Debt

[grumble]

As most of you know from reading patience's posts, the Treasury and the Fed are conspiring to reduce the value of our currency in part to be able to pay off the National Debt with "cheaper" dollars. What a plan, huh?

I was asked the other day why the same process wouldn't work for individuals. That is, assume someone has bucks in the bank, but borrows to the hilt for cars, homes, gold, whatever. This guy's theory was that so long as he had the cash to cover the borrowing (or almost, anyway), why not pay off the loans with the inflated dollars?

Clearly, this would be a dangerous way to go if he were mortgaging his home without the ability to repay it, but for the things he was talking about, I didn't have any good reason for him to not do it.

Thoughts?

[Aamylf]

DH and I have this conversation regularly. I am in favor of paying off the house asap. He says, we have a fixed mortgage, I have a job in a pretty recession proof industry (stayed afloat during the depression and actually grew each recession since) so why not spend our extra money on things like food, fuel, other preps and then pay off the mortgage as we go along with worthless dollars? I understand that, but it scares me as preps aren't a lot of use if you're homeless. On the other hand, we have friends with paid off homes and if we brought a year's supply of food, etc., we would be welcomed.

[God's Country]

Very timely thread. I've been pondering the same. The only debt we have is a tractor loan. We could have paid cash, but we qualified for 0%, and we each needed to replace our vehicles soon (which has happened), So opted to take a 5yr plan, of which 2 are almost up.

I've been wondering if it's best just to ride out the loan and pay it with increasingly worthless dollars.

I've also been wondering if somehow the bank could baulk and somehow readjust the balance based on the value of the $. Nothing would surprise me anymore.

[krapgame]

I've thought about this quite a bit over the past couple of years and studied it from the perspective of how to leverage it in my business application. Lots of variables in this equation. First, consider the time value of the money borrowed. $100,000 borrowed for 30 years at 6% interest has a total repayment of $215,838. As long as inflation is 6% annually or higher, I guess this kind of works out, but I'm not certain about that. What would the useful value of the other $115k over that 30 years have been had it been used in other ways? That's a lot of improvements, equipment, preps, etc. Now, if he used his own $100k on the front end, then made a regular monthly payment to his own bank account equal to that of the payment on what he would have borrowed, he'd not only have the value of whatever he bought with the money, but also his bank account would have $215k in it at the end of 30 years.

By comparison, if he had $100k in the bank at the time he borrowed $100k, and could get a 1.25% return on it compounded monthly for 30 years, it would be worth a little over $145k. Essentially, he'll spend $115k in interest to earn $45k in interest, a net loss of $70k. Unless he used the money he borrowed to leverage an effective return of more than $70k over 30 years, it doesn't make sense. But if he used the borrowed $100k to start a sideline business or something that could net more than $215k over 30 years (essentially making the loan pay for itself), then his leverage position worked, and that would make sense. Also, if he could get a guaranteed rate of return on his own $100k of at least 2.56% annually, it would make sense.

If the inflation rate raises high enough and fast enough, and your revenue source is steady enough and keeps pace with inflation, then it could make it much easier to repay borrowed money. Usually this isn't the case, as wages generally don't keep pace with inflation.

IMHO, if you're in debt anyway, I'd work toward retiring that debt as quickly as I could comfortably manage to do so. If inflation happened to work in my favor along the way, so much the better. That's basically my approach. I don't think I'd advise anyone to borrow new money with the intention of inflating away the payment, unless I could borrow it at 0% with a lump sum repayment 10 or more years out and a guaranteed inflation rate of at least 5% annually. I'd also like an order of fries with that.

[Quietgentleman]

This will only work if your income increases proportionally with the dollar devaluation. So when it comes to paying off the house a person going to have to decide is your income going to keep pace with the decrease in the buying power of the dollar. A person is going to have to decide if you will be bringing in enough devalued dollars to be able to over come the price increases and still meet your house payments.

QGM

[Steve_L]

It would be nice to pay off debts with inflated dollars. All you need is a job after the crash that pays more than you make now.

The writing on the wall says I'm lucky to have a good paying job now and I may not have it in the future.

High inflation is just the Federal Reserve's back door tax on people's savings. It is a punishment for having savings and not being in debt. The fed wants you to be in debt and NOT save money.

[patience]

SteveL said:
"The writing on the wall says I'm lucky to have a good paying job now and I may not have it in the future."

+100! My thoughts exactly. It all depends on secure income in the future, just like you said.

[JarDude]

There is very little if any way to justify debt, especially outside of a business setting.

[okiedokie]

inflation is a loans best friend,,,it does how ever depend on you, you took out a loan at a fixed rate,,if your not to far in debt,, don't owe to much,, you sould be alright,,BUT,,if the values have dropped and you find youselves upside down,,,well thats a whole different story,,,all i can say is,work really hard cut everything you can and get out of debt ,,we work really hard to get out of debt,,our house is paid for,,the land is paid for,,car same thing,, it takes a lot of hard work. rice and beans,,and when you grt tired of that,,beans and rice,,good luck with your goal;),,it is not easy,,but you can do it:)

[NCLee]

As most of you know from reading patience's posts, the Treasury and the Fed are conspiring to reduce the value of our currency in part to be able to pay off the National Debt with "cheaper" dollars. What a plan, huh?

I was asked the other day why the same process wouldn't work for individuals. That is, assume someone has bucks in the bank, but borrows to the hilt for cars, homes, gold, whatever. This guy's theory was that so long as he had the cash to cover the borrowing (or almost, anyway), why not pay off the loans with the inflated dollars?

Clearly, this would be a dangerous way to go if he were mortgaging his home without the ability to repay it, but for the things he was talking about, I didn't have any good reason for him to not do it.

