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View Full Version : Does Hyperinflation Make it Easy to Pay Debts



Alvah
08-07-2008, 04:48 AM
Suppose you have a mortgage of $100,000, at 7% interest in today's economy.

Now suppose, for some reason, the economy developed hyperinflation so that 6 months from now, it will cost $10,000 to buy a loaf of bread.
That means the balance of your mortgage costs the value of just ten loaves of bread.

Does that make it easy to pay off your mortgage?

In other words, is it good to have debt if you think hyperinflation is coming?

Of course there is the question of where do you get $10,000 to
buy a loaf of bread. Do people just starve during hyperinflation because
everything costs so much? Do wages rise too, or do wages
stay more or less the same while prices rocket up?

L M Ashton
08-07-2008, 05:31 AM
Sri Lanka is currently suffering through pretty bad inflation. Apparently, everyone's happy because the rate of inflation dropped 2% - it's now 26% this month, as opposed to 28% last month. Yippee.

Thing is, while the prices are climbing, not everyone gets an increase in wages. Most people don't, in fact. Most people that I know of are complaining about how it's getting harder and harder to buy their groceries and pay for other normal expenses. More people are turning to more ways to save on money, like doing more gardening to cut down on grocery bills. It's getting really stressful for a lot of people, and there was already a problem with homeless people, poverty, and all the rest that goes with this being a third world country.

My father in law's government pension isn't increasing - at all - because of the inflation. It won't.

Does it get easier to pay the mortgage? Nope.

Ravenlocks
08-07-2008, 06:12 AM
It can make it easier. I had a friend in Russia who bought an apartment shortly before a huge surge in inflation. After the surge the mortgage was worth so little that she was able to pay it off with one month's pay (and presumably she still ate and paid her bills). It worked out for her.

DeeCaudill
08-07-2008, 06:18 AM
I've been considering this quite a bit lately myself after watching the craziness in Zimbabwe. I guess late last week they chopped a dozen zeros off their currency. I guess the government was printing $100 billion bills.

Mechanically, I think you're correct: assuming you have really strong contract law in your country, it would take some sort of legislative intervention to force you into making higher payments. Even adjustable mortgages tend to have absolute caps on the interest rate they charge.

If you look at the bigger picture, hyperinflation is going to wreck the financial system, so I think the right question is whether there will still be a bank on the other side of the transaction? All bets are probably off...

I'd expect that barter economies do tend to emerge in hyper-inflation conditions. Also coinage, which has an inherent value much higher than paper currency, may also hold value. For example, www.coinflation.com (http://www.coinflation.com/) will tell you the value of US and Canadian coinage based on their metal content.

I am not an economist, nor a lawyer, I'm just an armchair theorist so take my post with a grain of salt.

Ravenlocks
08-07-2008, 07:22 AM
In post-Soviet Russia, metal coins completely disappeared for a while. At one point the smallest currency around was 100-ruble notes.

I don't know what, if anything, the old Soviet coins were actually worth in terms of the value of the metal, but they didn't buy anything in stores.

Hyperinflation is scary. In seconds all your savings become essentially worthless. There's no point in not spending your entire paycheck every pay period, because your next one will probably have less buying power even if it's for the same amount. Assuming you get one at all.

Phil DeBlanque
08-07-2008, 02:31 PM
When I was a kid, my country had inflation rates up to 80% a month. I remember things like comics had not the price stamped on the cover, but a code. You had to look at the code on a spread sheet, that would change once or twice a week.
the banks had an product called "overnight". It was the only way to keep your money, somehow, safe: you used to deposit the money in the afternoon and would receive more the next morning; it was madness.

Now, about paying debts: I think in such cases, some references would be created. We used to have the "monetary correction", a percentage that is added to all finantial transations that tried to compensate the last month's inflation. So, instead of "buy this TV: only $190 or 10 x $10" , would be "buy this TV in 10 months, with interests and correction"

robeiae
08-07-2008, 05:32 PM
Mechanically, I think you're correct: assuming you have really strong contract law in your country, it would take some sort of legislative intervention to force you into making higher payments. Even adjustable mortgages tend to have absolute caps on the interest rate they charge.

If you look at the bigger picture, hyperinflation is going to wreck the financial system, so I think the right question is whether there will still be a bank on the other side of the transaction? All bets are probably off...

I'd expect that barter economies do tend to emerge in hyper-inflation conditions. Also coinage, which has an inherent value much higher than paper currency, may also hold value. For example, www.coinflation.com (http://www.coinflation.com/) will tell you the value of US and Canadian coinage based on their metal content.

This is all pretty much correct, I think.

But in a country experiencing true hyperinflation, all bets are off with regard to government responses. So, legislative and/or executive action might very well occur to protect financial structures.

I don't think it's "good to have debt," in any case.

morintp
08-07-2008, 06:44 PM
I read a novel over 15 years ago that was about the US currency not being backed by gold and it led to hyper-inflation. Salaries were going up, but there was no way to keep up with inflation. People started starving which led to rioting and murder and finally the collapse of the government.

I can't think of the name of the book or the author. I'm trying, but it was a long time ago...

hammerklavier
08-07-2008, 07:09 PM
To answer you question, yes, you are aboslutely right, it's 'good' to be in debt and bad to own debt (i.e., the bank) during high inflation. It's very bad to hold savings during high inflation because the interest rates will be much lower than the inflation and your savings will become relatively worthless. Brazil went through a period of high inflation in the 80's and the people there would spend their paychecks as quickly as possible.

