Love your blog, Len. Let’s just say it has opened my eyes, and for that I thank you. I’ve not been able to get a reasonable answer as to what happens when the dollar fails and mortgage holders are saddled with a house they can’t pay for. Also, if the majority lose their jobs because people can’t buy or sell products and services, what then? Will people go to the barter system? — Rob C.
I’ll answer your last question first. If hyperinflation takes a year or two to play itself out, I would expect the economy to muddle along as salaries are forced to increase to keep pace with rapidly rising prices. And as long as the US dollar (USD) maintains some purchasing power, barter won’t replace the dying currency.
Of course, that slow-burn scenario would be favorable for mortgage holders who can remain employed, as they should eventually get to a point where they’d be able to pay off their mortgages with as little as a few months – or even weeks – of pay from their ever-increasing salaries.
Would that hurt the mortgage lenders? Indeed it would. But your mortgage is a contract, denominated in US dollars; by law you’re obligated to pay it back in USDs, regardless of their purchasing power.
For that reason, I would also argue that if the USD goes supernova and its purchasing power is vaporized overnight, then any dollar-denominated loans should go up in smoke too – and that includes mortgages.
Then again, there are those who believe that if hyperinflation destroys the dollar, mortgage lenders could pressure the US Congress to do something akin to what Germany did to mortgage holders after the Weimar hyperinflation from 1922-1923. Specifically, on 14 February 1924, German lawmakers passed the “Third Taxation Ordinance” – this law revalued existing mortgages at 15% of gold’s official market price (in German marks) on the day and year the mortgage was originated.
As a simple example, let’s consider a hypothetical post-hyperinflation situation where a similar law ends up being enacted in the US …
Let’s say you purchased your home with a $100,000 mortgage on a day in 2010 when the price of gold was $1000 per ounce. In that case, your new mortgage would be defined as being worth 15 ounces of gold. The math would look like this:
- Original mortgage value in gold = ($100,000/$1000) = 100 oz. of gold
- New mortgage value in gold = 100 oz. of gold x 15% = 15 oz. of gold
So, to sum up, your new revalued mortgage would then be based on 15 times the price of gold in the new currency.
I would hope if, in our example, one had paid down the mortgage by half over time, then the new mortgage would be revalued at 50% of 15 ounces of gold, or only 7.5 ounces of gold. Regardless, the hyperinflation still turns out to be a pretty good deal for mortgage holders; all of the other problems hyperinflation incurs notwithstanding.
And, yes … in that case, barter will almost certainly be required until the US establishes a new currency.
Either way, let’s hope it’s the bankers who will be in a world of hurt if the USD fails — not fixed-rate mortgage holders. After all, banks tacitly accept that risk when they make a loan, and risk is why they collect interest in the first place.
Thanks for your question, Rob.
I’m considering rolling over a 401k from a previous employer into a precious metals IRA as a means of wealth protection and hopefully avoid the fees for early withdrawal. My concern is that those precious metals are required to be held by a third party, which means I wouldn’t have the metals in my possession. Is this a sound financial strategy, or would it be better to pay the penalty and taxes for a straight withdrawal so that I can take possession? — Jeff in St. Louis
A precious metals IRA provides all of the benefits of other IRAs. Many people get precious metals IRAs because gold and silver have a low correlation to market disruptions that can impact stocks, bonds and currency; as a result, they’re an excellent way to diversify a portfolio.
You’re allowed to transfer existing IRAs and 401k plans without penalties, although you can only transfer 401k funds from a current employer if their plan allows for in-service distributions.
Precious metals IRAs typically require you to store your gold, silver, platinum and palladium in a depository. Of course, a depository provides a safe and secure place to store your metals; and periodic audits are conducted to ensure everything is accounted for too. Most depositories also offer insurance from theft, loss or damage. On the other hand, there are usually custodian fees and depository charges for storing your bullion. The biggest drawback, however, is limited access.
Many people, myself included, believe that if you’re unable to readily access your precious metals at any time and for any reason, then you can’t rely on them as rock-solid wealth insurance because you’re still exposed to counterparty risk — which is precisely what most gold and silver owners are trying to avoid!
Ultimately, only you can decide whether or not the risk of being unable to access your precious metals when you really need them outweighs the penalty and taxes.
If you have a question you’d like me to take a crack at answering, send it to: [email protected] — and please be sure to put “Mailbag” in the subject line.
Photo Credit: gajman
Joe Saul-Sehy says
Queue that music we keep talking about….
During the Weimar hyperinflation unemployment was almost non-existent
Len Penzo says
That’s correct. The unemployment rate was less than 1%.
RD Blakeslee says
There are literally tons of “junk silver” in private hands.
In addition to barter, I think a valuation of these coins will be quickly established and they will be accepted to make purchases, when the fiat dollar dies.
Len Penzo says
I agree, Dave. The other benefit of junk silver is very low risk of having to worry about counterfeit coins. So they can be used as currency with almost total confidence.
What are your thoughts on having a few hundred dollars, maybe a thousand at home in a safe? I’ve heard from some people that there getting worried about not being able to pull money out from the banks once a collapse starts to happen since it happens so fast?
Just personally speaking, I’m seeing a lot of new families on the block buying houses that are priced 40% higher than when we bought in 2009 and just feel people are overstretching themselves. To compound that, they take out home equity lines of credit to upgrade their houses or buy new cars. What do they do when companies start laying off and they can’t find a job to pay that high mortgage? Do other people think of things like this, or am I pessimist? 🙂
Len Penzo says
Your fears are well-founded, Dan. The financial crises in Cyprus and Greece saw bank depositors in both countries being subjected to draconian withdrawal limits. The same strategy will almost certainly be imposed in other places too during future crises, which is why I think everyone should have enough cash on hand for at least one month’s worth of groceries.
The mortgage discussion was fascinating! If you had to put odds on some kind of mortgage revaluation law happening in the US, what would you guess?
This is why I don’t make extra payments on my mortgage. I’m letting inflation do the dirty work.