That is the question that seems to be on everyone’s minds.
With U.S. debt reaching stratospheric heights, tens and tens of trillions of dollars worth, the prospect of a major depression seems all but unavoidable, and with it a collapse of the dollar that has not been seen since the Great Depression.
This has debtors justifiably worried about their prospects should this event occur. It begs the question, what happens to debt after a US dollar collapse?
Debt will not be forgiven in the aftermath of a currency collapse, including the US dollar. Any amount of money that a debtor owes will still be owed to the lender, and any agreements or collateral pledged in prior to the collapse will remain in force afterward.
However, debtors who are quick, clever, and have an actionable plan can absolutely leverage their position in a currency collapse to their own advantage for the purposes of eliminating debt. Keep reading to learn more.
Table of Contents
Do you want to see some staggering facts on debt? Here they are:
- 69% of Americans are living paycheck-to-paycheck, with less than $1,000 in savings.
- The average American household owes close to $8,000 in credit card debt.
- The average credit card debt for households that carry a balance is $16,048.
- 35% of Americans have debt in collections, meaning it is a minimum of 180 days past due.
Just think about these statistics. More than two-thirds of the U.S. population is living paycheck-to-paycheck and more than one-third has credit card debt in collections!
That isn’t even taking into account any other type of debt. So if the economy collapses, what happens to all this debt?
The short answer? You still have to pay it back.
As long as your name is still on the books as owing and there is someone on the other end who is able to collect on that debt, they will want their money back.
You will still be required to pay back your credit card debt, your line of credit, and all other loans.
You need not think that any debtors will be shown mercy or left to fall through the cracks just because a country is being racked by hyperinflation in the aftermath of a modern dollar collapse. Oh no, my friends, quite the opposite.
You’ll be living in an era where actual assets are what is valuable, while the currency is hardly fit for building a fire or wiping your bottom with.
Accordingly, the lenders will come to collect on any debt should borrowers default. Home, vehicle, land, and absolutely anything else that they can repossess or seize as part of the agreement they will take, and make no mistake about it.
One need only look back to the repossession seizures and auctions that took place literally around the clock during the Great Depression.
People who were devastated financially, left with literally nothing, starving to death, were kicked out of their homes with only the clothes on their backs and whatever meager possessions they could carry, if that.
Often the “vultures” would be lined up waiting for the auctioneer to arrive at the property and the unfortunate former homeowners could watch their homestead be literally sold out from under them for failure to pay, extenuating circumstances be damned.
Of course, in some tight-knit, remote communities armed townsfolk would be standing by at the auction, essentially daring the auctioneers and would-be buyers to run up bids on the house, allowing family or friends to buy it back for a meager sum and return it to its former (and new!) owners.
But you need not count on such mercies if you find yourself in the same situation today. The Information Age has ensured that everything is collated. Everything sticks.
And since enforcement agents and government agencies alike are armed to the teeth and can increasingly avail themselves of invasive intelligence-gathering operations, you won’t stand a chance of fending them off.
If you owe on your property, car, land or anything else during a dollar collapse, your lender will take it from you. Depend on it.
Hyperinflation? Or Something Else?
If there is one word that is all but guaranteed to send shivers through the spines of anyone with even a modicum of financial education, it is hyperinflation.
Hyperinflation is perceived by consumers as the skyrocketing, ever-climbing price of goods and services: Tools, food, fuel, transportation, entertainment, everything.
In actuality, what is likely the cause of this perceived hyperinflation is actually the collapse of the currency, in the case of the United States, the U.S. dollar.
What consumers see happening on the shelves of stores, on their receipts, and on the blinking display of cash registers is actually caused by the precipitous plummet of the value of their currency.
It is not true that the goods cost so much more suddenly; it is that their currency does so much less. Prior to the onset of a currency collapse and the attendant hyperinflation, a dollar can be expected to purchase so much of any given commodity.
But the very next week, post-collapse, it only buys half as much. The week after that, only ⅛ as much, and the week after that only a tiny fraction.
The result in practical terms?
Prior to the collapse, let us say your $5 bill would buy you a gallon of organic milk at the grocery. After the collapse takes hold it only gets you a pint, then a mouthful, then a sip, then a thimble full.
Pretty soon you need thousands and thousands of dollars to purchase that same gallon of organic milk off of a grocery store shelf!
This is, understandably, absolutely calamitous for the average consumer who lives paycheck to paycheck, has no savings, and hardly any truly valuable hard assets. That being said, there is more to the currency collapse and subsequent hyperinflation than this.
The Currency Collapse-Wage Increase Death Spiral
The collapse of currency is not just a single, momentous isolated event, like a bomb going off or a volcano exploding.
