Hi everyone, I just wanted to pick your brains and see if anyone has a good point or strategy on regards to inflation and debt. I own silver/Gold, I also have a house (well the bank owns it because I have a loan). I have heard several times that may be the USA is inflating their currency with the purpose of paying their debt with worthless currency at the end instead of defaulting. How can an individual use this strategy successfully? Is it even possible... For the purpose of this question, If necessary lets assume we are headed for Hyperinflation, or high inflation... I think we will see high inflation at some point! Would be great to see what you guys know....Perhaps this would be the way to gain great wealth in hard times. Regards
One option is to have an off-set account against your mortgage and when the price is relatively low load up on Gold / Silver then as they move higher sell some down and pay down the loan. You can then repeat this as Gold / Silver continue to move between over bought and over sold positions. Trick is the balance, you never want to have no metals and at the same time you don't want to have no debt during a high inflation period. You also want the capacity to buy more at any time and you also want the loan repayments manageable in any circumstance. It would also be prudent to have the metals in a position that they could be liquidated should the Country try and do the right thing and up the interest rates above real inflation, however that's about as likely as getting kicked in the groin by the Easter Bunny.
If you can keep your real income keeping pace with inflation, then in the long run, inflation will pay off your house, by making the debt more and more worthless. If you cannot keep your real income keeping pace, this does not really work as effectively, because then your income is being eroded just as the debt is. I like the sound of tozak's concept...
I've heard similar musing before. It would seem that some people think that you can have huge debts, and inflation will neatly erode it away for you, making your debt smaller or simply gone altogether. In my opinion, it takes a special kind of wishful thinking to actually believe this would happen. Reasons it would (probably) not happen: - inflation does not occur in all things equally (eg, wages not keeping up) - you might be winning the inflation war, but be completely unable to keep up on repayments (cashflow problems) - bank interest rates can anticipate inflation, they do not have to lag it - if the debt is against collatarel, lenders can take that collatarel anytime they want The best strategy, IMO, is to not have debt. Well, so far all they have succeeded in doing is inflating their currency and taken on even more debt. If they print enough currency to pay off their entire debt, then I think you'll find it doesn't work out very well for them. The reason is that the value (and world use) of the USD is predicated on the rest of the world using it. So in fact the entire world gives the US the privilege of being the world reserve currency. If Bernanke prints/creates $16 trillion tomorrow (ignoring the physics) then he will no doubt stretch that friendship beyond its breaking point. It is already very stretched. World economics aren't simply black and white - they are many shades of grey. There is a lot going on that is not immediately evident. Some of it political, some of it strategic, some of it military. We're not the only ones that see the USA's predicament. IMO, the best thing to do is live within your means. Save some of your earnings outside of the fiat system, whether that is in gold, silver, property, gadgets/machinery (if you're W&F), your own health, animals, education, anything useful. But if you want to gamble with debt - good luck. Most of the best minds out there have been wrong on the timing thus far, and it will take timing and a good strategy to win such a gamble with debt (IMO).
how about this strategy... Obtain loan/debt, and get some one else to pay for it, and if possible, have a difference between loan repayment and cash received. so if there is no inflation, we still earn money from cash flow. if there is inflation, we earn the cash flow and capital gain. can anyone see the problem with this strategy ?
Yes, the person paying your debt stops paying it. Or your lender freaks out about your leverage and demands you bring up your equity ratio (similar to a margin call). Debt is in essence a play on risk. Mostly risk to the lender, but this can translate into a risk for the borrower if the lender pulls the funding.
Using infltion to reduce debt only work if you have fixed rate debt. Variable loan rates will rise with rising inflation to compensate for the reduction in the real value of the loan.
