
The Era of Very Low Inflation and Interest Rates May Be Near an End - digital55
https://www.nytimes.com/2018/04/26/upshot/the-era-of-very-low-inflation-and-interest-rates-may-be-near-an-end.html
======
SCAQTony
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 practically double after a 10-year period.

Here are the historical CPI numbers from 1913 to 2017 —(1970 to 1980 was not
pretty.)

[https://www.minneapolisfed.org/community/financial-and-
econo...](https://www.minneapolisfed.org/community/financial-and-economic-
education/cpi-calculator-information/consumer-price-index-and-inflation-
rates-1913)

~~~
lawtguy
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.

~~~
simonh
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.

~~~
shams93
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.

~~~
ganeshkrishnan
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

~~~
kirubakaran
Europe went from World War II to Schengen agreement in 40 years.

------
elvirs
I am not buying that inflation is low. Property taxes and housing cost
(especially rent) has doubled in last 10 years in New York. I think so has the
medical costs. Just because gas prices are low dose not mean inflation is low

~~~
samsonradu
Housing is not included in the CPI I believe.
[https://economics.stackexchange.com/questions/4777/why-
arent...](https://economics.stackexchange.com/questions/4777/why-arent-house-
prices-included-in-cpi)

~~~
elvirs
CPI does not include rent but thats what more than half of average couples
combined income is spent on. (Couple with full time $15 per hour jobs living
in $2000 per month apartment)

~~~
dragonwriter
> CPI does not include rent

CPI includes both rent costs for actual rentals and imputed rent for owner
occupied housing. [0]

> but thats what more than half of average couples combined income is spent
> on.

More like a quarter. [1]

[0] [https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-
an...](https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf)

[1]
[https://www.bls.gov/news.release/cesan.nr0.htm](https://www.bls.gov/news.release/cesan.nr0.htm)

------
samsonradu
> So as long as the moves don’t go too far, increases in inflation and
> interest rates would be a sign the global economy is returning to a more
> prosperous equilibrium like the one that prevailed before 2008.

Pre-2008 was quite far from a prosperous equilibrium, otherwise it wouldn't
have caused the crisis.

~~~
wuliwong
It is pretty shocking for someone to consider the years leading up to 2008 as
being in equilibrium, economically.

------
MrEldritch
"And if threats of a trade war with China or other countries turn into
reality, this will tend to increase inflation, driving up prices both directly
through new tariffs on imported goods and indirectly by encouraging less
efficient production."

...I'm confused as to why either of those effects are supposed to be _good_
things.

~~~
craftyguy
Those aren't the 'good things' that trade wars are supposed to bring. Some
people believe trade wars bolster local economies, by giving local
manufacturers a price advantage for their goods.. thereby increasing demand
for local products and "increasing jobs". I don't think it has ever worked out
that way, despite all the rhetoric.

~~~
simonh
Quite. Since those locally produced goods are more expensive (otherwise they’d
have been locally produced already), everybody buying them now has less money
to spend on anything else, reducing consumption and hitting the rest of the
economy. Then you’re trapped, because if you try to unwind the damage, those
jobs you did create go away again.

------
rmrm
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 valuable assests, and then well?

What say you HN? Whats the play to protect ones assets? Or does one just need
to avoid cash and bonds?

~~~
arkona3
... if I mention that very obvious deflationary fixed supply asset I will get
downvoted into oblivion on Hacker News.

~~~
rohit2412
I think its inflationary actually (beyond the current speculation).

Consider that the miners will always produce a selling pressure on
cryptocurrency (because equipment+electricity+labor costs), it stands to
reason that cryptocurrencies will always have more sellers than buyers (again
no new speculatary buyers for store of value, just pure currency as it was
intended initially). This constant selling pressure will add inflation
(increasing supply, decreasing price) to Bitcoin. Actually, once a stable
price is reached for a long enough time, this constant inflation should make
it a viable currency, and unsuitable as a store of value.

~~~
hvidgaard
Unless the majority of miners agree, there will never be mined more than 21
million btc, and we already know that a none trivial fraction of those coins
sit in wallets that no one controls, and thus are completely out of the
market.

------
tunesmith
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.

~~~
msegal
Rents will increase, your mortgage will not if you're locked in. The resale
value of your house will be pushed down by reduced affordability, but pushed
up by higher rents and cost of goods. Ultimately owning a hard asset in an
inflationary period is a good idea.

~~~
debacle
The value of most residential property is tied to demand, and demand is tied
to interest rates and ability to borrow. If most people can't borrow 300k+,
most houses are going to see a drop in value.

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tanderson92
> The shift looks to be driven mostly by a rise in investors’ expectations for
> future inflation. In the United States, prices of inflation-protected bonds
> imply that investors currently expect consumer prices to rise 2.09 percent
> annually over the next five years, up from 1.65 percent expected in
> September.

This claim that the shift is due to inflation expectations is inconsistent
with the data. Most of the rate increases has been due to real interest rate
increases, unless I am missing something which I don't think I am.

source:
[https://fred.stlouisfed.org/series/T5YIE](https://fred.stlouisfed.org/series/T5YIE),
[https://fred.stlouisfed.org/series/DGS5](https://fred.stlouisfed.org/series/DGS5)

~~~
pishpash
It has been both, about half and half.