It pays to think of it more like a weather system, or like the tides on the open ocean. Unfathomably complex, and incredibly powerful.
Consider this also. As we just learned, when the currency collapses, consumers perceive the plummeting value as increased prices on goods.
Accordingly, employers are forced to pay their employees more so that they can afford those same goods.
But because the employers must pay their employees more, the cost of labor skyrockets, and to offset increasing costs these employers, whatever their business, increase the prices of their goods and services to consumers, resulting in ever-increasing prices for those consumers.
In response to this, the government, being the sham organization that it is, starts recklessly printing vast oceans of fiat currency.
You can see where this is going: The vicious cycle continues, on and on, pretty much forever until something serves as a brake. Increasing wages, the ever-increasing cost of goods and services, and an ever-deepening ocean of printed money.
This is what is known as the “Price-Wage Death Spiral”, and it is the chief calamity that is inflicted upon citizens when their currency implodes utterly.
It is this effect that has given us such shocking historical pictures as people bringing in wheelbarrows or cartloads full of money to buy basic commodities like a loaf of bread. It seems like a bad joke, like a staged photo.
It isn’t: this economic “storm system” is entirely real and has affected countries both rich and poor throughout recorded history, at least in the era of paper currency.
But, for all of this terrible news, there is a glimmer of hope for debtors should the US dollar collapse.
Currency Collapse: Good for Debtors, Bad for Savers, Terrible for Lenders
It isn’t all bad news. I mean, it genuinely is bad news because whatever gains you might make on the backside of hyperinflation pretty much everything else around you is going to be falling apart, but never mind that for a moment.
As it turns out, debtors might be advantaged during a period of profound hyperinflation if they can set themselves up for success with enough cash on hand prior to or immediately following the big drop.
This is because hyperinflation is good for debtors but terrible for lenders. Consider it this way: Your debt, however much you have accrued and for whatever reason, does not scale with the price of goods.
In fact, the plummeting value of the currency is good for debtors because of the reliably increasing price of labor.
If you can keep your job, you’ll be getting paid a fortune in bills (though they are increasingly worthless) but those bills spend just the same as always against the debt you already have.
This, you might say, is tough luck for lenders. You can pay them back with currency that is basically worthless and they’ll have to honor the terms of the agreement as it stands.
Enjoy your Monopoly money and thanks for playing, banker man!
But don’t feel too bad for them because the opposite is also true: Anytime the value of the currency rises, lenders stand to profit even more on the debt that you already owe them.
That’s because you’ll be paying them with currency that is more valuable than it was when you made the bargain.
Unfortunately, those of us who try to be fiscally responsible and save money without investing it will lose out big during a currency collapse.
That fat, chunky nest egg that you have been building since your early twenties, the one that you thought would carry you through any disaster great or small, might quite literally be worth only peanuts when hyperinflation takes hold in the aftermath of a currency collapse.
The point of all this is to impress upon preppers how important it is that you become financially fit and prepared to go along with all of your other preparations in life. It is not enough to save, invest and earn more.
You must make yourself financially antifragile and also become acutely aware of your own financial position as the monetary “ecosystem” around you shifts and changes. Failing to do this, could see yourself metaphorically swept out to sea in very bad weather…
What Will Cause Economic Collapse
The U.S. economy has been holding on—barely. But they are facing $18 trillion in debt and by anyone’s account, that isn’t good or even remotely sustainable.
It nearly crashed in 2008 and has yet to truly recover from that near catastrophe. With this in mind, an economic collapse in the U.S. is not just possible, but highly probable. The question is are you prepared?
First, let’s take a quick look at what could cause an economic collapse in the U.S. There are a number of various scenarios that are entirely possible, and if they happened, would lead to a collapse. These include:
- The U.S. dollar quickly loses value: This would result in hyperinflation.
- A run on the banks: Banks would close and lending and cash availability would disappear.
- A cyberattack on the financial system: This would halt all electronic transfers of funds between people and institutions, paralyzing the banking system.
- Terrorist attacks: This could cause the trucking and transportation system to come to a halt, leaving grocery store shelves empty and people hungry and getting desperate.
- War: Yes, a major war would stretch the resources of the U.S. so thin, the economy would suffer.
- Pandemic: If a serious pandemic broke out, it would badly damage the U.S. economy. Many people would not be able to work and the population would decline.
- Lack of confidence in the Federal Reserve, the President, or an international event: A lack of confidence in any of these could cause people to stop spending money, slowing down the economy and causing a chain reaction.
Now, since the U.S. economy is such a large beast, it will be difficult to bring it down, but considering how close we came in 2008, it would be unwise to ignore the possibility.
With these potential causes in mind, let’s take a look at what will happen if economic collapse were to become a reality.
