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Letter Re: Is it Deflation or Inflation Ahead? Should I Pay Down My Debts?

JWR,
Thanks for the always excellent blog. I recently came into a significant wad of money, more than $100,000. I have been toying with my options. I owe around $200,000 on my house, but I can afford the payments no problem; I am self employed in a health-care related field that I do not expect to struggle.

My thought process goes something like this: Why should I pay the mortgage down on my house since (1) I can afford my house easily, (2) with inflation coming I would rather pay it down with 2012 or 2014 dollars (that are "worth less" if not "worthless") than current dollars, and (3) before I default on my house loan, there will be 95% of other Americans who also default... so why should I worry about it? To me it seems to make much more sense to take that money and invest in gold, silver and guns, which I can sell for a nice profit--or at least, not lose huge amounts of value due to inflation. Or, just buy even more food, hand tools, etc. etc.

I keep thinking there must be a problem with my thought process, since you advocate paying down debt first. If there is a problem, what is it?
I have a fair amount of beans, bullets and Band-Aids already, by the way...
Thanks, - WPR

JWR Replies: It appears that we'll have another 12 to 24 months of deflation before the much-heralded inflation will likely kick in. If someone loses their job in the midst of deflation, then they might also lose their house. And even after inflation starts to increase, you will still need some income to make house and car payments. No job means no cash flow, and that will soon precipitate a foreclosure.

Since you are otherwise well squared-away logistically, I recommend that you put most of the $100,000 that you mentioned into 1 ounce gold US Eagles. (Get it out of anything dollar-denominated!) Wait until gold jumps up past $1,600 per ounce (+/- 2010?). At that point, do your best determine if further deflation seems likely. If so, then pay down you mortgage, just in case of layoffs. But if mass inflation seems imminent, just hold on to your gold, and gradually pay off your mortgage with cheaper dollars. You gold investment will then act as your "in case of layoff" insurance.

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