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The Era of Very Low Inflation and Interest Rates May Be Near an End (nytimes.com)
185 points by digital55 on Apr 26, 2018 | hide | past | web | favorite | 211 comments

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.)


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.

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.

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.

Wasted. I'm sure Iran, Bashar Al Assad, Putin and goodness knows who else would completely agree with you.

Anyway, the entire US military budget coms to about $2350 per adult American. Emptying half of the prisons would about double that (taking into account the productivity of released prisoners, the above includes full economic costs of incarceration). Only about $40,000 each left to find the funds for.

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

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


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

NY Case Schiller home price index is flat to slightly down over that period, actually. This is for the NYC metro area. I could be convinced that rent has doubled with housing price flat, but I'm guessing not?


Nationally there are some strong indications of housing inflation occuring. The median new US home price is up about 40% over the peak of the 2005-2006 real estate bubble, and it's up roughly 100% since 2000-2001:


Raw numbers are meaningless outside of context.

The Case-Schiller index the GP was referencing takes CPI inflation into account.

Sure. I was only responding to the New York part.

Metro area is a much larger sample size though; for certain rapidly gentrifying areas, like Long Island City, I could see there being a large increase which gets drowned out in metro-wide statistics.

OK, but you can't tell much about national inflation (even inflation in housing costs) from smaller-than-metro-area statistics.

Just because housing prices in NYC and healthcare costs have risen fast doesn't mean inflation is high.

This is why we calculate these numbers using a broad basket of various goods and assets.

Sure, but housing prices (nearly everywhere) have risen fast and healthcare costs (nearly everywhere) have risen fast. Education and Child Care have too.

The criticism isn't "inflation should be based on NYC rent." The criticism is "the basket of goods weighs nice-to-haves too highly, and important needs like rent/healthcare/education too low".

So while inflation (as officially defined by the consumer price index) is technically low, "real" inflation (as experienced in impacts to citizens cashflow) is significantly higher across the board.

Even when correctly measured, there will be a lag because there are many people who don't pay the new prices right away, and inflation is averaged over everyone.

Homeowners don't experience higher housing prices unless they decide to buy a new home. (Though they might have to pay higher property taxes.)

Renters might not experience higher rent right away, either due to rent control, or having a landlord that doesn't raise prices as fast as the market.

Your not taking about an inflation index thec, but a cost of living index. And they are not the same thing. There are many reasons the cost of living can change without a change in the currency, such as a change in the preference of goods or technological advancement in a particular field or price controls or regulation.

If you are going say "but the CPI does measure things that way" you are right. It has been well observed that the CPI had been looking more and more like a cost of living index for years (eg, the hedonics changes). This is why the GDP deflator is used more often to gauge inflation now, except it only come out quarterly with the GDP figures.

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."


Going from "I see higher inflation" to "a nationwide measure is rigged" is a big leap.

Rigged? All they have to do is change the methodology of how it's calculated.


Come on. If people stopped posting "I saw X once, so your national statistic is wrong" that would wipe out huge swathes of comments on.... OH!

The Fed's monetary policy exactly fits the definition of "taxation without representation".

Yes, put property prices have shot up PRECISELY BECAUSE INTEREST RATES ARE SO LOW. When interest rates and inflation are low- asset prices such as property go up.

High(ish) inflation/interest is a really good thing for workers because although repayments on their loan may briefly be high they decline in real terms at a much faster rate. The best bit is the principle declines at a much faster rate too- meaning that a worker can in fact pay off a mortgage in a decade or two.

This is sort of the same as "Look, it snowed in April, so much for global warming". Your local anecdote may not be representative of the whole economy.

My rent has increased about 10% over the past decade... And I live in neighborhood that pretty rapidly gentrified ~6 years ago. Yours doubled? Really?

My rent increased by a whole $50 a month from 2009-2016 and I moved once during that time period. I own a house since 2016.

I just looked up the current rent on the apartment complex I lived in from 2005-2009 in another part of the country. My rent didn't increase in those 4 years I lived there and the current rent is basically the same I was paying back then when you take into consideration CPI inflation.

Two data points, for what its worth.

whats your zipcode? I will try to look up history rental listings from your local apartment complexes on zillow to see if this is true. really curious

Housing is not included in the CPI I believe. https://economics.stackexchange.com/questions/4777/why-arent...

