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A stupid question about debt


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I see allot of people talking of economic collapse, end of the $, end of fiat currency and the realisation that it might just be worthless paper..

So it got me thinking, What happens to debt in a currency collapse?

Would my bank still want my £'s

Would my bank still be solvent, if not who do I owe money too?

Would my debt be inflated away? So my £200,000 mortgage is now the same price as a loaf of bread.. Like my great auntie @97 who pain £1200 for her first house as debts were inflated away by wage inflation. 

Would my pension be worthless and therefore a waste of my last 20 years of contributions, should i have just blown it on hookers and coke? 

Would my savings be seized or be converted into a new government crypto of some sort?

How would we pay for our 50% food imports we need to feed our bloated population?

How would gold/silver react, does it still have the power it once had..

Is monitary collapse even a possibility in the UK? Is it only something that happens in Zimbabwe? Countries outside of the monitary control system where billionaires do' not store their cash?

What I'm asking is if monitary collapse did ever occur what would the government do? And would my assets that i have be seized as my cash becomes worthless, until my mortgage is paid my bank owns my house, would they take it?

So many questions.. excuse my ignorance.. 

 

Edited by macca
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Well, in an inflationary melt up, or a currency collapse, what tends to happen is that those with debt free hard assets. some soft assets, and no debt do OK, unless the government levies taxes on them that they then cannot pay.  Think revolutionary France/Zimbabwe.  Those with soft assets and some debt free hard assets can also do well IF they can rotate the soft assets into inflationary hard or soft assets.  That's the stage we are at now, in my view.

Those with no hard assets and no debt are OKish as long as they can find some income to pay for food - wages often rocket to stay alongside (but lagging) food.  

Those with no debt free hard assets but with debt (think most UK folks with a huge mortgage, car loan, credit cards, and nothing apart from the house) are fucked in the arse big time as the payment demands climb but the income fails to keep pace (think germany weimar).  

Those with soft assets (pensions, money in the bank) and no hard assets get fucked in the arse doubly as their soft assets head towards zero whilst costs rise, plus the mental blow of seeing the value of savings erode daily. (again, Germany)

Those with gold, no traceable hard assets to be taxed, and no debt, can make out like fucking bandits if they can avoid government attention.

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49 minutes ago, wherebee said:

Well, in an inflationary melt up, or a currency collapse, what tends to happen is that those with debt free hard assets. some soft assets, and no debt do OK, unless the government levies taxes on them that they then cannot pay.  Think revolutionary France/Zimbabwe.  Those with soft assets and some debt free hard assets can also do well IF they can rotate the soft assets into inflationary hard or soft assets.  That's the stage we are at now, in my view.

Those with no hard assets and no debt are OKish as long as they can find some income to pay for food - wages often rocket to stay alongside (but lagging) food.  

Those with no debt free hard assets but with debt (think most UK folks with a huge mortgage, car loan, credit cards, and nothing apart from the house) are fucked in the arse big time as the payment demands climb but the income fails to keep pace (think germany weimar).  

Those with soft assets (pensions, money in the bank) and no hard assets get fucked in the arse doubly as their soft assets head towards zero whilst costs rise, plus the mental blow of seeing the value of savings erode daily. (again, Germany)

Those with gold, no traceable hard assets to be taxed, and no debt, can make out like fucking bandits if they can avoid government attention.

Must admit I don't really understand this either...

But if wages rise with inflation all be it slower than the price of food, surely debt repayments become cheaper no?

For example if your wages double, your loan repayment stays the same... ergo the debt payment halves in relation to wages... 

 

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I think for Joe Public weighted by £ most loan repayments are dependent on the interest rate (mortgages must dwarf all other types of debt).

So if inflation was high, interest rates would also have to be high. 

I think the game for the government is to rig the inflation figures so it appears that the rate of inflation is lower than wage growth, so that on paper people think they are doing better and also justifies the policies they want to bring in.

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Nice thread. There's a lot of this confuses the cr4p out of me so I try not to think about it too much. 

So the trick afai can see is not being in debt, and turning soft assets into untouchable hard assets that will grow with the inflation? Hold industrial blue chips in an Isa if you're confident you'll always be able to feed n clothe yourselves via wages or drawdown, buy them thru a sipp if you think you might end up on the sausage roll and needing the government to pay your rent?

