Monday, 28 October 2013

Inflation and Your Mortgage

I don't currently own my own home. I'm a renter, although I would like to be an owner of a small cottage or cabin on an acreage where I can express some "self-sustainability." Something I find confusing about the whole money-printing scheme our governments are involved with is, "why should I be mortgage/debt-free (which I am) during a hyper-inflationary period when I only have to pay back my mortgage in de-valued dollars?"

I have read before, about Wiemar Germany's inflation, that not everyone was destroyed by the devaluation of the currency. In fact, some people prospered from it - namely business owners and such, who owed large sums of money on assets and machinery but paid off their debts in devalued currency.

On the other hand, look at what happened with the high inflation (not hyperinflation) of the 1970's and early 1980's. Real-estate sky rocketed during the inflationary period of the late 70's, much as it has in the past decade, but when Paul Volcker raised interest rates into the 20%+ range to restore confidence in the dollar, people's mortgage payments sky-rocketed and home values plummeted, causing many to find themselves "under-water" to such a degree that they simply abandoned their homes altogether and declared bankruptcy.

I understand why this happened with the mortgage market. People don't actually buy the top-end valuation of a home, rather they buy a mortgage payment. It's the payment that represents the value of the home to a buyer. $1,500/month or $1,000/month, that's what really matters to the buyer. Well, if you can afford a $1,500 payment, it means that at today's interest rates, you can afford a mortgage of around $300,000. If interest rates were to rise to around 8%, a $1,500 payment would get you around a $190,000/mortgage. The payment on the house stays the same (affordable), while the "top price" fluctuates along with the interest rates - but always, it is the monthly payment that the home represents which really matters, not the top price.

Jim Sinclair, of Jim Sinclair's Mineset, had a reader recently write in with questions similar to my own:


I have worked in the gold and silver industry since 1983.  I own a well-respected and successful precious metals firm.  I am very well versed in most areas related to my industry.  I have followed you for the last 11 years.  

I have an important question I would like you to address.  So far, I have never seen anyone discuss this topic.  It will affect many of your readers.

Assuming a major devaluation of the US dollar and a massive rise in the price of gold and silver, what will happen to dollar-denominated debt, such as a home mortgage, denominated in dollars. Will we be able to pay off the mortgage with the gold profits?  Assuming a million dollar mortgage, in today’s dollars, and the price of gold increases by 300%, will I be able to take those "profits" and pay up the mortgage?  How will the banks survive if people pay off their mortgage debt with watered-down "Weimar Republic" dollars? 

When I took out my mortgage in 2005, it took 2000 ounces of gold to pay it off.  When your target of $3500 (minimum) is reached, I can pay it off with 300 ounces.  The big loser will be the issuer of the mortgages.  Since the holder of the mortgages are the big banks and they usually come out on top, and lobby for legislation that favors them over the public, what do you expect will happen?

You urge your readers to pay off all debt now, including mortgages.  But why sell gold for $1350 now to pay off a mortgage when with a little patience, it could be paid up with gold at $3500 and require a liquidation of only one third of the ounces?

This is an important consideration.  What is the downside of holding onto gold and silver and paying up the dollar denominated debt with an asset that you and I expect to increase dramatically, against a constant dollar amount?  I own the gold and could easily sell enough to pay up the mortgage now.  

So far, waiting has served me well and the big gains (in dollars, not percentage) lies ahead. Many of your readers are no doubt in the same position.  What is the downside of continuing to wait for a much higher gold price so I can pay off the mortgage in watered down dollars?

Thank you for your consideration.


Dear DMS,

History indicates that loans will be reset to equal the depreciation in the dollar thereby leaving the debt at a similar value to what is was before the hyperinflation during the "Great Leveling," leading to the "Great Reset." The idea is that you will pay off your $50,000 mortgage with one maple leaf is historically fallacious.

This economic trick has the same chance of working as does your deposits of $250,000 in ten banks, and your expectation of being repaid by the FDIC $2,500,000 in a banking systemic failure. You will not be.



Another post on this subject.

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