Housing is part of the CPI [0], contrary to what lots of people in the thread are saying.

Now, there are legitimate debates about the imputed rent method by which owner-occupied housing is included in the CPI, but housing is definitely part of the CPI.

[0] https://www.bls.gov/cpi/questions-and-answers.htm#Question_1...

You’re right. Housing isn’t a consumer good. But CPI does fail to measure inflation in consumer goods. I agree with op that there has been inflation for years.

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)

> 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...

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

It includes rent just not house prices because house prices reflect investment (cost of consumption in the future) more than immediate consumption. House prices are converted to a kind of rent equivalent before being included in CPI.

This is why I don't take the CPI seriously as a meaningful measure of inflation "on the ground." A key inflation metric that misses the major expenses of most people is IMHO borderline fraudulent.

From what I've seen inflation has been very high for the past 20 years, but has not been evenly distributed at all. The deflationary pressures of offshoring, automation, technological advancement, and device convergence have caused tech, appliances, and gadgets to drop dramatically in price, creating the illusion in many sectors of low inflation or deflation. Offshoring and automation have also held wages down and kept consumer product and service prices from inflating much. The Internet has completely collapsed the price of media (music, TV, news, etc.) too. If you're looking at these things then inflation looks low.

Tuition, health care, housing, and energy on the other hand have all inflated quite a bit. Housing is the big one. In some markets it's at the level of "real estate hyperinflation," rising to absolutely ludicrous 8-15X median income multiple prices. There's also been a lot of asset and stock price inflation and bubbles in things like trendy tech and cryptocurrencies can be considered secondary symptoms of a lot of money sloshing around.

I've heard the present condition described as "in-deflation": deflation in everything you make and in therefore labor, inflation in everything you need such as health care and housing/rent. My hypothesis is that this results from an impedance mismatch between inflationary industrial-era economics and monetary policy and deflationary information-age pressures. Both high technology and globalization are extremely deflationary. We did a ton of QE to re-inflate the economy after 2008 but since high tech and globalization were such powerful deflationary pressures the only place all that money could go was real estate, stocks, and speculative bubbles.

In any case they've pumped so much money into the economy we may now be about to see a little bit of wage growth.

> This is why I don't take the CPI seriously as a meaningful measure of inflation "on the ground."

But it (that CPI doesn't including housing costs) is a completely false statement that can only be made (other than dishonestly) if one lacks even a basic knowledge of the matter being discussed.

Inflation is not low, but the Fed must continually repeat that it is else the public would realize their savings and wages are being inflated away to pay off mountains of bad debt.

The fed's monetary policy is taxation without representation.

> Property taxes and housing cost (especially rent) has doubled in last 10 years in New York.

Same thing in Canada's larger cities (if not a doubling in much less than 10 years), yet we're told the change in the housing component of the CPI is < 2%. Lies, damn lies, and statistics.

Just going on zillow and looking up any local apartment listing in 2000-2500 range you can see prices have increased by 400-500 a month since 2011 yet the index shows 10% increase barely.

Ok this is getting ridiculous, I'm very curious what motive someone would have for downvoting this (other than my username). What is there to disagree with?

My hypotheses for why your comment was downvoted:

* Only two sentences

* Not relevant to the main topic of discussion

* Makes a vague claim

* Unsubstantiated by any source

* Claims that authorities are lying without specifying the particular authorities or particular lie

* Uses a mild swear word

* Resorts to cliche

* Doesn't teach the reader anything new or interesting

* Doesn't reflect any nuance or thoughtfulness

Not saying all these hypotheses are true, but they might explain why your comment was downvoted. I sincerely doubt it has anything to do with your username. Anyway, I hope you don't feel bad about the downvotes. Hopefully your future comments are perceived as contributing more value to readers. :)

Overall the comments on this article feel pretty substandard to me. A fair number of armchair economists are confidently explaining how things are going to unfold and how the system is nefariously rigged. For some reason, it seems the topic of economics brings out a lot of ill-informed speculation presented as fact.

> Only two sentences

As are many other comments in that subthread. Is conciseness against the guidelines?

> Not relevant to the main topic of discussion

Whether inflation is also understated in Canada and correspondingly low interest rates and their effects is not related to the topic of "The Era of Very Low Inflation and Interest Rates May Be Near an End", as well as the content of the rest of the sibling comments in that subthread?

