With all the liquidity that the governments of the world have been releasing into the economy, I believe it will only be a matter of time before we begin to experience a nasty bout of inflation that will force interest rates into territory not seen since the late 1970s and early 1980s.
With that in mind it got me thinking, if high inflation is inevitable, is it still worth it for me to continue to pay down my mortgage with a goal of completely retiring it by the time my son, God willing, graduates from high school seven years from now? For me, the answer to that depends on just how long I think the inflationary period will last.
So what’s my situation? As I discussed in my previous post on the benefits of living within your means, I bought my current house in 1997 for $199,000. Over the 10-plus years that I owned the house I have faithfully made extra principal payments in order to ensure that I was mortgage free by the time my first child was out of high school. As a result, today, I owe less than $120,000.
After my latest refinancing goes through, my new mortgage bill will be reduced from $1122 to only $640. This new monthly payment borders on a level approaching the ridiculously absurd! By that I mean the new monthly mortgage is so low that I should be able to pay it with little trouble, regardless of what type of job I have. Furthermore, the new lower monthly mortgage also has the advantage of putting a much smaller dent into my rainy day fund than my old mortgage. Of course, although I will be going from a 20-year fixed loan back to a 30-year fixed loan, my original plan for now will be to stay the course and continue paying excess principal on the loan to ensure that it is retired early.
Or will it?
Because if inflation goes into or near double-digit territory, as I believe it will, I may be wiser to hold onto that money going toward the extra principal and forget about retiring the debt early.
Why? Because as inflation rises, it erodes the value of the dollar over time. Banks, in particular, hate high inflation because folks with longer-term fixed-rate loans end up repaying those loans with dollars that are worth a lot less than the value of the dollars they originally borrowed. Normally, interest payments are more than enough to compensate the banks for the costs attributed to benign inflation, but when high inflation appears, all bets are off — for the banks anyway!
High inflation is a blessing for those who find themselves deep in debt — assuming they still have the means to stay solvent. And who is one of the biggest debtors among us? None other than good old Uncle Sam! Trillions of dollars of debt. For this reason I believe that the Fed will ultimately determine that the best way to reduce the impact of the multi-trillion dollar debt run-up by the United States is to unleash a managed run of high inflation over a period of several years. Sure they’ll talk a good game about reigning in inflation, but I believe they will realize that it is the best way out of the mess this country currently finds itself in.
Since I am the household CEO, I plan to make some assumptions and run some numbers to see if I should abandon my plans to pay off my mortgage early. I’ll let you know my decision in my next post.
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I have the same problem. I could pay off my 200k loan out of savings but, with inflation coming and maybe even hyper inflation, I not sure. If interest rates on treasuries rise and even higher on short term bonds. I may be better off waiting and taking advantage of the high interest rates?
Let me know how your numbers work out. Thanks
JR: I decided to take the extra principal payment money (equivalent to one extra payment per month) and put it in a separate (relatively) high interest savings account for awhile. I will continue to collect and park that money there until I get more clarity on the inflation situation. If the Fed can somehow contain inflation by managing to remove the excess liquididty from the economy over the next several years (doubtful), then I’ll use that money to pay off the mortgage. If I see inflation rearing its ugly head, I’ll probably use the money to help buy inflation-resistant assets (like gold or real estate).
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As difficult as it is to say on a blog dedicated to frugality, the possibility of inflation of this magnitude actually makes it possible to argue for getting into all kinds of debt, but only for appreciating assets.
Since the dollar will assumably continue to lose value as liquidity is injected, purchasing anything that will hold its value (houses, land, etc) with the constantly depreciating dollars seems like the most reasonable course of action.
The drawback though is that there is a risk of betting on the come, so to speak – if your bet is wrong, your financial position will most certainly be in dire straights.
[...] Len Penzo: So are we going to have high inflation in our future? Len bets that we will (well, so do I!). He thinks we can potentially approach inflation in the double digits. If so, then this may be a relatively good thing for those carrying debt. If you’re a debtor, root for high inflation! [...]