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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

#181

Post by vivekd »

adrianratnapala wrote: post #180
cs702 wrote: post #134

Earlier quoted context omitted.

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…

While this make sense, I must put my skeptical-of-all-economics hat on when I see this: > People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In [other cases] , other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. In the case of bonds, it is just a mathematical identity, since the the int…

Is it really difficult to check empirically? It seems to be as simple as finding the number of investors and the amounts invested and checking that historically against the interest rate while controlling for things like population and GDP (or some other measure for disposable income available to be invested)

I guess it might be difficult to get numbers on how many people are playing the stock market and by how much, but you might be able to get that data from individual brokerages or looking at the number of brokerages and hedge-funds and checking their publicly filed financial reports.

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

#182

Post by cortesoft »

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.

I meant the inflation adjusted value of your debt.

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

#183

Post by guelo »

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…

> the present value of all long-lived assets will come down

That's not true for at least the last two asset bubbles. Interest rates were 4-5% leading up to '07 housing bubble and 5-6% leading up to '00 stock market bubble. Inflation was mostly higher than now, in the 2-4% range.

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

#184

Post by dragonwriter »

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…

> No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments".

No, you can get mortgages they are fixed for the life of the loan.

> Fixed rates are not free; you pay extra for the fixing.

You do typically start with a higher rate, but when we shopped for loans last, the variable rate loans all had a floor very near the initial rate and interest rates were at historic lows, so either the momentary extreme lows would last indefinitely or fixed rate would be cheaper over the life of the loan.

Further, if interest rates do drop, you can refinance a fixed rate loan down, minimizing the difference between it and a variable rate, even if the latter doesn't have a floor that prevents meaningful reductions, where variable would be best. OTOH, where fixed would be best (with rising rates), variable leaves you high and dry.

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

#185

Post by hueving »

adrianratnapala wrote: post #180
cs702 wrote: post #134

Earlier quoted context omitted.

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…

While this make sense, I must put my skeptical-of-all-economics hat on when I see this: > People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In [other cases] , other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. In the case of bonds, it is just a mathematical identity, since the the int…

The interest rate set by the government is not the interest rate on the 2/5/10/30 US government issued bonds.

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

#186

Post by simonh »

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…

That just puts the crush on the sectors that Offer low wage jobs, increasing their costs and the prices they must charge their customers. The people who do get those jobs earn more, but there will be fewer of them, making the poverty trap even deeper.

I’m beginning to think a low Basic Income might help, maybe as little as a hundred bucks a month. The problem with current BI tests is they are Big Bang experiments - big basic incomes for a tiny number of people. However a relatively low BI combined with moderate minimum wages could effectively act as a subsidy on low paying jobs. It would have to be funded by a tax increase, but a relatively modest one. This should make more low paying jobs viable to offer, make them more economically attractive to workers in terms of total earnings, and make the businesses that employ people on low wages more price competitive, increasing low wage employment. All without the massive distortions to the economy a high BI could cause.

This approach to BI wouldn’t free everybody up to become artists and explorers, but that was always a fantasy anyway. Somebody has to do the productive work somewhere, the trick is to make that work progressively more secure and rewarding.

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

#187

Post by collyw »

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 hope so as I just signed up for a mortgage after years of waiting for prices to drop.

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

#188

Post by shams93 »

simonh wrote: post #186
lawtguy wrote: post #158

Earlier quoted context omitted.

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…

That just puts the crush on the sectors that Offer low wage jobs, increasing their costs and the prices they must charge their customers. The people who do get those jobs earn more, but there will be fewer of them, making the poverty trap even deeper. I’m beginning to think a low Basic Income might help, maybe as little as a hundred bucks a month. The problem with current BI tests is they are Big Bang experiments - b…

If we stop running a military empire we probably have enough peace dividend to provide a $45,000 a year BI that would truly make a difference. To do it we have to end standing armies and let all of the non-violent offenders out of prison. We would have to make deals with all the other countries to put an end to standing armies as a thing and use the UN to cooperatively resolve conflicts. The amount wasted on the military and war is staggering.

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

#189

Post by thisisit »

harry8 wrote: post #156
cyberferret wrote: post #53

Earlier quoted context omitted.

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…

> You really wanted to have as much debt as you could service without going bankrupt.

This is an interesting thought. I have mostly heard this advice for corporate. Companies are encouraged to take on as much leverage as they can without affecting their bottom line. But I never thought it can be applied to personal saving and market crashes too.

I had couple of questions - how do you calculate debt or leverage at personal level?

The savings example - wouldn't the savings increase as well?

Should you look to increase your leverage in times of high interest or a low one?

And lastly, how do you find assets which aren't hit by inflation?

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

#190

Post by ganeshkrishnan »

shams93 wrote: post #188
simonh wrote: post #186

Earlier quoted context omitted.

That just puts the crush on the sectors that Offer low wage jobs, increasing their costs and the prices they must charge their customers. The people who do get those jobs earn more, but there will be fewer of them, making the poverty trap even deeper. I’m beginning to think a low Basic Income might help, maybe as little as a hundred bucks a month. The problem with current BI tests is they are Big Bang experiments - b…

If we stop running a military empire we probably have enough peace dividend to provide a $45,000 a year BI that would truly make a difference. To do it we have to end standing armies and let all of the non-violent offenders out of prison. We would have to make deals with all the other countries to put an end to standing armies as a thing and use the UN to cooperatively resolve conflicts. The amount wasted on the mili…

Unfortunately this is just wishful thinking. This is not going to happen anytime soon; maybe not in our lifetime. This does not mean we should not work towards it
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