> Makes a vague claim


> Unsubstantiated by any source

As with most other sibling comments, and not uncommon at all on HN, and also not a violation of guidelines.

> Uses a mild swear word

Wow. https://en.wikipedia.org/wiki/Lies,_damned_lies,_and_statist...

> Doesn't teach the reader anything new or interesting

You assume all readers are familiar with the interest rate and housing price environment in Canada, as well as the fact that inflation numbers are highly suspect? Possible I suppose, but what evidence do you have for this belief (assuming I haven't misunderstood)?

> Doesn't reflect any nuance or thoughtfulness

Perhaps I'm not aware of the nuance, and for that I apologize. I would appreciate if you could point out some of the nuance so I can learn.

> Anyway, I hope you don't feel bad about the downvotes.

I feel bad if the objectivity of the community is decreasing.

> For some reason, it seems the topic of economics brings out a lot of ill-informed speculation presented as fact.

While I didn't link to supporting evidence (I tried to find the "smoking gun" that I'd read before, but could not) have supporting, my words are an understatement of reality if anything.

Also, note that despite disagreeing with you, I upvoted you for actually contributing positively intended criticism, which I appreciate.

> 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.

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

I don't think it means the immediate time before 2008, but rather the generally prosperous post-WWII era

"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.

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.

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.

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?

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

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.

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.

there seem to be a lot of variants of them, for having a fixed supply :)

Fixed rate debt. If you have an income that will keep pace with inflation and you have low-cost debt, like a mortgage, you get to pay off the "dollar amount" of that debt using the inflated funny money.

Agree, that is potentially a very good one. We have that covered so far as a hefty California mortgage.

It would be nice if there were other avenues to take on low fixed rate debt, I suppose.

From what I've read, gold and other PM generally perform inversely to real interest rates (vs nominal FED rates). This somewhat makes sense, as gold has a carrying cost (storage, security, etc.) and earns no interest, whereas when real interest rates are high, the money will produce better yield in bonds and similar investments.

In a situation of runaway inflation, nominal interest rates are insane also (I've seen double-digit percentages per month in one hyperinflation event in a country I visited), but the real inflation is likely even faster, making real interest negative.

Precious metal, if held in physical form, has the unique property of being no-one's obligation. Additionally, it is by definition a bearer "instrument" and easily transportable, therefore suitable for mitigating political risk. This is why it performs well in times of crisis.

There is no one-size-fits-all answer to your second and further questions. Too much depends on individual circumstances, risk appetite and time horizon.

Your ending hints at my problem with inflation discussion and I suppose economic projections and asset price projections in general based on some macroeconomic fact.

One would assume based on the casual and confident nature in which people talk about them, that rising inflation should result in X. But if being honest they will also include "ignoring second order effects", which can mitigate or completely reverse the expected outcome. The complexity is monumental.

I believe one could say rising interest rates should reduce the value of existing fixed rate bonds denominated in the same currency. Im not sure a lot else can be said, with confidence. Much else is paradox.

Investing in the total market: vtsax because yes it will crash, but it will also recover.

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.

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.

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).

Fixed-rate mortgages aren't common everywhere.

A diversified portfolio.

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.

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.

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.

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.

That completely ignores the downward pressure on home prices that a high interest rate has. Inflation at 7% would be tied to significantly higher interest rates, which would reduce the buying power of potential buyers, which reduces home prices.

Leaving aside all the mechanics of timing the market such that you have a huge, low interest, fixed rate mortgage in hand when inflation magically jumps to 7%.

The first line says precisely this is the assumption. The second declares the example about to be relayed to demonstrate the effect of unanticipated inflation as a "stupid example." Sorry that wasn't clear enough for you. Yes anytime you invest in an asset that is a total loser financing working for you or against you is a case of "how bad you lose."

> 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/DGS5

It has been both, about half and half.

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.

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.

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

They've been saying that about Japan for decades.

Still waiting.

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?

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 government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.

Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there."

Source: "Mr. Buffett on the Stock Market," November 22, 1999 -- http://archive.fortune.com/magazines/fortune/fortune_archive...

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 interest rate can be nothing other than a relation between the face value and current price.

In all the non-tautological cases, Buffet admits that the effect is "obscured". Which is to say that it is just another reasonable sounding humanities-theory that is difficult to check empirically.

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.