 

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Historical debt is one thing -- the impact of that is 'it depends'.  But the most likely result is the debt being inflated (eroded) away.  In that instance the problem (for the median person) is keeping up with interest payments in the early years of the inflationary period -- ie, if you keep your job you're okay (albeit likely 'poor'), if you lose your job you lose everything. 

But so long as you can make it through the early years of the inflation you're probably better off.  (This is actually the 'property ladder' that people go on about -- it is a consequence of higher inflationary periods, not an absolute thing).

The other side to debt in inflationary periods is new debt.  Banks don't like risk, and in inflationary periods the risk is more difficult to quantify (let alone it usually occurring in 'risky' recessionary periods).  So you end up with new debt being hard to get hold of*, and expensive even for those who can get hold of it.  This, then, makes the entire economy crumble, etc.

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5 minutes ago, dgul said:

debt being inflated (eroded) away.

this is a load of economist shite as well......you might inflate away your debt cos your house value is rocketing but all you're doing is creating an unfair, fucked up society where your offspring (and other poor people) have been shafted by shortsightedness and greed....

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46 minutes ago, Google247 said:

Must admit I don't really understand this either...

But if wages rise with inflation all be it slower than the price of food, surely debt repayments become cheaper no?

For example if your wages double, your loan repayment stays the same... ergo the debt payment halves in relation to wages... 

 

Interest rates can change. Late 80's early 90's I was working as a dispatch rider in London. The firm also did a 'vip' taxi service. Many of the vip drivers were middle and upper management guys. Some were using the company car. Interest rates had climbed so high that their monthly take home barely covered their mortgage. The moonlighting was to pay the other bills and to put food on the table.

At the time, debt free people like me were quids in. Loadsa money and nothing to spend it on except pleasure.

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1 hour ago, Google247 said:

Must admit I don't really understand this either...

But if wages rise with inflation all be it slower than the price of food, surely debt repayments become cheaper no?

For example if your wages double, your loan repayment stays the same... ergo the debt payment halves in relation to wages... 

 

you are correct, IF you can cover the interest payments, then as wages rise the actual balance of the debt gets smaller and smaller.  My father bought a house for about 28,000GBP in 1978ish.  By 2000 that was worth over 1,000,000 and so any mortgage left was pennies.

However, in inflationary times when you get jumps in interest rates, the monthly debt repayments shoots up more than wages.  Add to that that for the past ten years, interest rates have been insanely low, and it gets very scary.

Lets say you borrowed 500k at 3%, 30 years (25 or 20 years, everything following increases).  Monthly repayments are about 2100.  Now, if it doubles to 6% what are the repayments?  3000 a month (an extra 12000 a year).  What about to 10%, which it was when I started my first job? 4400.  15% (the rate some of my mates were on with their first house) 6400.  a month.  That's an extra 4200 a month compared to now.  Or 50 grand a year.  Now, wages will rise a bit, but everything else does as well (food, heat, clothes) and then you have the mortgage too.

If you can't pay, you start getting penalty rates and it's a disaster.

Now, consider the rental market and BTL.  They've often got fixed rental agreements, cannot increase rent, and might see their payments double in a year.

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There are decent 10yr fixed rate mortgages available. If you get one of those, and your wages keep up with inflation, your debt gets inflated away. All the problems outlined above apply to variable rate mortages. We've become so conditioned that this is normal, we forget about fixed rates. Our yank cousins routinely get 30yr fixes as they are linked to 30yr government bonds, and that security is passed on. Here, banks mostly borrow at long term fixed rates and lend at short term variable rates, and will screw us royally if interest rates rise. Get your long term fix while they're available.

3 minutes ago, Google247 said:

Fair point

I was looking as the debt as a fixed term... ie a 3 year loan at 3% will become cheaper to pay

Or a 10 year fixed mortgage

The problem lies with the rollover of debt onto a much higher interest rate when the 10 year term ends

Exactly.

Make a plan to clear it in 10 years.

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Surely the banks can't be factoring in any real inflation in the next 10 years if they are offering mortgages out at 2%

Of course they could be wrong and just be missing the signs... wouldn't be the first time

But if there is rampant inflation the haves will have more and the have nots will have even less chance to catch up, especially when it comes to assets such as houses

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10 hours ago, macca said:

I see allot of people talking of economic collapse, end of the $, end of fiat currency and the realisation that it might just be worthless paper..

So it got me thinking, What happens to debt in a currency collapse?