"Inflating their currency" really means that they are inflating their money supply, which really means that they are increasing the quantity of money available, which means they are printing money, which means they are counterfeiting. The benefit that they receive by inflating the money supply is two fold: 1. In small regular quantities, the government is able to use that new money at full current value, buying good and services at a rate that does not account for the new money that has been created. This is the first user advantage and the closer you are to the sprigots of money printing the greater the advantage you will receive when you spend that money. This is stealing value from the economy and its people in a way that is not apparent or obvious and is why inflation is called a hidden tax. 2. In larger quantities, the government can just print as much as it wants/needs to errode the actual value of its debts and and pay back the nominal amount it owes with a currency that is worth much less than when originally used. This is a way of stealing the value of the original loan from creditors (bond investors). So, it follows that unless you are a counterfeiting, thieving criminal you can not duplicate or compete with the government in its fiscal and monetary activities. And if you did, it would be illegal and they would be on your tail in Logan in a flash.
your mortgage holder would simply jack up interest rates during a period of high inflation to ensure that the principle expands at a quicker rate than what inflation can devalue it. This is where the banks have everyone by the balls... they can charge whatever interest they like! A mortgage contract is actually a very cruel joke... it's completely and utterly one sided.
yes - getting someone else to pay for it is dependant on finding somebody who can afford the payments/rent you are asking. if you lose your tenant and you cant afford the loan payments the bank will take back the collateral (your property) and you will have lost whatever you put into it, plus - according to our hairbrained system - you could be a surf to the bank for the rest of your miserable life.
Inflation is a long process, it means you have to have the debt for a long time, I read that at 3% or whatever Australia has on average, it takes 17 years or so in order for the debt to be halved. http://www.rba.gov.au/calculator/annualDecimal.html To look at it in another way, a litre of milk today costs $1.50, 17 years ago it cost 75 cents and in 17 year's time it will cost $3.00. (as an example, who knows, I don't even buy milk today let alone 17 years ago) So if you bought a litre of milk 17 years ago priced at 75 cents and you paid the shop keeper his 75 cents today you would be laughing, you just got your milk for half price and erroded half your debt. But if he charged you 5 cents a year to service the loan then you would still end up out of pocket. I thought about having an offset account to offset the mortgage. I figured if I could get enough money in the account to nullify the mortgage then in 17 years time I would be able to buy the house at the equivalent of half price. However the money in my offset account will also have lost half its buying power. So I get the house for half price but I lose half my savings. And the house has probably gone down in value and requires a lot of maintenance. If I could get silver (a hedge against inflation) to offset my mortgage I would be laughing as the silver would retain its value and the value of the silver would lower my interest repayments. So from what I gather the idea to use inflation to pay off your debt is to... Buy two houses, pay $300K each for a total of $600K Hold them for 17 years, paying only the interest, not the capital. By now your debt is still $600k (but really only the equivalent of $300K in the future's money) Your house prices have also doubled, because that's what they have always done. You sell one of your houses for $600k. You use that 600K to pay off the capital of both houses. You have a home and all it has cost you is the mortgage interest repayments for two houses for the past 17 years. If you have offset the cost of your mortgage then this will not be much money at all. If you have rented out the second house then this will be further reduced by the rental income and if you are in Australia you can claim tax back from your other job as you are losing money renting out a house. Plus if you get it on the NRAS scheme the government pays you $10K every year (index linked) for 10 years and don't forget the first home owner's grant, apply seperately and you might even be able to get two of them. Of course if house prices don't double you are going to be in trouble, and if you can't service your loan you are in trouble. If the renters run out or trash the place you are in trouble and over 17 years, that's a lot of time for trouble to take place. Hyperinflation would be fast and there might be a small window of opportunity for you to sell your silver at the wickedly high rate and pay the loan before they put the rates up, but that would be unlikely, the people who cause hyperinflation are the ones who set the interest rates, it is unlikely that you will catch them unprepared. If the loan rate was locked in, then maybe it could work. I would not take on any additional loans in the hope that hyperinflation would wipe them out. If there is hyperinflation then it would be hard to deposit any money into your mortgage holder because of all the flames.
I guess you don't have to do anything but wait as long as you can manage before paying, and the central bank and Treasury will do the rest of the work for you. It's somewhat crony-like to devise a payment scheme like that though.
IS it possible to get a fixed loan for 25/30 years..I don't think you can in Australia but I think it is possible in the USA. That would make it a different game altogether.. Would love to hear what the situation is in your neck of the woods. Regards Errol 43
It would seem like the only safe way. But do people realise that if you shaft the bank, they can just 'call' the loan? All this talk of free lunches... Sure they exist, just not for the little fish like us. The only way the little fish can get one over the big fish (banks) is by using the weight of numbers (politics or mob rule). And even then the 'enablers' will just take their cut. Ask anyone in the know how compensation legal cases work and who benefits the most. It's the lawyers.