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

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

we can consider 'value' but also recognize that actual market price is another thing. real estate prices can continue to go up and at times actually have gone up in environments where interest rates were rising.

as Buffet points out, there are additional important variables.

If the rate change is expected, shouldn't this be priced in?

> 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.

Maybe those bubbles would have risen even higher if the interest rates were lower.

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.

Household debt was not as bad back then as it is nowadays, so I don't expect it to go as well if we ever hit those levels again tomorrow.

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.

> 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?

Do I need to point out that anyone following advice from an (anonymous?) internet poster deserves to go bankrupt and none of the following is any kind of financial advice? Well I did, sorry.

> how do you calculate debt or leverage at personal level?

Can you make the payments? Chances of not making them next year etc. So much personally specific stuff in that there can be no rule of thumb. Is your job secure? Will your wages go up? How is your risk appetite? Why do you want more money - what do you want to spend it on, when, etc.

> wouldn't the savings increase as well?

You have $100k, you buy US Govt. Bonds with a 10 year term and an expectation of low inflation. Inflation rips (surprise!), your 100k buys a lot less stuff in 10 years time. The 5% coupon doesn't cushion that blow much. If the inflation is anticipated then you would have a very high yield on 10 year us govt bonds and there is no redistribution of wealth between borrowers and lenders. You get back a sum of money that buys a similar amount of stuff.

I've just described the simplest case with fixed coupon long term bonds, you can make it more complex with variable interest rate accounts or whatever and you'll see unanticipated inflation always is a redistribution to borrowers from lenders. "Pay off your loan with worthless currency." "Remember when you could get a beer for under $100?" Sounds ridiculous now, right? $10 beers used to be equally ridiculous.

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

No easy answer. Depends on your circumstances and preferences. If you do increase your leverage, can make the payments and your investment is an inflation hedge, unanticipated inflation is a win for you if that's what you want. There is additional risk involved, obviously. Putting money in the bank is almost certainly a losing proposition. In addition to the redistribution to borrowers the increased interest payments are taxed so you're going backwards. think 2% real interest 10% inflation for a bank interest rate of 12%. Well you're taxed on all %12. So some part of that 10% to compensate for inflation goes to the taxman and you're losing purchasing power of your capital.

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

Most assets are some kind of hedge against inflation. NOT bonds, obviously. But equities will likely be so, gold, real estate, antiques & jewellery. Think of an asset's price as a percentage of the average annual salary. If inflation rips will that percentage of salary change? Much? Why? With bonds the answer is yes and the reasons are pretty straight forward. With housing, rent is likely to be a fairly fixed percentage of salary, salaries double in nominal terms, rent will likely do the same. (But do consider what else is going on in an economy when inflation takes off, will the plant shut down making that place a slum? Likely it's more subtle than that). Buying an equity of a company that has sales, will their sale prices keep pace with inflation? You'd imagine McDonalds would, for example. Will their sales qty drop in an economy with high inflation is also worth considering and is a trickier question to get right. I'm partial to S&P500 index tracking funds, they're popular nowadays too. Obviously equities can crash in value over the short to medium term.

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.

Fair point. I was still only just out of school at that point, and as a young student with little debt, my world view (and that of my friends) would have been different from people who owned property or other investment vehicles that came with interest payments.

EDIT: But I also recall that those times were when high flying business people like Alan Bond etc. were still getting banks to throw money at them even though interest rates were astronomical. A large part of the problem which probably lead to the eventual crash and burn of the economy...

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 term. Not only that, that it will climb sufficiently enough to offset the cost of locking into the fixed rate so you still come out ahead. Once that term is up, you're no longer locked in; so you have to re-evaluate everything at the start of the next term.

(You don't have to do this upfront, either; variable rate mortgages have the option to switch to fixed for the remainder of the term.)

Anyway, people who go for fixed rate mortgages end up paying tens of thousands of dollars extra over the life of a mortgage, unless they are somehow able to game things in periods of rising interest.

When I was signing up for a mortgage, the financial institution offered to cover the lawyer's fees for all the paperwork, running into the hundreds of dollars. That offer was quickly rescinded when it became apparent that I'm declining the fixed term mortgage and opting for variable. That's obviously because the fixed term is good for them; that's why they incentivized it. When some aspect of a deal is good for you, it's never incentivized.

> It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term.

