So if tomorrow all of the sudden a “$100” was now worth a “$1000” wouldn’t that be a great deal for me as far as paying off my house? (Providing that I had $4,000 worth of gold to pay off a $40,000 mortgage)
Hi,
Your terminology is confusing.
Of course, your debts are based on the old PP, so when inflation is rampant, debtors benefit at the expense of creditors.
You could pay off your house, provided you were sitting on 4oz of gold.
And you’d learn quickly that a gallon of milk now costs $30 and a new car costs $200K. Nobody is really a “winner” when inflation is rampant.
you are describing an increase in the purchasing power of money. That is consistent with deflation. i.e. the opposite of inflation.
You are correct. Debtors and consumers win in the short term with inflation. Lenders and producers lose. In the long term all lose as wages fail to keep up with the inflation. You made an agreement to pay dollars valued at the time of purchase. The dollars now are worth less so they are easier to earn. Now understand that other things like metals, energy, health care, education, etc will keep up with inflation better than other things. So your purchases of these items will not go up.
With deflation, Producers and Lenders win in the short term. In the long term everyone wins or stays the same.
Thank you all for your quick and informative responses. However, let me be clear that I am not looking forward for such an event as I know there would be many undesired consequences. Now if I understand correctly, it seems that no amount of bailouts could save banks in the long term if we are stuck with a runaway fiat currency, nor could the rest of the economy survive. Perhaps, the future will see much more barter and trade as the dollar dwindles.
And crime and violence.
Yes it would be. And that is part of the reason I decided to buy a house this year. It is much easier for rental properties to raise rates with inflation than it is for banks tied into a fixed rate loan. A rental property can raise their rates on you every 6 months to 1 year. A bank cannot legally raise the interest rate on a home loan that is a fixed rate loan.
The price of food will go up for everyone, as others have pointed out. But home owners will be better off than renters.
Maybe, maybe not.
I have a rental property (wife’s condo, from before we were married) and the glut of housing available right now means that many landlords are taking losses on their properties. We ate about $100/month for the last 15 months. It sucks, but it’s better than foreclosing or eating 100% of the mortgage. We have just found a new tenant, and fortunately her rent will pay for the entire amount of our mortgage payment, but it’s not going to be an “income property” for the foreseeable future.
Landlords are capable of raising rents where banks are statutorily prohibited from doing so, but competition between landlords, for tenants, tends to put the kibosh on rent-raising.
This is a very interesting point.
Are you not afraid that the price of the house will drop even now, say to half or less, like I think some are predicting?
Or do you think inflation will eat up your savings anyway so might as well buy a house?
Thought experiment: Price $200,000. 20% down is 40,000 of current dollars. Leaves 160,000 at 5% say, for 30 years. probably winds up 200,000, lots of it inflated away. Say half? Total paid for house $140,000 current dollars, or double that in inflated dollars 30 years hence. House has dropped to $100,000 current dollars, inflated to double that after 30 years. Total loss: $40,000 current dollars.
Am I way off?
That won’t matter when 1000% inflation hits.
It depends on what the government does. The price of my home will not drop if the government does not raise interest rates and keeps the $8,000 tax credit in place. If the government either drops the $8,000 tax credit or increases interest rates, then in the short term, I expect the value of my home to fall. But regardless of what the government does, I expect the government to come to a point where they cannot borrow money, and have to start printing currency in massive quantities. At that point, my home value will shoot up.
I expect inflation to eat up savings. We don’t have inflation right now though. Foreign governments are propping up the dollar because they don’t want to lose all their money they have loaned to the U.S. government. If at some point they decide to eat their losses, and stop lending, then we will have massive inflation.
Sorry, I don’t follow you here. Inflation does not result in your home depreciating in price. It would appreciate in price.
I meant it would drop in price in a week or a month from further deflation of housing bubble, i.e. more defaults increasing glut of current housing, dropping price. I was going with the assumption I mentioned that housing prices will drop very soon. Then I assumed infaltion striking after that, doubling the unbubbled price over 30 years.
Thanks for sharing your thinking. Is food for thought.