~~~
tanderson92
Right, so I don't understand the confidence with which the reporter is
mentioning only one and implicitly attributing the rise exclusively to it.
Even if you use 50% of the effect as being due to one or the other as the
threshold, it's actually been more due to real interest rate increases (only
55-60% so you're right it's like half and half), so the piece is just really
baffling.

------
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.

------
davewritescode
Housing market should cool off bit. When people buy houses, they look almost
exclusively at the monthly payment which includes interest, taxes and
insurance.

The FED will raise rates slowly to avoid crashing the economy

------
neilwilson
They've been saying that about Japan for decades.

Still waiting.

~~~
graeme
I think some people have predicted that Japan's rates might rise in the long
run. Has anyone serious made predictions of a _near_ end to Japan's current
period?

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

~~~
adventured
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 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,
it would collapse their housing markets and shatter their household finances.

Australia is in the same boat, two years ago nearly 1/2 of all new Australian
mortgages were interest only mortgages; over the last 10 years, the average
has been about 35% of all new Australian mortgages have been interest only (in
a nation where their housing market is 4x the size of the economy; by
comparison, the US housing market is 1.5x the size of its economy). 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]

The solid gains Canada made in their household wealth figures over the last
decade? Almost entirely from their real estate bubble, which has produced a
housing market that as a % of GDP is 2/3 larger than that of the US (the
Canadian housing market is 2.5x the size of their economy, up from about 1.6x
in 2007). They also can't afford significantly higher interest rates.

New Zealand is similar to Australia, their housing market is 4x the size of
their economy. The UK's housing market is 3x the size of their economy, or
twice the ratio of the US. These countries are all fragile when it comes to
higher interest rates on mortgages.

Even the Swiss are in terrible shape, their household debt as a percentage of
GDP is 50% higher than the US ratio.

In the US, its households are in reasonably good shape on debt; US household
debt to income figures are the best they've been in decades, essentially the
lowest the US has on modern record. Its corporations have loaded up on debt
over the last ten years, and of course the Federal Government has taken on
immense debt over the same span of time. The US Government simply can't afford
4-5% interest rates on its soon to be $30 trillion in public debt; which is
another way of saying: in the US we are never returning to normal interest
rates, not under any circumstances. The Fed will go into perpetual QE mode, as
Japan has, to guarantee that.

Germany is a particular stand-out among high income nations when it comes to
having low government debt, no real estate bubble, and no serious household
debt to income ratio problem.

[1] [https://i.imgur.com/2Z0mzou.png](https://i.imgur.com/2Z0mzou.png)

[2]
[https://www.bloomberg.com/news/articles/2018-04-15/tougher-l...](https://www.bloomberg.com/news/articles/2018-04-15/tougher-
lending-standards-put-australia-property-on-shaky-ground)

~~~
ajross
> 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 burst of inflation hits the dollar
such that the price of a latte doubles, then you only need to pay back 50
lattes to the lender. You win!

Obviously it's the holder of the debt that ends up on the hook for this. Which
is why interest rates of lots of debt get indexed in some way to adjust with
inflation (or things like the prime rate, which itself tends to track
inflation). So the net effect is complicated. But on the whole it's the
lenders of money who stand to lose the most when inflation rises. Those who
have borrowed come out ahead, on average.

So the net effect of inflation (assuming no second order effect like a global
crash, yada yada yada) is to effect a wealth transfer from the _lenders_ of
money (e.g. banks and institutional investors) to the _borrowers_ of money
(consumers and governments).

There are some very smart people who think this isn't necessarily a bad thing
at all.

~~~
amag
> Those who have borrowed come out ahead, on average.

I once stayed in a hotel room where the shower had the heat I wanted _on
average_ , it was horrible.

But when it comes to real estate, as long as you can afford the increase in
interest you'll probably be fine. My concern, here in Sweden at least, is that
given the current real estate prices here, I can't see how people with average
incomes can afford a more normal interest rate like 4-5%.

~~~
klipt
In America, most people get fixed-rate 30 year mortgages, so if you buy now,
even if interest rates rise subsequently, your monthly payment doesn't change
for the next 30 years.

------
jacksmith21006
Not convinced. Was talking to my 20 year old kid and was thinking he has never
seen anything but crazy low interest rates for his entire life.

But I just do NOT believe things are going to change. Guess we will see.

------
s2g
So will this cool the market and cause housing prices to become less
incredibly insane, or will it just make things more expensive.

I'm gonna guess the latter because god forbid something good happens to my
generation.

------
trustno1
So our savings will be inflated away at an only a slightly slower pace now?
How kind of the Federal Reserve!

~~~
dang
Can you please not create accounts to use HN for political flamewar? This is
the sort of thing we're trying to avoid here.

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

~~~
trustno1
I'm sorry, what? Everyone commenting on this article is discussing inflation.

~~~
dang
Yes, but snarky blasts of the Fed and invocations of "taxation without
representation" cross out of thoughtful discussion and into ideological
battle, which is an entropic state we're trying to avoid on this site.

------
lewis500
"if threats of a trade war with China or other countries turn into reality,
this will tend to increase inflation, driving up prices both directly through
new tariffs on imported goods and indirectly by encouraging less efficient
production."

I wouldn't call this "inflation" in the sense economists mean it. This could
cause a one-time rise in prices, but it would not necessarily mean permanent
change in the rate prices go up each year.

Maybe some of yall would like this federal reserve simulator I made last year:
[http://lewis500.github.io/macro/](http://lewis500.github.io/macro/) It is one
of my least popular explorable explanation but also one of my favorites.