That's not true. I chose to pay an extra £30 a month on my mortgage because I'm not sure rates won't rise over 5 years, and I want to be confident of budgeting for the the next 5 years. I'm confident rates won't go down, but rates going up could affect me. Think of it as insurance. I don't take home insurance because I'm confident my house will burn down, I take it incase my house does burn down

Do you apply the same reasoning for the last payment of the fixed-rate term? £30 because you're not sure that the rate won't rise over the last month and end up costing you £60; good insurance?

I think fixed rate can make sense in some circumstances, but you need to factor in the expectation of eventually refinancing. But then frankly you should expect to refinance anyway. It's highly unlikely that the same mortgage will turn out to be just a suitable to your circumstances and the competitive landscape in 20 years time as it is now, or even in 10 years, whatever mortgage you choose.

Here's my (partial) heuristic. If you see adverts on TV for fixed rate mortgages, don't get one.

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.

You can get fixed rates on shorter mortgages in the US. I have been quoted fixed rates on 15 and 20 year mortgages in the past month.

> 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.

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?

There are fees and process time to refinancing that acts as a disincentive to do so; and for several decades the fixed rate (by design) has been higher than what the variable rate incurs over the term (at least in Canada, where the term and the amortization period aren't the same).

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.

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 backed by long-term bonds issued by the bank).

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.

I was quote young during that period (I'm 37 now) and even I remember people having heart attacks and / or defaulting on loans in Port Lincoln (highly leveraged commercial finishing outfits).

> 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.

Imagine this was done quickly:

1: everyone who's got a borderline repayable mortgage to get anything in the overheated market and hasn't increased earnings by some 20-30% since then goes bust. This creates a wave of increased supply.

2: everyone's willing to buy gets way less loan amount for same repayments. This severely reduces demand at current prices.

3: 1+2 force prices down, meaning some people end up owning banks more than their house is worth. In the US the banks are in trouble, as people start walking away from their mortgages. In the EU such people are stuck with negative equity.

Such a scenario is outright disastrous, so no sane government will try it. So, the only way out of low rates is to increase this gradually enough to not create visible waves. Which means all 3 happen, but at a magnitude where most people do not notice.

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.

I've heard of fixed rate mortgages up to 15 years, at interest rates as low as 1.6%-1.7% if you have a secure job and an established relationship with a landesbank.

In Sweden, lots of mortgages are adjusted every three months, and I would assume (though not certain) that a majority of mortgages are fixed on no more than two-three years.

German banks have always been extremely conservative when it comes to mortgages. It’s hard to even get a mortgage when you don’t have a secure job and bring a substantial down payment (like 20-30% of the house/apartment total).

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.

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.

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

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.

While they make up the moajority of new home loans, they only make up ~15% ot total mortgage originations, leaving 85% of homes being mortgaged with conventional mortgages.

I meant the inflation adjusted value of 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 taking a mortgage right at the edge of your expense threshold, that 20% jump in monthly payments can hurt.

The alternative is another 25y amortization for $2630/mo (and hey, inflation means you should be clear to $2730/mo to match your first mortgage) but that's just prolonging the life of the loan.

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).

I think people are getting confused.

Fixed rate means the interest rate doesn't change over the term of the loan. Compare this to variable or floating rates that can change.

The difference for the US is that the 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.

In the US your rate might never change. In other countries it changes when you refinance at the end of the term.

Guys, don't downvote him. Many parts of the world do it like that- your 30yr mortgage is really a series of 5yr balloon amortized for a 30 year period. They don't have the option of a true 30yr fixed.

Correct. And I know for at least Canada there are circumstances where you can be denied a renewal if you don't meet income requirements.

Let's say you refinance from 2% to 6% and your mortgage payment exceed loan to income ratios, you might have to sell your home.

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

For maybe 5 years, then it’ll come to hurt you when you have to re-sign at a new rate.

In your case 1, this refers to people who have variable rate mortgages, correct? What about people who have fixed rates?

They're eternally thankful for living in a country where you can get a fixed rate for more than 5 years.

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.

people who have leveraged themselves to the hilt to buy expensive real estate and are just managing to pay the mortgage will be screwed, when their monthly payment doubles or triples they'll have to unload, at the same time as everyone else in the same position depressing the market - there will be crying, the gnashing of teeth, and bankruptcies among those who don't sell quickly enough.

