What happens to debts during hyperinflation?
🗣️ DISCUSSION 💬
Just trying to wrap my head around hyper-inflation. If the US Dollar goes the way of the German Mark from 1923 and the USD is worthless what does that do to existing debts? If I could walk out onto the street and scoop up $500,000 from the gutter could I pay off my house? I'm sure the banks that hold the mortgages have safe guards in place to protect them. What am I not understanding?
The debt would lose its value (which would be beneficial to the Debtor). Think if you took on a debt in 1950 but could pay it off with today's inflated money supply. You could buy a lot with, say, $10,000 in 1950 but it would be relatively much easier to pay off with today's money.
This sounds interesting and familiar. But could you respond again like I'm in 8th grade? In a different analogy? Thank you.
Let's say you somehow know for a fact that an inflationary event is about to happen and the dollar is going to lose half of its value. That means that whatever used to cost $1 will now cost $2. Food, houses, education...it will all cost twice as much. BUT your labor will also cost twice as much. If you were charging $50,000/yr for your services before, you'll be charging $100,000 after. Unfortunately it won't do you any good to be making that extra money because everything will cost twice as much. You will be living the exact same lifestyle except all the numbers will be double.
BUT let's say you took out a loan for $10,000 right before the inflationary event. When you took out the loan you were making $50,000 so the total value of the loan would equal 20% of your earnings. It will probably take a number of years to pay off. But after the inflationary event you will be earning double and paying double...that is, you'll be paying double on everything EXCEPT for on the loan. The loan is still for $10,000. That won't change and your payments won't change. So after the inflationary event you'll be earning $100,000 and the $10,000 loan will represent only 10% of your total earnings and will become much more manageable.
Of course, the above is all theoretical and a big inflationary event isn't going to be smooth. It will probably be very disruptive to the economy. Maybe you'll lose your job. Maybe the rise in wages will lag behind the rise in prices. Lots of things could happen that might make a loan much harder to pay off. But if you didn't have to worry about those things (because you were already super rich), you could do something like take out a loan for $10,000, use the money to buy something (like silver at $23/ounce), wait for inflation to strike (which would raise the price of silver to, say, $46/ounce), then sell the silver, pay off the loan and pocket the difference in cash.
Thank you.
Really great explanation. I appreciate the time and energy to put in to help me (us).