carte blanche in invoking arbitrary rules under the pretense of "emergency"
The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it.~ Morpheus
Located in Ft. Lauderdale, FL. PM me.
Thats an interesting comment Morpheus. The idea of a wealth tax keeps popping into my head as being quite likely. The numbers out there are getting exponentially worse. The government might have no choice but to do a progressive wealth tax on stocks, bonds, and cash. Makes me want to go buy a bunch of stuff before the cash is taken in one form or another. Geez, I guess thats an inflationary comment in itself - but not for reasons of devaluation but rather fear of wealth taxation!
That's exactly what happens, unless some horrific riot inducing laws get passed. This has already happened in the past. If you bought a house in the 1960's, by the 1980's when your house was getting close to being paid off, your mortgage was les than your utility bills. Even with mild inflation of say 5%, as long as you have a job or income that is keeping up with inflation, your fixed-rate mortage will become less of a burden relative to your other expenses.
As CM has pointed out before, the problem is that if you don't have an income or assets like gold keeping up with the inflation, then you can become trapped with all your income paying for the necessities (food) so that you still can't pay the mortgage. Also you have to be aware that things like taxes and insurance will be going up as well. Stil, I think as long as you have sufficient assets to tide you over, even without a job, for awhile, you are certainly better off not paying off any fixed rate loans. Of course, that is only if you are in the inflation camp.
There are other things you have to consider as well. Housing is still probably significantly over valued, so you have to weigh several options: 1) Sell house now (if you still have positive equity), buy PM, and then buy a house later when real prices fall and PMs rise. 2) Hold house even though the value may fall because the loan you have now you may not be able to get again with tougher lending standards and wait for inflation to reduce the burden.
Does anyone know of historic charts showing the price of houses relative to necessities (like food). I'm thinking if you look at long term trends with housing priced in necessities, you could determine what "value" represents normal house prices. I've seen housing shown in inflation adjusted dollars and gold, but would lke to see it relative to something that is not as manipulated.