Results of Collapse
The results of an economic collapse would be brutal. The following would be experienced by everyone:
- No access to cash or lending: Banks would close, bank machines would cease to operate, and there would be no access to credit.
- The supply of groceries, gas and other needs would be low.
- Civil unrest and criminal activity might become a problem.
- Interest rates would increase substantially.
- Demand for the U.S. dollar on a global scale would decrease as investors turned to other currencies.
- Hyperinflation could become an issue.
In essence, with the collapse, the dollar would be worth less, but things would cost more. Survival in this society would be difficult.
Inflation or Deflation
When the economy goes sideways, the result will be deflation or inflation. The short version is:
- Deflation (decreasing prices) increases your debt
- Inflation (increasing prices) decreases your debt
While you don’t want debt in any economy, if you are caught in an economy with inflation, your debt will effectively decrease.
Essentially, inflation often brings an increase in income, which means you will have more money to pay off your debt, which was money spent when things cost less.
Obviously, this will only benefit you if your income increases and your interest rate doesn’t. There is a lot of risk in this scenario.
When it comes to deflation, the cost of your debt will effectively increase (even if your interest rate decreases). Every $100 you spend on your debt could purchase more when it comes to food, gas, and other necessities.
You are essentially taking your money and spending it on paying down the debt you incurred when goods cost more.
In addition, it is common for people to people and companies to reduce their spending when prices fall, which means that companies lose revenue and they need to cut jobs. If you lose your job, then you have no income with which to pay off your debt.
Ultimately, there is no way to know for sure what will happen when the economy collapses.
Even though there is a chance you would come out unscathed or even better off if you carry debt into inflation, your safest bet is to protect yourself as best you can by getting out of debt and ensuring you stay out of debt.
When you don’t owe the lenders money, you aren’t under their thumb and you can truly be self-sufficient and worry-free.
How to Protect Yourself
You need to protect yourself in case of economic collapse. That means preparing ahead and gathering both hard assets and getting out of debt. Each of these is equally important.
Invest in Hard Assets
Chances are you already have some hard assets tucked away. These are the tangible items you need that will be difficult to acquire after a collapse and will bring you to full preparedness. They include:
- Medical supplies
- Arms and ammunition
- Any other items you would store away for a catastrophic event
This is what most preppers think of when they prepare for disaster or SHTF, but any major disaster is likely to bring down the economy, so your finances play a significant role in your ability to survive.
Get out of Debt
Many people believe that after the U.S. economy collapses, they will no longer have to worry about their debt. This is valid—if the event is significant enough to really tear apart the fabric of the U.S. economy and life as we know it.
Yes, a zombie apocalypse would qualify, as would an incredibly devastating pandemic, a major war, or a large meteorite impact. Essentially, the event would have to be incredibly catastrophic for the players in the financial industry to not be able to collect on their debt.
Most people have some form of debt, particularly credit card debt. Many people also have car financing/loans, college debt, a line of credit, and/or a mortgage.
Having said this, the first thing anyone should do is avoid getting into debt as much as possible. Instead of using credit cards, pay cash, and if you can’t afford it, don’t buy it.
It’s really that simple, but not always easy. You can also alter your lifestyle to spend less money. The following are some of the ways you can do that:
- Embrace DIY
- Become a bargain shopper
- Create a budget and stick to it
- Be mindful of every dollar you spend and on what you are spending it
Second, you should pay off all the debt you do have as quickly as possible. There are great methods out there for paying down credit card debt, which is probably the highest interest rate debt you have. You can use this method:
- List all your debt from smallest to the largest amount owing.
- Pay the minimum payment each month on all those debts and add as much extra as you can to the payment at the top of the list (if there are any that are the same, pay off the one with the highest interest rate first).
- Once the first on the list is paid off, add the minimum plus the extra you were paying on it to the payment of the second debt on the list.
- Continue this until everything is paid off.
You will feel good striking a debt off your list and over time you will get through them all. Then you can take the extra money you no longer have to pay on your credit card debts and apply it to your mortgage and other loans.
Get Out Of Debt Now
In the end, getting your financial house in order is just good sense. Even if the economy doesn’t collapse, getting out of debt and living within your means is the smart thing to do.
When you don’t owe money, you can be more self-reliant, no matter what happens in the world. And isn’t being self-reliant in the face of any event and any type of society what prepping is really all about?
An urban prepper and rural wannabe, Karen has been working as a freelance writer for a decade and prepping for about half that time. She has gathered a wealth of knowledge on preparing for SHTF, but there is always more to learn and she has a passion for gathering and sharing that knowledge with other like-minded folk. Karen lives in London, Canada with her two children and plethora of cats.