# Keep debt as hedge against inflation/hyperinflation



## ipad (31 Aug 2010)

Hi all,
I recently queried member's advice about whether or not I should sell my house for a loss and pay off the negative equity balance given that I am on a very good tracker rate.
http://www.askaboutmoney.com/showthread.php?t=142606

Just when I'd made up my mind to sell and take the hit upfront, I read in one of the Sunday papers that in these times it is prob a good idea to have some debt as the only way governments/countries can get out of their debt is to inflate their way out. Is this a valid possiblity? No point in me paying huge sums to get out of debt when it may 'naturally' erode over a few years instead.

This is such a major financial decision for me and I just can't find the right answer.


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## PaddyW (31 Aug 2010)

Well, inflation will erode debt, but it will erode your savings also, from what I understand?


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## Chris (31 Aug 2010)

Paddy is absolutely right. The biggest problem for your savings is that after you pay tax on interest the devaluation through inflation will be larger than the appreciation through interest. This means that your savings wealth will devalue in event of high or hyperinflation.
I created a thread a while back on what inflation actually is: http://www.askaboutmoney.com/showthread.php?t=141913
This should give you an idea as to why governments the world over love inflation, and will do anything to keep it going, while blaming others for higher prices.
During times of high inflation, cash is very bad to own, while debt and hard assets are good to own.


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## ipad (31 Aug 2010)

OK so in the event of high/hyperinflation keeping the current (devalued) house makes more sense in the long run? I plan to use my savings to reenter the property market further down the line though (perhaps a year to 18 months), so they shouldn't be affected by it.

What are the chances of high or hyperinflation occuring over the next five years given the current government debt problems?


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## ivuernis (31 Aug 2010)

ipad said:


> What are the chances of high or hyperinflation occuring over the next five years given the current government debt problems?



We're in the Euro remember and don't control our monetary policy.


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## Chris (31 Aug 2010)

ipad said:


> OK so in the event of high/hyperinflation keeping the current (devalued) house makes more sense in the long run? I plan to use my savings to reenter the property market further down the line though (perhaps a year to 18 months), so they shouldn't be affected by it.


Not quite. In the case of high inflation it will be good to have debt. The value of the underlying property is whole different thing. It would have to keep up with general price rises, which it may or may not do. 
Please do not take any of this as specific advise on what to do regarding your investments, I'm merely pointing out what inflation does. The only one that should come to that conclusion is you.



ipad said:


> What are the chances of high or hyperinflation occuring over the next five years given the current government debt problems?


Euro zone deficits are only one problem. The much bigger problem is the inflated monetary base and artificailly low interest rates. It all comes down to when banks will lend out their excess reserves. Politicians and central bankers like to say that once credit starts flowing again they will reverse their inflationary policies. Question is whether you believe them. I for one cannot see these policies being reversed, as doing so would contract the money supply and reduce availability of credit; and this would lead to another correction/recession/depression, which of course is politically very unpopular. From my point of view it is pretty unlikely that we will see hyperinflation. But unless there is an acceptance at government and central bank level, that they are actually causing the increase in general prices due to their inflationary policies, and then reverse these policies, high inflation will hit us sooner rather than later.



ivuernis said:


> We're in the Euro remember and don't control our monetary policy.



The entire Euro zone has debt problems which are fiscal policies not monetary, and Ireland is in full "control" of its fiscal policy. Ireland also has a say in monetary policy through the Irish Central Bank at all the ECB meetings, but it would have to convince enough members to change policy. I have yet to see any evidence that the Irish Central Bank voted in favour of higher interst rates.


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## george.shaw (31 Aug 2010)

Good points by Chris. In order to prepare for high inflation/ hyperinflation one should keep long term debts, pay off short term debts and own some gold and silver. 

Good article in the FT at the weekend:
The True Value of Gold
http://www.ft.com/cms/s/2/e9378c6c-b0b8-11df-8c04-00144feabdc0.html


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## george.shaw (2 Sep 2010)

Good article on the hyperinflation in Zimbabwe here:
[broken link removed] 

Not suggesting we will have a Zimbabwe style inflation here but likely to have very severe inflation in which case deposits will get hammered and international equities and gold will be the best inflation hedges.


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