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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

#161

Post by RickJWagner »

lawtguy wrote: post #158
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, b…

Agreed.

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

#162

Post by rmrm »

nerfhammer wrote: post #155
rmrm wrote: post #129

Earlier quoted context omitted.

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.

Interest rates fell for what, 40 years, creating the great bond bull market? Things can tend to trend, not happen all at once and discretely. Maybe that means the market was horribly horribly wrong for 40 years, I dont know.

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

#163

Post by skookumchuck »

prokes wrote: post #146
skookumchuck wrote: post #133

Earlier quoted context omitted.

> happy with their interest returns being so high. The "returns" were rarely above the inflation rate, plus you got to pay income tax on those illusory "returns". Savvier people would shift their money into assets that kept or increased their value independent of inflation, such as equities and real estate.

I question the equities and real estate being independent from inflation bit: if interest rates are at 20%, imagine the interest cost of a mortgage! Prices have to come down to compensate.

Equities return, on average, 7% in real terms. Meaning they are good investments in inflationary times.

Another way to look at it is inflation means the dollar is worth less, not other things that are not pegged to the dollar.

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

#164

Post by Lerc »

matte_black wrote: post #3

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

It always amused me that the thing that dated Die Hard so much was this line

“When they touch down, we'll blow up the roof, they'll spend a month sifting through rubble, and by the time they work out what went wrong, we'll be sitting on a beach, earning twenty percent.

Of all of the crazy things in the film, Twenty percent seems the most unimaginable to people who have only experienced recent times.

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

#165

Post by Naritai »

caf wrote: post #150
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…

You don't have to go for all-fixed or all-variable: you can typically split your loan and fix part of it. This effectively lets you hedge against the interest rate risk - you aren't as exposed to rising interest rates, but also don't benefit as much from falling rates. The main downside of fixed loans is that you usually can't reduce your interest payments by making additional repayments (because ultimately they are…

Depends on where you live. California state law requires all lenders to except early payments, so a fixed loan holder in California really gets the best of both worlds.

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

#166

Post by daurnimator »

adventured wrote: post #27
matte_black wrote: post #3

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

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…

> As of a year ago, in total around 39% of all outstanding Australian residential loan balances were interest only. [1] For those that recall the US real-estate bubble, that's a terrifying figure; the US interest-only share of the market during the crazy years of the real-estate bubble was single digits (5-8%). Australia is currently taking action to try to counter this, which is rocking their market presently. [2]

At least for myself, I have an interest only loan; but it comes with an offset account. In a day-to-day sense it's not very different to a normal mortgage with free redraws. I think this gets confused when comparing stats across countries, as offset accounts in the USA don't seem to really exist (while they are common in Australia).

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

#167

Post by beiller »

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.

I disagree. If inflation is very high, the fed (aka BOC for me) will increase the interest rate, and by correlation, a higher mortgage rate ensues. Less people qualifying for mortgages attacks the demand side of the market, lowering the prices of homes.

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

#168

Post by beiller »

adventured wrote: post #27
matte_black wrote: post #3

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

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…

I'd like to give my thoughts on unsustainable interest rates in Canada. Living here, I see it as yes, a raise in interest would be catastrophic for many home owners and their mortgage payments. But we are tied to USA's Fed. If they increase the rate, and we do not, our dollar will plummet in USD CAD terms. So in my eyes, it is a trade of between devaluing the CAD, thus every Canadian absorbing the blow, or home owners taking the interest rate hit. I am not sure which is the best outcome :)

edit to clarify why CAD will drop, is because CAD will be given up at the lower rate for USD which offers higher rate.

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

#169

Post by kazinator »

lotsofpulp wrote: post #152
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…

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?

Only that: TANSTAAFL.

Also: variable mortgages can also convert to fixed. If the rate is sitting flat, you're better off variable, with the option to switch to fixed if it looks like it will climb, than vice versa.

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

#170

Post by [deleted] »

cs702 wrote: post #134
matte_black wrote: post #3

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

For starters, the present value of all long-lived assets will come down -- stocks, bonds, real estate, you name it. As Warren Buffett explains: "[Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from…

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