Thoughts?

IMHO, the flaw in this theory is the ASSUMPTION portion. There's no guarantee that the money will stay in the bank to cover those loans. Lets say he has $100,000 in the bank and takes out loans of $100,000 for a couple of fancy trucks.

The inflated cost of living will be pulling more of those pre-inflation dollars out of the bank to pay the grocery bill, electric bill, gasoline bill, etc.

If the furnace goes out, the replacement cost of it will be inflated, too.

If a tree falls on the house, ever seen an insurance company pay 100% to make it whole again?

He's probably also made the ASSUMPTION that there will be income from some source during this period. If he has to start pulling out those pre-inflation dollars to pay inflated daily expenses, PROPERTY TAXES, not only is the inflation factor eating at that account, 100% of what he needs to survive is coming out, too. At the inflated rate!

What will be left to keep the repo man from hooking up to those 2 trucks? Likely that because he tried to keep up the payments of those trucks for too long, his home will go on the auction block at the court house.

IMHO, buying personal "stuff" for investment is part of what got us in this pickle in the first place. People started treating their homes as investments, as if they were shares of stock on the Dow.

Just like playing the market. Buying a HOUSE for $100,000 and hoping to sell it at $200,000 is no different from buying yesterday's GM IPO and hoping to double the investment. If those stocks take a loss, we say "tough", you invested, you take the loss. Yet, today, we (some) bemoan the fact those HOUSES are underwater in terms of investment. Tuff.... a HOME isn't a share of stock.

Pay off debts. Get out of debt. Don't incurr any more debt with the object of getting a return on investment, if it means the tax man can nail an eviction notice to your front door. The Great Depression didn't stop the sheriff from piling up belongings along side the street.

Once the debts are paid, use the remaining dollars to "play" the investment game, if that's your goal. There's no guarantee any assumptions made today will pay off tomorrow. IMHO, the average person doesn't have the resources to hedge their bets, the way the big players do. So what, if pork belly's take a hit in the commodities market. Those guys have other irons in the fire that will compensate. Again, IMHO, 2 fancy trucks sitting in the yard aren't enough to enter the fray with them.

Lee

[grumble]

Excellent replies, folks! Lots to think about.

I think NCLee pegged it when he talked about "assumptions." Whether my friend's scheme will work or not depends on the assumptions he makes and how those compare to what the future really holds. (To clarify, he's a retired gov't civilian and on Social security, so he will have income as long as the unions control the gov't).

I think it's very interesting how the mindset of folks here differs from what I've seen elsewhere. I really like your insistence on independence in all forms, be it debt, gov't interference, or just what you do in your daily lives.

Again, many thanks for the thoughtful and coherent replies.

[krapgame]

NClee once again has pretty well nailed the situation. The line of thinking he details is why I recommended that if your friend has the money on hand already, "borrow" it from himself then repay it to himself, with interest, just like he would have made monthly payments to a bank or whatever. Calculate a monthly payment schedule and a due date and stick with it. That serves the purposes of increasing his own savings over the time of the "loan" and depriving some banker somewhere of making any money off of him. If he's prepared to pay interest to somebody, who better to pay it to than himself?

At least at the present, there's not enough inflated dollars hitting Main street fast enough to accomplish inflating away a debt.

[grumble]

Good point, kg. But then, wouldn't the guy be paying himself back with those inflated dollars? The whole premise of the scheme was to borrow with the expectation that inflation would outpace the interest, so he'd be getting a present value that would exceed the future value of the loan. Borrowing from himself would mean paying back the reduced future value, and would be a wash for him.

And, if some of the predictions I've read here come true and there actually IS a collapse of the economy, he might not have to pay anything back.

It's all a theoretical exercise for me. I hate debt.

[krapgame]

Grumble,

That's true to a point I guess, if inflation becomes that aggressive, or if the loan lives long enough to be overtaken by inflation. The hedge against it could be to invest the payments in PMs, though that has its problems as have been discussed at length. Investing the payments in preps is another possible solution. At any rate, setting an interest rate (rate of return) higher than the rate of inflation somewhat ensures accumulating dollars faster than inflation erodes their buying power. Setting an inflation adjusted rate of return would be better, and I frankly look to see banks start exploring that option if inflation becomes an issue.

I personally just don't think inflation has become aggressive enough to inflate away a debt yet, and when it does become aggressive enough, things will become too unstable to have any degree of comfort in holding any debt. Lee, Patience and others who've pointed this out are 1000% correct in that point. IMO, inflation will only erase a debt when your ability to capture new money to service that debt matches or outpaces inflation. If you're working for wages, that's likely not gonna happen. You have to be in a position to sell your time, services or other assets at current inflationary market rates and you have to have a market that has access to enough money to pay those rates.

I also wouldn't count too heavily on a collapse equating to debt forgiveness. There will always be some bottom feeder willing to buy somebody's bad debts (assets) and try to collect on them.

Hypothetically, if a person were wiling to do this, it might be possible to borrow the money unsecured then bankrupt out of the obligation if/when it became prudent to do so. While a bank would likely come after a real estate security, a consumer loan shark isn't going to come after the 1000 rolls of toilet paper that you borrowed the money to buy. If inflation is a loans best friend, chapter 13 BK is an unsecured loans prom date with a pocket full of viagra. I don't advocate this route, just mentioning that it is a tool available in the system. Remember though, the rules of the road on this path are heavily subject to change without notice.

Interesting thought exercise though.

[JarDude]

If inflation is a loans best friend, chapter 13 BK is an unsecured loans prom date with a pocket full of viagra.
Dang you have a way with words. :sarcastic: