The Era of Very Low Inflation and Interest Rates May Be Near an End • Hacker News Board

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#111

Post by nwatson » Thu, Apr 26, 2018, 9:53 PM UTC

jamie_ca wrote: post #109

cortesoft wrote: post #90

Earlier quoted context omitted.

Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.

For fixed rate, you'll get hit when you renew at the end of the term (typically 5y). Say you've got a 5 year fixed mortgage, at 3.49%. You buy a new home, taking a $500k mortgage at 25y amortization. That's $2494/mo. At the end of the mortgage, you'll have $431,321 remaining on the loan. Renewing, if you find the fixed-rate amount is up two points to 5.49%, your 20 remaining years now costs you $2950/mo. If you're ta…

That's not a "fixed-rate" mortgage (at least in the U.S.), because fixed-rate mortgages set a fixed interest rate until the entire mortgage principal is paid down to $0.

It seems like you're describing a https://en.wikipedia.org/wiki/Balloon_payment_mortgage, where you pay a fixed (or perhaps variable?) rate for a few years, but then need to make a huge balloon payment on that mortgage at the end of the term (usually done by arranging a separate mortgage).

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#112

Post by hop » Thu, Apr 26, 2018, 9:54 PM UTC

lowdest wrote: post #88

rmrm wrote: post #65

In a world where inflation is going to go up, what should one invest in? People will often say gold. Which I guess is a proxy for any fixed supply asset. But weve seen price inflation in many things other than gold, such as houses and land, art, stock prices. Most things of lasting value ie not consumables. Does a precious metal have some other special qualities that make it behave poorly relative to other limited va…

Get a mortgage (or otherwise use dollar debt.) The dollars that you owe will shrink.

But if interest rates keep going up, it could depress housing prices (or at least stunt it relative to inflation).

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#113

Post by Xylakant » Thu, Apr 26, 2018, 9:55 PM UTC

mattmanser wrote: post #101

cortesoft wrote: post #90

Earlier quoted context omitted.

Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.

In the UK mortgages aren't fixed for the lifetime of the mortgage. Not sure about the rest of the EU. Ours are like 3/4/5 year fixed rate then revert to a bad variable rate, at which point you get a new mortgage.

In Germany, 10 year fixed mortgages are common, though shorter terms get you lower interest.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#114

Post by Judson » Thu, Apr 26, 2018, 9:55 PM UTC

jamie_ca wrote: post #109

cortesoft wrote: post #90

Earlier quoted context omitted.

Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.

For fixed rate, you'll get hit when you renew at the end of the term (typically 5y). Say you've got a 5 year fixed mortgage, at 3.49%. You buy a new home, taking a $500k mortgage at 25y amortization. That's $2494/mo. At the end of the mortgage, you'll have $431,321 remaining on the loan. Renewing, if you find the fixed-rate amount is up two points to 5.49%, your 20 remaining years now costs you $2950/mo. If you're ta…

I'm sure this is US-centric, but the standard fixed rate products for primary-residence home loans here are 30yr and 15yr.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#115

Post by danieltillett » Thu, Apr 26, 2018, 9:56 PM UTC

cyberferret wrote: post #53

matte_black wrote: post #3

I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?

I recall a time of nearly 20% interest rates here in Australia a few decades ago. As far as I can remember, it was all just business as normal for most people. It all comes down to just how much debt you own. If I recall, people who were highly leveraged or had negatively geared property were hit the hardest. People with actual savings in the bank were actually happy with their interest returns being so high. Househo…

Having lived through the 20% interest days here in Australia it was far from "business as normal". We had a massive recession shortly afterwards, house prices crashed and unemployment went over 10%.

I don't think we will ever see 20% interest rates again because the level of debt here in Australia is so much higher now. If interest rates even get to 8% it will be like 1990.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#116

Post by millettjon » Thu, Apr 26, 2018, 9:56 PM UTC

ajross wrote: post #47

adventured wrote: post #27

Earlier quoted context omitted.

It's almost guaranteed we are not leaving a world of low interest rates (vs historical norms of the past 30 or 50 years). Most of the global economy is loaded up on debt: Japan, China, the US, large parts of Europe. These days it's the exception when a country has a modest debt context, whether at the government level, corporate level, or household level. Countries that we normally think of as very well off, such as…

> Countries that we normally think of as very well off, such as Denmark, Sweden and the Netherlands are among the most indebted people on earth in terms of household debt to income. They can't afford much higher interest rates at all, That's a little mixed up. The effect of inflation is to reduce the effective size of debt, not increase it. So if you owe someone $500US(which has a barter value of ~100 lattes), and a…

In Chile mortgages are denominated in a separate currency UF which is inflation adjusted. So the wealth transfer goes the loan holder.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#117

Post by nerfhammer » Thu, Apr 26, 2018, 9:57 PM UTC

rmrm wrote: post #65

In a world where inflation is going to go up, what should one invest in? People will often say gold. Which I guess is a proxy for any fixed supply asset. But weve seen price inflation in many things other than gold, such as houses and land, art, stock prices. Most things of lasting value ie not consumables. Does a precious metal have some other special qualities that make it behave poorly relative to other limited va…

if you assume markets price inflation expectations efficiently, the answer is invest in just about anything with a market price or interest rate.

Even bonds. Bonds are just the price of money in the future. If the market expects inflation then bond prices will drop accordingly to match it. Just don't stuff money under your mattress or keep it all in a checking account.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#118

Post by patmorgan23 » Thu, Apr 26, 2018, 9:57 PM UTC

herge wrote: post #93

cortesoft wrote: post #90

Earlier quoted context omitted.

Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.

Inflation won’t do anything to your fixed-rate debt, but hopefully it will increase your wages to make the debt easier to pay.

Most US mortgages have a fixed rate for 20 - 30 years with no balance further due at the end.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#119

Post by jgalt212 » Thu, Apr 26, 2018, 9:57 PM UTC

justonepost wrote: post #96

herge wrote: post #93

Earlier quoted context omitted.

Inflation won’t do anything to your fixed-rate debt, but hopefully it will increase your wages to make the debt easier to pay.

It will also increase the value of your house. Fix rate debt is definetly your friend.

Fixed rate debt may increase the value of your house if interest rates go up and your mortgage is assumable.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#120

Post by pyoung » Thu, Apr 26, 2018, 9:59 PM UTC

pishpash wrote: post #39

adventured wrote: post #27

Earlier quoted context omitted.

It's almost guaranteed we are not leaving a world of low interest rates (vs historical norms of the past 30 or 50 years). Most of the global economy is loaded up on debt: Japan, China, the US, large parts of Europe. These days it's the exception when a country has a modest debt context, whether at the government level, corporate level, or household level. Countries that we normally think of as very well off, such as…

Why does loaded up with debt imply interest rates will be low? Most debt is fixed-rate and not inflation-adjusted so there is a strong incentive to drive up inflation and interest rate with so much outstanding debt. This may fail in which case you get a deflationary collapse, but a priori it's not clear at all which direction things go. If the stagflation era of the 70's is any guide, the world will undergo a signifi…

> Most debt is fixed-rate

While technically true, the term of the loan matters. The government (and most companies that issue bonds) have revolving debt. I.e. they are continuously issuing new debt as existing debt expires. So while inflation theoretically makes your existing debt cheaper, it might not matter that much if you still need to rely on the debt markets in order to fund operations.