Remember your parents bought their house and paid these higher interest rates, house prices were lower than now partly because people could only afford so much of a mortgage.

If you live in the US, where you can lock in a 30yr rate, and you haven't you need to do it now, if you live in the rest of the world where mostly you can't you're screwed

Me neither, but I tend to think we'll not find out very soon. The article is heavily biased towards the US economy, meanwhile the EU, Japan still struggle with ~0% yields. Hell, Japan's been doing it since 1992.

All of a sudden the idea of having a "savings account" along side your "checking account," and buying "CDs" will make a whole lot more sense.

The average savings account interests are currently around 0.02% APY. Those kinds of numbers make savings accounts meaningless--people just use them as a second account to help their budgeting. CDs are not much better, at 2.5% for a 5-year.

Compare that to 8% APY for savings accounts and 12% APY 5-year CDs in the 1980s, and you'll understand why they exist at all. People actually had a reason to chose interest-bearing savings accounts.

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

[2] https://www.bloomberg.com/news/articles/2018-04-15/tougher-l...

> 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.

> 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%.

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.

That is not quite what he is saying. People in the big cities in Scandinavia have so much debt and variable interest loans that they will be hit hard by an increase in interest. It'll eat away disposable income and in general lower economic activity.

My debt in the house has fix interest for 5 year periods, so if the interest at the start of next period is higher, it's going to cost me disposable income.

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

But if the borrowed can make the payments right?

Because in Canada people are often taking the max amount banks approve.

"Collapse of the housing market" is a funny way to talk about affordable housing. It assumes that everyone already owns a house and will have a problem if / when the value drops below the remaining debt.

In the US around 65% of households own their home. A collapse of the housing market would be catastrophic for their finances. I'm sure this is true of other countries as well.

You might argue that many people don't actually own their home since they still have a large mortgage, but this just makes the situation worse: now you have a mortgage that's more than your house is worth.

It wouldn't make any difference to those who own their homes outright, unless they were planning on trading up, in which case is it would be a positive, or down, a negative. Those who overleveraged could indeed find themselves in difficulty, however I fully expect they will get bailed out by the very people they priced out of the market by overbidding.

Well, if they were planning on trading up, now the home they were going to sell to purchase a new home is worth less too, so it comes out in the wash. In either case, it makes their net worth look worse on paper.


when housing markets collapse, the economy goes down and people loose jobs. when you dont have a job, you cant buy a house. one of the many reasons why housing market collapses are not refered to as affordable housing.

don't need to look further than 2007-2009 to see an example of this.

You can see here that home ownership did not go up: https://en.wikipedia.org/wiki/Home-ownership_in_the_United_S...

> when housing markets collapse, the economy goes down and people loose jobs.

I believe the causality goes the other way around. Economy goes down, people lose jobs and then the housing market collapses. It's funny to keep a bubble inflated to protect people from their mistakes.

People always get overleveraged (encouraged by the government and the banking sector) to buy real estate when the economy is doing fine, what else could one expect to happen when things go south?

it does go both ways, but drops in housing price also cause the economy to go down. like a lot. This is already a well established fact

I tend to have the same outlook, i.e. the US govt will be hard pressed to "afford" high interest rates, but I struggle with your statement about QE. QE does not reduce inflation - QE,i.e. printing money to buy debt that is not productive - would devalue a currency and increase inflation. QE is only made possible by deflationary pressures existing elsewhere. Such as Japans shrinking population and lack of productivity growth.

Inflation is how a debt load becomes affordable again.

Is that not correct?

> 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).

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.

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 significant bout of inflation to clear the plate and the holders of USD (playing the role that gold played then) will be wiped out and it will no longer be the reserve currency.

> Why does loaded up with debt imply interest rates will be low?

adventured seems to think that "can't afford interest rates to rise sharply" implies "therefore interest rates won't rise sharply". That seems a bit naive. (Though in fact the Fed can make that happen, with QE. But the results could be pretty disastrous in non-interest ways.)

However, there is a bit of a negative feedback loop. Interest rates rising hurt those who owe variable-interest debt. (Side note - if you have a variable-rate mortgage, you should seriously look at refinancing with a fixed-rate one.) Those who are hurt in this way spend less. This slows down the growth of the economy, which slows the rise of interest rates.

> If the stagflation era of the 70's is any guide, the world will undergo a significant bout of inflation to clear the plate...