Yes, wages go up, but not uniformly. Some people will lose everything and become poor while others will keep the pace as their wages rise. If the reason for the inflation increasing is that the government is printing more/devaluing the currency, then you want to be a government contractor (not employee), so you can demand that they send that extra money your way.

When inflation is high you want to be buying real commodities such as precious metals, real estate, and businesses that produce necessities. You also want to stock up on food. So you don't buy a loaf of bread, you buy a fifty pound bag of flour and make your own bread.

Kathie Freeman
08-07-2008, 07:21 PM
It depends on whether your income rises with the inflation. One of the reasons why Germany encouraged hyperinflation in the '20's and '30's was because it made it easiler for them to pay off the reparations imposed on them by the Allies after WWI.

robeiae
08-07-2008, 07:33 PM
To answer you question, yes, you are aboslutely right, it's 'good' to be in debt and bad to own debt (i.e., the bank) during high inflation. It's very bad to hold savings during high inflation because the interest rates will be much lower than the inflation and your savings will become relatively worthless. Brazil went through a period of high inflation in the 80's and the people there would spend their paychecks as quickly as possible.

Yes, wages go up, but not uniformly. Some people will lose everything and become poor while others will keep the pace as their wages rise. If the reason for the inflation increasing is that the government is printing more/devaluing the currency, then you want to be a government contractor (not employee), so you can demand that they send that extra money your way.

When inflation is high you want to be buying real commodities such as precious metals, real estate, and businesses that produce necessities. You also want to stock up on food. So you don't buy a loaf of bread, you buy a fifty pound bag of flour and make your own bread.
This is all true for high inflation, rapidly rising inflation, and out-of-control inflation. But hyperinflation is truly a horse of a different color.

Because it doesn't occur in a vacuum, your ability to participate in the market may be quite limited. And the government may take actions that undercut these tactics severely.

And again, debt isn't a good idea--imo--certainly not intentional debt. It's speculation if you do it because you see hyperinflation on the horizon. Suppose you're wrong?

ShadowFox
08-07-2008, 07:35 PM
Suppose you have a mortgage of $100,000, at 7% interest in today's economy.

Now suppose, for some reason, the economy developed hyperinflation so that 6 months from now, it will cost $10,000 to buy a loaf of bread.
That means the balance of your mortgage costs the value of just ten loaves of bread.

Does that make it easy to pay off your mortgage?

In other words, is it good to have debt if you think hyperinflation is coming?

Of course there is the question of where do you get $10,000 to
buy a loaf of bread. Do people just starve during hyperinflation because
everything costs so much? Do wages rise too, or do wages
stay more or less the same while prices rocket up?

Hyperinflation and inflation are different beasts. In the case of inflation, if you owe a debt, the debt is devalued to the degree of the inflation (so a bet worth 100,000 at 4% inflation is only "worth" 96,000 ), and assuming that you are on a fixed rate deal you are better off. EDIT: most economists generally agree that inflation isn't a bad thing, but that volatility in inflation IS a bad thing. Basically, it is important to be able to plan lending in the future.

With true hyperinflation, a currency loses all but its intrinsic value. So a debt of 100,000 isn't worth anything at all, but you can't sell your house or earn money that is worth anything.

It isn't relevant whether wages stay the same, or rise, because the currency isn't worth anything except, possibly, as kindling for a fire.

what tends to happen is that because the currency is worth nothing, farmers do not sell their produce for it, and so people are unable to get even the basics necessary for life. As a result, a new de facto currency emerges - maybe food, maybe gold or shells or whatever, or a barter economy forms. It is rare that people "starve" but any stored wealth (i.e. pensions, savings etc) become worthless and it becomes almost impossible to have basic trade and commerce.

robeiae
08-07-2008, 07:40 PM
It depends on whether your income rises with the inflation. One of the reasons why Germany encouraged hyperinflation in the '20's and '30's was because it made it easiler for them to pay off the reparations imposed on them by the Allies after WWI.
No, I don't think that's correct. The Weimar hyperinflation was something that was set up much earlier, from the actual funding of the War. The Reparations bill accelerated the process. But hyperinflation didn't make the bill easier to be paid. Paying the bill is what drove the cycle onward.

No doubt, Weimar leadership did nothing to combat the problem.

ShadowFox
08-07-2008, 07:51 PM
I think the thing to remember is that inflation shrinks the value of national debt, and governments tend to print money as a form of indirect taxation when they are unable to raise money via taxation (due to political problems). As a result of reparations, the weimar government was effectively insolvent, and had to print money in order to meet its obligations because it couldn't operate from taxation.

In the case of weimar, the reperations were not in reichmarks but in foreign currency, so the devalutation of the currency did not shrink them. However, it did shrink the other obligations of the Reich.

This is fine up to a point, but as inflation bites you tend to need to keep on printing more money , and there is a point of no return when people lose confidence in a currency. Economics theory doesn't really definitively predict when this will happen, but it's one of those things which when it happens there is no return. the currency enters a death spiral, and the only choice is to replace the currency.

Alvah
08-08-2008, 03:13 AM
Thanks everyone, for your thoughts and insights.