So, I will start this by saying I am ignorant to how most of this all works. So if you need to use crayons, I will not be offended. I searched this and found a post, but this specific question was not answered!
We bought a house right as the covid dip happened, and got an amazing fixed interest rate (3.75). Our house (in oklahoma) is currently valued at 130k and we bought for 81k.
In the worst hypothetical situation, if hyperinflation was to occur in the US, and money lost it’s real value, how does that work with our situation?
I’ve heard horror stories of countries full of “trillionaires” that are poor. But if something like that happened here, wouldn’t I be able to just pay off our house in a day? While I know that doesn’t change the problems we would face with the economy, would it work in our benefit like that? Or in situations like that, do they find ways to counter taking advantage of the situation like that?
Thanks for any explanation to my (for now) fake scenario!
Comments
Yes, inflation is “good” for people who owe fixed interest debt because their debt is inflated away.
Yes hyperinflation wipes out debt so indeed you can pay off your mortgage in one day, problem is the economy as a whole might collapse so you will have bigger things to worry about.
Inflation is good for people who have debt, like you and I.
At least in the short term.
But it is bad for the economy in the long term.
Yes if you owe money, or debt inflation can be somewhat beneficial to you.
Your rate and debt would stay the same barring any major government intervention to save the banks. It’s part of the risk banks take on when giving you a fixed rate. I wouldn’t anticipate this happening but yes, in theory you could pay off your house with a newly-printed $100,000 bill that’s worth the cost of a cup of coffee.
Not an economist. There’s certainly more nuance to this scenario that could be explained further.
In isolation, yes your debt becomes less expensive. Groceries? Utilities? Eating out? Property taxes? They’re all going up so it’s unclear to me if you’d come out ahead.
This is exactly why people say that fixed rate, long term debt is a good thing when the value of the dollar is declining.
It becomes less expensive every year, relatively. It doesn’t even have to be hyperinflation. Even through just normal inflation, a fixed rate mortgage payment gets less expensive every year.
If someone got a 30 year mortgage in 1995 and their mortgage payment was $400/month, it’s still that same amount today (aside from increases in taxes and insurance). What might have been a lot in 1995 is extremely cheap today. The same can be said 30 years from today.
Hence why short term, high interest debt is looked at very differently from low interest, long term debt.
Hyperinflation makes debt worthless. Sometimes countries get into a hyperinflation problem just trying to make national debts easier to pay.
So yeah, your mortgage would be very easy to pay.
The thing is, the US is very very rare in offering long term fixed rate mortgages. In the UK you get the rate fixed for 2 or 5 years, so in hyperinflation, well unless you pay before your current term expires, you will be hit by a massive rate hike, if anyone will lend you anything at all.
So, since the US hasn’t experienced hyperinflation, there isn’t a great example from history about what would happen.
> But if something like that happened here, wouldn’t I be able to just pay off our house in a day
In some cases, yes, others no. When the Weimar Republic had hyperinflation some debts (mortgages) were revalued so the lenders could get some of their value back.
But even in the case of that not happening, the rest of the economy would be in absolute chaotic shambles, so the benefits might not be worth as much as you think. You’d might be better of than some other people, but still not in a good position.
Do you have any savings? Pension? Not any more. Gotta convert any cash you get your hands on into goods with intrinsic value (food, drugs, toilet paper etc) so you can barter for what you need at a later point.
Your mortgage getting cheaper is a silver lining to an otherwise bad situation. As your house appreciates the taxes will go up too. In your theoretical hyperinflation scenario you could end up owing more taxes than you pay in mortgage, along with everything else being more expensive in general. But yes, you will be able to pay down your mortgage faster.
Assuming the government didn’t bail out the banks by giving them a rate reset…
Your mortgage would effectively get inflated away to what would effectively be Pennie’s.
Note that other costs related to your home very much wouldn’t be – property taxes, maintenance and so on. The zeros would pile on to these numbers approximately in line with inflation.
Read the fine print in your mortgage documents. The bankers all remember Weimar Republic where a farmer walked in with a basket of eggs to pay off his farm mortgage; they are wise to that now.
Generally what happens in hyperinflation, many lose their jobs and can’t pay mortgages, property taxes, or food. Hyperinflation countries have gone to paying workers twice a day so they can run out at lunch and spend their wages because by the end of the day their morning wages would have only bought half as much groceries as at noon.
Zimbabwe, Venezuela, Jordan, Romania, Argentina, and the Weimar Republic are countries to research.
Look for the book “the great taking” (free pdf is out there).
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Yes, that’s part of why hyperinflation is destructive to economies.
Businesses need to be able to borrow money to buy tools, parts, hire workers, and expand. Construction companies need to be able to borrow money to build new houses before they sell them to buyers who borrow money to buy those homes. But once hyperinflation hits, banks are wiped out and the whole chain of economic activity collapses.
3.75 is average. Currently on 2.3.
Hyper inflation is like prices rising 20-50% and more.
Your bank would likely adjust interest rates to compensate.
> Or in situations like that, do they find ways to counter taking advantage of the situation like that?
Hyperinflation is basically “money is too cheap” so it’s too easy to get large piles of it. Deflation is the opposite problem, “money is too expensive” and it’s too hard to get.
Before the 1930s, basically all loan contracts said “IOU gold” for the same reason modern loan contracts say “IOU money” — gold was money.
Due to new technologies like factories and railroads, the rest of the economy had advanced a lot faster than gold mining — meaning gold was “too hard to get” (deflation). So they decided to change the system so money was green pieces of paper instead of gold. They basically passed a law that edited all those existing contracts that said “IOU gold” to say “IOU green pieces of paper” instead. The court system eventually ruled this edit was legal.
So in a hyperinflationary economic crisis, the government could absolutely decide to edit everybody’s loan contracts to say “IOU Bitcoins” instead of “IOU dollars”.
Interestingly, the Franklin D. Roosevelt years were a bit similar to today: An administration that feels it has a popular mandate to radically change the role and purpose of government, expanding the President’s powers in what many people see as a blatantly unconstitutional power grab — and seriously pushing the norm that a President must not run for re-election after serving two terms.
>But if something like that happened here, wouldn’t I be able to just pay off our house in a day?
Only if your income also hyperinflated (in nominal dollars). Which it kinda does but usually with a bit of a lag.
What would suck would be anyone trying to buy a house afterwards. Banks will refuse to give out loans due to not being able to predict future inflation/interest rates.
Other people have explained that yes you could pay off your mortgage much easier. In Oklahoma, where you will be mega screwed is that your homeowners insurance will go up by multiples in line with the increased replacement cost of your house due to the same inflation that made your debt cheaper, assuming the insurance industry didn’t collapse altogether.
Yes. You’re house will be paid off but you won’t be able to afford bread
Yep. If Inflation got worse you could pay off the house for the price of a bread.
Look at Venuzuella, there money is so worthless, they are making Bags out of multiple 100.000 dollar notes because the money is cheaper than buying cloth or leather. And also looks nice and colourfull.
It does have a downside though, no one would be willing to accept money as payment, because the money is losing the worth so fast. And people go back to trade more stable curencies such as booze, bread, fruits, clothes, cigarettes or just doing each other a favour.
Remember that hyperinflation is 50% a month, not per year. It’s very rare, and even with current US economic volatility the likelihood of anything that even comes close to that is basically zero.