That seems likely. Those who owe variable-rate debt will get crushed by this, though. Those who owe fixed-rate debt will be relieved over time.

> ... and the holders of USD... will be wiped out and it will no longer be the reserve currency.

Depends on whether the Euro and the Yuan hold up better than the USD. I find it hard to believe that China will let the Yuan be significantly more solid than the USD; it has found it commercially helpful to have the Yuan be weak. The Euro might be the winner, or it might become as weak as everyone else. If it's the latter, then the USD likely won't be very significantly hurt - it has the advantage of incumbency, and if it's no worse than everyone else, it will be fine.

> USD (playing the role that gold played then)

Gold didn't play that role in the 1970s - at least not in the second half. Once the US let the price of gold float, gold was a rocket. It went from $35 to $200, dropped back to $100, and then went up to $800 (though this started in the 1970s, I don't remember what year it hit $800). Those holding gold were very much not wiped out in the 1970s!

> 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.

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.

I suppose if the the additional demand instantly translates to near immediate provision of supply? Most manufactured goods would fit in that category nowadays?

Only things like housing do not as they can't be easily provisioned to meet demand as quickly.

Correct, in that if supply increases you've either increased productivity, or the workforce. It cannot come on line otherwise.

I think it generally lags, and does not quite close the gap, outside of other deflationary pressures being present.

>The Fed will go into perpetual QE mode, as Japan has, to guarantee that.

And many other countries as well.

The very few ones who can "afford" high rates are, ironically, the frontier markets. Gulf kingdoms, *stans, banana republics, Vietnam, and much of Africa. And yes, ... Germany.

Frontier market bonds has never looked so attractive in my lifetime.

Germany is joining the club at the moment with a real estate bubble.

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

Do you know how Poland is doing compared to the others you mentioned?

Debt becomes more expensive. If interest rates go very high, that can be crippling. That's probably unlikely.

There will likely be less money pursuing assets (real estate may be affected), and business ventures (start-ups). Given trends of the past decade, both are likely healthy changes, though SV types may be impacted.

We live in weird time. If rates were to hit 80ies era level, 1 out of every 3 countries will default.

For this reason they wouldn't.

I thank myself for making a decision in my teenage years to keep half of my savings in metals. It was unbelievably wise for a 15 years old me.

> If rates were to hit 80ies era level, 1 out of every 3 country will default.

Huh? Are you saying 1/3 of mortgages are variable rate?

I'm talking about government debt, not private. Though, a chain reaction , if it is to happen, will reach pretty much all and everything including private mortgages.

If you have a fixed rate one, you may well read the fine script better. Quite a few banks put a no reservations callback clause in the loan agreement.

If an individual gets his mortgage called back, for an average Joe the only way to get through that would be to get another loan, and at a higher rate.

Loans cost more. The interest rate on my first mortgage (in the 90's) was 7%.

Back in the 1970's a 12% interest rate on your mortgage was considered pretty good!

It basically reduces buying power for real estate. Using the google mortgage calculator and assuming a $1500 max monthly payment.

At a 3.92% (today) rate you can borrow ~$320K At an 8% rate you can borrow ~$200K

A 38% decrease in buying power. It's already happening in Canada as the gov't is trying to slow down the real estate market by making buyer qualify at a rate 2% higher than what it is today.

It also made the idea of a starter home more meaningful. Your monthly payments quickly became meaningless especially if you got any kind of a promotion.

At 5% inflation if you pay 1000$/month in year 0 it feels like 614$ / month in year 10 and 377$ / month in year 20.

At 1-2% inflation the loss of the interest tax deduction over time as you pay more principle and less interest means home lone feels about as expensive in year 0 and year 20.

Right, but isn't the distinction that you are paying principle, which in essence buying equity? It isn't free cash flow, but there's a big difference between putting money towards principle and paying a bank interest.

I am not saying it's reasonable or unreasonable for home interest to be tax free. Just that the difference impacts your disposable income.

> as the gov't is trying to slow down the real estate market

This is not the reason for mortgage stress test, just one of its effects. The main reason for the regulation is to avoid a tsunami of bankruptcies when interest rates eventually increase.

These are not fixed rate loans?

You can't really get a rate fixed over the entire amortization period in Canada, our 'fixed rate' mortgages are a 5 year lockin typically.

