Quantative Easing

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yallambee's picture
yallambee
Status: Member (Offline)
Joined: Oct 27 2008
Posts: 10
Quantative Easing

Hi,

 

I have a simple? question.

If I owe the bank $100,000 for my mortgage, and the Govt prints money resulting in long term inflation.

 Now a year later the dollar is worth 10% of what is used to be so the govt now reissues the currency and  replaces $10 notes with $1 notes and so on reducing the value of the currecy to 1 tenth of ist value.

 

Do I now owe the bank $10,000? as the debt would be down valued too?

Ready's picture
Ready
Status: Platinum Member (Offline)
Joined: Dec 30 2008
Posts: 917
Re: Quantative Easing

I have not read your note, but I doubt in all the legalese you can find a statement that is to your favor in this situation. Likely, you will still owe $100,000 USD that will now seem impossible to pay off. The USgov could potentially get involved and have your note re-written, but that is iffy and should not be your "plan" IMHO. Seems kinda like using the lottery to fund retirement.

There are 2 solutions in your proposed scenario:

1.)   The USgov will not be able to stop printing, so wait a while longer and you will be able to pay it off again with devalued dollars. Look at the reasons the inflation has been created, are they likely to magically go away any time soon?

or

2.)    Buy 10 oz. Gold at just under $10,000 today. In your scenario, they will now be worth $100,000 dollars, (although the actual intrinsic value is unchanged) which you can cash in and pay off your mortgage if you find it wise to do so at this point. If not, you still have your store of wealth that you can use for another more pressing purpose you cannot see today.

Obviously, reality may come down differently than the scenario you set, but I believe the principals are the same even if the values are different. Do a search for Gold on the forums and you will see many different perspectives, but few will dispute it's ability to store wealth independent of the fluctuations of a certain currency.

Best

Rog

james_knight_chaucer's picture
james_knight_chaucer
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 160
Re: Quantative Easing

Something similar to this happened in France. I remember as a small boy (around 1973) buying something in a shop for a 20 centimes piece and getting several 1 Franc coins in my change. I tried to tell the shop owner that I had the wrong change, but my father explained that France had suffered terrible inflation some years before. They had converted all the old Francs into centimes, and continued to use them as small change.

yallambee's picture
yallambee
Status: Member (Offline)
Joined: Oct 27 2008
Posts: 10
Re: Quantative Easing

Thanks for you comments,

 

But I am in Australia not the US so lets not focus on what you refer to as the terms it is the principal that I am chasing here, does debt diminish with a revaluation?

 

The frech example was more to the point I was raising, Merci Beacup(long time ago) James

 

 

Michael Höhne's picture
Michael Höhne
Status: Silver Member (Offline)
Joined: Nov 16 2008
Posts: 119
Re: Quantative Easing

The introduction of a new currency comes with a set of rules. We had the same in Europe with the Euro.

  1. There was a fixed exchange rate. If I remember correctly, 1 Euro = 1,95583 DM
  2. You can change the previous currency to the new currency for a long time. We can still change the old European currencies into Euros today, so theoretically we could still use DM or Francs for trading. However, the monetary base is too small to do it. We cannot change Euros to DM or Francs though, because the old currencies (notes and coins) were destroyed.
  3. All bank accounts, insurance contracts, mortgages, loans and everything else denominated in the old currencies was automatically changed to Euros, based on the fixed exchange rate. If they were not, the fixed exchange rate would prevent such assets from being decoupled in value.

So if you have a new currency where one new dollar equals 10 old dollars, then your loan will either be 100,000 old dollars or 10,000 new dollars. You have two currencies, even if they share the same name and any two currencies have an exchange rate.

jerrydon10's picture
jerrydon10
Status: Gold Member (Offline)
Joined: Mar 2 2009
Posts: 442
Re: Quantative Easing
yallambee wrote:

But I am in Australia not the US so lets not focus on what you refer to as the terms it is the principal that I am chasing here, does debt diminish with a revaluation?

 

It would seem to me in the way you phrase the question that the answer is yes: debt does diminish with an inflationary revaluation.

You signed a mortgage contract to pay back X amount of dollars. If the government devalues the currency and that dollar is not worth what it was, that does not affect the contract you signed.

Ready's picture
Ready
Status: Platinum Member (Offline)
Joined: Dec 30 2008
Posts: 917
Re: Quantative Easing

I guess the question is if the currency is replaced for annother (a Franc becomes a Euro at a fixed rate) or the currency is left in place and simply devalued. Either could potentially happen, and both with different results discussed above.

 

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