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A dollar collapse

Chris Farrell Dec 10, 2009

Question: Will personal debt be devalued like government debt when Obama devalues the dollar and please don’t act like he won’t do that 3rd quarter next year. Please pursue this answer regardless if you agree it is going to happen. Dave, Coatesville, PA

Answer: What would be the impact on consumer and household debt if the dollar collapsed? Interest rates would spike and inflation would spiral higher. Most consumer and mortgage debts are pegged off the interest rates in the government bond market. For example, fixed income mortgage rates are priced off of the yield on 10-year Treasury notes. So, a dollar collapse would make it increasingly expensive for the government, business, and homeowners to borrow since rates would be much higher.

However, a high inflation rate can be a boon to existing debtors that borrowed at a fixed rate. They get to pay back their lenders with dollars that are worth less every year. Plus, they benefit from a low fixed rate in a high interest rate environment..

For the record, I don’t agree that this will happen. Of course, no one can rule out a collapse of the dollar (although, even if it did happen I have no clue when it will). The risk is there, but I still think it’s unlikely. That isn’t just my forecast. The bond market vigilantes don’t seem overly concerned. They’re still snapping up U.S. government debt and keeping interest rates low.

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