Thursday, August 11, 2011

Q&A With The Doc: What Happens to Personal Debt in a Currency Collapse?

Dean writes:
I've been following and accumulating precious metals for about 4 years now and the ride is getting more and more interesting every day! My question to you revolves around what happens to personal debt once a currency collapses. I understand fully why someone needs to have precious metals after the currency fails but I've never heard anyone speak to what happens to our mortgage and car loan balances. If the currency is worthless and is not transferred to the new currency with any value then so should the debt! Any information you could provide would be greatly appreciated!

The hyperinflation/ dollar devaluation freight train that is rolling at us right now is uncharted territory for most Americans.  To have an understanding of what happens to personal debt once a currency collapses, we need to study and learn from history, and/or learn from those who have experienced a currency crisis personally first hand.
As far as history, take some time to study hyperinflation in the Weimar Republic Germany in the 1930's, the hyperinflation of the Zimbabwean dollar this past decade, the hyperinflation of the Continental currency in the late 1700's, and the Argentinean collapse/default in the 1990's.
For personal accounts, spend some time and read LoneRangerSilver's account of Living Through the Mexican Peso devaluation in the late 1970's, as well as Gonzalo Lira's account of what hyperinflation looked liked during the Chilean hyperinflation of 1970-1973.

Basically, as long as the debt remains denominated in the original currency, your debt will be hyperinflated away during a currency crisis. 
If however, the banksters suddenly reinstall the gold standard in the midst of a currency crisis, and convert all debt to the new currency, a massive depression would be created as all debt would suddenly be owed in a stronger, appreciating currency.  This is what happened a decade ago with the creation of the Euro from weaker national currencies, whose debt was converted to Euro debt- and eventually resulted in the massive sovereign defaults that are in progress today throughout the European Union.
Please read Martin Armstrong's discussion on how a Return to the Gold Standard Would Create a Great Depression for further insight on this issue.

Hope this helps your understanding Dean of hyperinflation/ currency collapse, and how it will affect personal debt.
The times ahead of us will be tumultuous for all, but many extreme opportunities also await those who are prepared and hold strong physical currencies such as gold and silver.