Deflation and the Pandemic

I appeared to occupy a unique place on the lunatic fringe when, many years ago, I started writing about the prospect of a short squeeze on the dollar. When I bounced this idea off a half-dozen finance professors, each had the same response: "Huh?"  Their incredulity notwithstanding, it has always seemed a given to me that it would take a catastrophic deflation to wipe out debts, both public and private, that long ago exceeded our ability to repay them. The main feature of a debt deflation is an increase in the real burden of debt. Ultimately, and unfortunately, every penny of every debt must be paid -- if not by the borrower, then by the lender.  We kid ourselves to think we will escape it via hyperinflation. Realize that the biggest piece of what Americans owe, putting aside future liabilities from Social Security and Medicare, is mortgage debt. It is not simply going to go away, and that is why  deflation, rather than hyperinflation, is far more likely to determine the financial endgame.

This premise starts with the assumption that mortgage lenders will never accept a few hundred-thousand-dollar bills peeled from our overstuffed wallets to settle up.  Instead, most mortgages will eventually have to be rewritten as lease agreements so that people can  stay in their homes during the very hard times that are coming.  This process is already well under way via a rental boom that has drastically altered the dynamic of the housing market. Private equity firms have not only been buying up whole neighborhoods at inflated prices in order to rent homes to those who cannot afford them, they have been building news homes to lease to the same hapless crowd.