Would my bank still want my £'s

Would my bank still be solvent, if not who do I owe money too?

Would my debt be inflated away? So my £200,000 mortgage is now the same price as a loaf of bread.. Like my great auntie @97 who pain £1200 for her first house as debts were inflated away by wage inflation. 

Would my pension be worthless and therefore a waste of my last 20 years of contributions, should i have just blown it on hookers and coke? 

Would my savings be seized or be converted into a new government crypto of some sort?

How would we pay for our 50% food imports we need to feed our bloated population?

How would gold/silver react, does it still have the power it once had..

Is monitary collapse even a possibility in the UK? Is it only something that happens in Zimbabwe? Countries outside of the monitary control system where billionaires do' not store their cash?

What I'm asking is if monitary collapse did ever occur what would the government do? And would my assets that i have be seized as my cash becomes worthless, until my mortgage is paid my bank owns my house, would they take it?

So many questions.. excuse my ignorance.. 

 

Debt is nominal.

You borrow in £s. It does not matter if trhe £ changes from 50p = $1 ot £1 = $4.

However, large falls in a currency i.e. foreign investment doing a runner, so need to cash up and sell out assets, tend to be followed immediately by large increases in interest rate.

If you have borrowed from a regulated bank then what happes is roughly:

You put in 10% of the house cost.

The bank puts in ~20% as capital, then draws down the balance from BoE.

If the bank fails then the banks assets - its loans, tend to be sold on to another bank who can change the terms.

BoE will oversee the sales process.

You dont get free money. You tend to end up with very little choice- see mortgage prisoners/Norther Rock mortgage owners.

If you ever end up with a mortgage from a bust bank./closed funds then monev mortgage ASAP. Chuck as much money at it so you can move.

UK cannot default on its debt as it borrows in its own currency, which is not fixed against anything.

However ... that does not mean its free n easy.

If - or when - the shit hits the fan then other entities will refuse to trade with is. Or just not accept the $ as a mean of exchange.

Theres a large number of countries that have had to adopt the dollar as a currency as peopel will no linger touch their own currency.

 

Your assets would not be seized. Theyd just not be worht a lot.

 

 

 

 

 

 

 

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56 minutes ago, Google247 said:

Surely the banks can't be factoring in any real inflation in the next 10 years if they are offering mortgages out at 2%

Of course they could be wrong and just be missing the signs... wouldn't be the first time

But if there is rampant inflation the haves will have more and the have nots will have even less chance to catch up, especially when it comes to assets such as houses

The only way that you are going to allow the "have nots" to catch up is sustained high wage inflation and as long as immigration continues as it is that is never going to happen.

The government is forcing it at the low end with minimum / living wage (aimed to cover 20% of jobs) but that's no answer as paying everyone the same crushes productivity (why work harder to gain a promotion if that position pays the smae or nea as damnit?).

If the BoE keeps printing then eventually they will get their inflation but it will be price inflation, not wage inflation, and the "have nots" will be worse off.

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1 hour ago, Google247 said:

Surely the banks can't be factoring in any real inflation in the next 10 years if they are offering mortgages out at 2%

Of course they could be wrong and just be missing the signs... wouldn't be the first time

But if there is rampant inflation the haves will have more and the have nots will have even less chance to catch up, especially when it comes to assets such as houses

They dotn need to.

They raise enough money to cover the fixed period , normally 2 years.

Then they can adjust the SVR  if their funding costs go up.

MMR is still using ~6% as th stress test for mortgages. Looking at SVR thats not too far off.

 

Banks can further protect themselves by just reduing lending. UK is seeing this a the mo. Despite what you migth read about a 'surge of mortgage applications' banks are shitcanning mortgage applications as they cannot repo.

Effectively you could only borrow from a bank with a 20% deposit. Anything less and they are reluctant to lend.

Chuck in a 40% deposit and you can virtually borrow for free - providing you can show a good, unencumbered income stream.

 

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3 hours ago, Google247 said:

Surely the banks can't be factoring in any real inflation in the next 10 years if they are offering mortgages out at 2%

Of course they could be wrong and just be missing the signs... wouldn't be the first time

But if there is rampant inflation the haves will have more and the have nots will have even less chance to catch up, especially when it comes to assets such as houses

wrong.

aussie banks were using offshore money to fund onshore mortgages, got the sums badly wrong, and almost went bust in the GFC as a result.  The management got to keep all their bonuses.  kerching.

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