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

nytimes.com

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

#151

Post by someone454 »

umeshunni wrote: post #127
kazinator wrote: post #121

Earlier quoted context omitted.

No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars. Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay. It only makes sense to go fixed rate if you're very sure that the interest will climb over the next ter…

From another comment below: In the US, fixed rates are for a 30 year term. Countries like Canada and Australia have 10 year terms as a max, with most people electing for something shorter as the rate goes down.

Or 15 year terms

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

#152

Post by lotsofpulp »

kazinator wrote: post #121
anon84598 wrote: post #100

Earlier quoted context omitted.

It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.

No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars. Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay. It only makes sense to go fixed rate if you're very sure that the interest will climb over the next ter…

If the interest rate goes down, you can just refinance. The fixed rate protects you from upward movement, and being able to refinance protects you from downward movement. What am I missing?

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

#153

Post by toomuchtodo »

gibybo wrote: post #143
toomuchtodo wrote: post #130

Earlier quoted context omitted.

Almost no US mortgage products are assumable.

All US government home loan programs are assumable (FHA, VA, and USDA). This Quora answer indicates that FHA loans alone alone make up a majority of new home loans in the US: https://www.quora.com/What-percentage-of-US-home-loans-are-f...

I should've said conventional loan products. Thank you for pointing out my mistake.

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

#154

Post by Jeema101 »

cobbzilla wrote: post #50
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…

Isn't QE just injecting more money into the system? How can that not result in inflation, eventually and if done excessively? It's the classic "more money chasing fewer goods." It's not just where the fed pegs the discount rate that drives inflation, it's also the money supply.

...and if inflation goes up, so does the cost of borrowing, unless banks are planning on loaning people money at below the inflation rate. There's no free lunch, unfortunately.

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

#155

Post by nerfhammer »

rmrm wrote: post #129
nerfhammer wrote: post #117

Earlier quoted context omitted.

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.

I guess bonds, if inflation expectations are constant, as they will drop if expectations rise as you say. Avoiding bonds would be a mechanism to avoid rising expectations. So I think this is technically correct, if things are static, but does not protect against rising rates, which I guess it my question.

Bonds are priced according to the market's best expectations of how much inflation there will be.

If there is more inflation than the market expects than you will lose money. But, are you smarter than the market?

Otherwise, if you only care about avoiding inflation just buy anything that is not a direct cash equivalent. Gold, iron, rocks, stocks, vespene gas, whatever.

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

#156

Post by harry8 »

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…

You missed it. It's subtle but it's a really, really big effect worth understanding. You really wanted to have as much debt as you could service without going bankrupt.

Australia had a massive redistribution of wealth from savers to borrowers. As long as you didn't become insolvent the more debt you had invested the richer you got.

Borrow $100k as long as your salary kept going up so you could make the payments every year the amount you borrowed was worth less. Think salary goes from $20k to $50k over 5 years. $100k borrowed goes from 5 times salary to twice. Borrow, and invest in anything that isn't hit by inflation. In the 80s houses did that job.

Now if you had $100k in the bank (or government bonds or similar). 5 times salary saved just became 2 times salary saved. Ouch.

Unanticipated inflation is always a redistribution of wealth from lenders (savers) to borrowers.

Of course if you borrowed for a car or a holiday that's something different but you are still paying it off with devalued currency.

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

#157

Post by SilasX »

protonfish wrote: post #91
quadyeast wrote: post #15

Earlier quoted context omitted.

I agree completely. Everything I buy has gotten much, much more expensive, food, housing, transportation etc. Not 2%/yr more like >5%/yr. The CPI is rigged. Probably in favor of those who must payout relative to it.

It's easy to rig - remove key commodities like food, fuel, housing from the calculations because the are "volatile" then base your numbers on products that are increasingly built overseas in nations with a impractically favorable exchange rate. That is, in fact, what has been done, but there is a limit to how long this ruse can last.

"Your food costs more, but if you bought a new iPad, it would be faster, so it balances out."

http://www.reuters.com/article/us-usa-fed-dudley-ipad-idUSTR...

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

#158

Post by lawtguy »

SCAQTony wrote: post #136

Hopefully wages rise with the Consumer Price Index (CPI). Arguably for the back-half of income earners this has not happened for decades. If we experience the same consumer price increases as was experienced through 1980-1990, rents and goods will go up an average of 5.4% each year over a 10-year period. If it gets as bad as the 1970-1980 CPI then rents, goods and services will rise almost 7.1% a year and will practi…

In the US, the combination of globalization, automation and lack of support for private sector unions means workers outside of the creative class have very little bargaining power. I'm sure workers will get raises, but I don't see much hope for them getting much above the inflation rate. The only political solution that seems to be getting any traction at all is raising the minimum wage. Some states are doing that, but I don't see the Federal minimum wage getting raised any time soon.

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

#159

Post by harry8 »

tunesmith wrote: post #137

Still having trouble figuring out of being a landlord of a second home is good or bad in this environment. You owe a fixed-rate mortgage, and you're charging rent.

If the real value of the residential property in future sale price and rent received goes absolutely nowhere. Having it mortgaged will cause you to win big.

Stupid example, say inflation goes to 7% year on year.

Your house is say $100,000 totally financed by debt.

You pay interest only on your loan.

10 years time, your loan is $100,000 and is worth $50,000 in 2018 dollars due to the inflation. If you have a 0% real return on the value of your house you can sell it for $200,000 in 2028. A nominal return of 100% over 10 years even with zero increase in real value of the house.

So if you have a good investment property it will go really well. But if you have something that becomes a future slum, you can still lose.

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

#160

Post by RickJWagner »

Ugh. Higher interest rates and inflation will work against those on the lower end of the poverty scale. (Yes, wages will go up. But not enough to match increases in the price of goods.) Those who need to borrow will fall even farther behind.

Low inflation and rates isn't ideal, but it's probably the best scenario when there is a big difference between high and low economic ends.

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