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Letter Re: With Inflation Ahead, Why Be Debt Free?

Jim,
I was wondering, as perhaps some other readers are, why you advocate paying off your fixed rate mortgage in preparation for inflationary bad times ahead. It would seem that, short of Zimbabwe-style economic collapse, leaving your money in investments that more or less track inflation, and using those increasingly deflated dollars to pay off a fixed rate, constant dollar mortgage that will become increasingly cheaper with time, is to your benefit (and very much not to the bank's). What am I missing? Regards, - Lou P

JWR Replies: I advocate being debt free for several reasons. The first and foremost reason is Biblical. Clearly, modern-day interest rates are usurious. (See Nehemiah 5:4-13.) That alsone is enough to keep me away from the banksters and their money. I have never taken a loan from a bank, and, Lord willing, I never shall. (I do use a credit card, but purely for convenience. I pay the full balance each month so that I'm not charged interest.) My other reasons are purely pragmatic:
A.) The times to come may not be inflationary. There is a chance (albeit far less likely) that times might turn deflationary, a la the 1930s. Those were dreadful times for debtors.
B.) You might lose your job and not have any income. At that pont, you might not be able to make your payments, even in inflated dollars.
C.) Never underestimate the ability of well-intentioned of governments to over-react in an "emergency." Governments are quite likely to institute wage and price controls, as they have done in the past. They might impose limitations on mortgage pre-payments. They might place limits on savings account withdrawals. They might index interest rates to match inflation. They might issue a new currency and reschedule/recalculate all recorded mortgages. And they might even decree that the remaining principal of mortgages be indexed to match inflation! (A banker's fondest dream is an installment debt that can never be fully repaid.) For some documented cases of government over-reaction in the recent past, see Dr. Gary North's book "Government by Emergency". (IIRC, it is available for free download, along with dozens of other books at I.C.E. Free Books.)

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