Letter Re: Does Future Inflation Justify a Higher Level of Indebtedness?

In reading the recent economic commentary on your blog site I have to wonder – if one is convinced that we’re to see a significant increase in inflation, then why get out of debt? Take a mortgage for instance: with decent credit it is now possible to refinance (or purchase) and get a fixed rate mortgage under 5% and rates will likely go lower before we’re done. With tax breaks and even normal inflation this is essentially free money. In an inflationary environment (which I don’t argue we’re in) it would make sense to keep this debt and instead use your cash to purchase things that will increase or at least hold their value. You’ll later be able to pay that mortgage down with cheaper dollars or not at all if TEOTWAWKI actually occurs. Obviously nobody should be carrying credit card debt and getting out of variable rate mortgages would be a good idea but debt in and of itself isn’t necessarily a bad thing.
Obviously I don’t know what direction the markets will go, nobody does (or at least they aren’t telling). But I do feel quite safe sitting on cash and nibbling on stocks as they come down in price. One always must consider the horrible possibility that the world as we know it will not end.) Regards, – Steve G.

JWR Replies: I cannot in good conscience recommend that anyone go into debt, stay in debt, or go deeper in debt if they can avoid it. The nascent economic recession will bring with it some huge layoffs–all the way from multinational corporations down to your local “Mom and Pop” stores. In an age of layoffs, debt will not be your friend. Even if you have debts that are being serviced with increasingly cheaper dollars you will still need an income to pay your debts! If you lose your job, you could then lose your car, and then your house. Keep in mind that although mass inflation at the consumer level seems very likely, it is not a certainty. Albeit much less likely, we could see price and wage deflation–something like the situation in the 1930s. In such deflationary times, all forms of debt would be absolutely dreaded.