When those fixed rates end and they have to refix a ton of overleveraged people will force mortgagee sales.

In Auckland there's been talk of that for at least 5-6 years. For example, people I personally know only earn $80-90k/yr and yet own a $500k house (absolute entry level livable house in Auckland). They also got in under our old rules which meant they only needed 5% deposit instead of the 20% required now.

They're only being propped up by their record low interest rates. If those interest rates went up 2-3% they'd be in serious trouble.

EDIT: for more context the average fixed period for any home loan in NZ is roughly 2-3 yrs. The term is a 30 year term typically.

In USA it’s common for loans to be fixed rate for life of loan.

> It basically reduces buying power for real estate.

But real estate is unlike a lot of other goods in that it's value is significantly driven by what other people are willing to pay, rather than what it intrinsically costs to produce. Thus, as your buying power goes down, so does everybody else's.

Much higher mortgage payments. Run the math on a mortgage with 4% interest vs 8%.

However during the years when the baby boomers were buying that house and paying 15%+ interest, that house sold at a 1/4 of today's prices, adjusting for inflation. There were mortgage tax relief schemes so it wasn't that hard to buy a house for that generation. They cheerfully tell their younger children to save up for a deposit like how they did.

My intuitive sense is that it should destroy the real estate market. Anything that I'm missing in that analysis?

When interest rates rise, prices fall. New buyers have a certain amount of money they're willing to pay each month and the market adjusts to that, so it makes little difference there. Existing owners would be the ones getting hit by rising interest rates, just as they were bagging outsized profits when rates were falling.

Existing owners wouldn't really be affected if they plan to live in their house as it's just paper wealth that they can't access until they sell anyways.

Those that downsize just after interest rates rise in order to spend the value locked in their house might lose a bit depending on whether any of the money is reinvested in something else after they sell.

People who will lose the most are house builders. Their revenue is directly tied to house prices. However, for a rate rise to be sustainable there has to be other good ways to make money out there otherwise rates will likely quickly go down again.

Yeah, I guess I meant that house prices would crater. Obviously some people benefit from that and some don't.

My intuition is that it would also precipitate an economic downturn. Many households will see a drastic deterioration of their balance sheets, which should act as a damper on consumer spending. Which would, in theory, have 2nd order effects on the real estate market...

People won't be able to borrow against their lost wealth either (or only at very high rates). Builders/Flippers will stop spending and so the construction trades will suffer a lot... ditto RE sales people and their 6% commissions. I don't think inflation would be high for long.


In the late 1970s you could get 17% return on your savings account and mortgage rates were well above 10%. People still bought houses.

I'm not talking about a steady state. I'm talking about the transition from a low interest rate regime to a high interest rate regime.

If someone barely qualified for a mortgage in a 2% environment, and now suddenly is faced with 10%, that's a bit of a shakedown.

Nobody, anywhere, ever, in the history of this topic, has suggested the fed would raise rates such that rates would 'suddenly' jump to 10%. That's the straw-iest of straw-men.

Depends on how fast it rises, and if wages can keep up. Obviously the slower the better. But yeah, the optimal time to buy RE is when rates are high and then refi when they drop.

High rates and inflation tends to reflect an overheated, strong economy. This usually signifies higher demand for real estate and lower cap rates (higher valuations). Nothing happens in a vacuum so it depends on relative opportunities elsewhere too.

A lot of misinformation and propaganda about the cause of it. See the 1970's in America.

(Usually, greedy businessmen, greedy unions, and speculators are blamed.)

> inflation aren't low

Inflation is only low if you trust how the Federal Reserve is calculating it. Personally, I think the weightings they assign to various categories are intentionally incorrect.

Anyone who lived through 2008 knows better than to think inflation was sub-2% -- yet many savings accounts have been paying 0.01% interest for over a decade.

The fed's monetary policy is taxation without representation.

The Fed doesn’t calculate CPI, but CPI ‘adjustments’ are indeed fundamentally cherry picked to lower the rate. There are a bunch of crazy mechanics like “hedonistic substitution”, min() functions, and adjustments that by definition can only adjust the rate down and not up (eg ‘quality increase’ in basket of goods = adjust CPI down by the ‘quality increase factor’, but quality decrease does not adjust CPI upwards).

People use the million prices project to argue CPI is correct, but misses the point that the project uses a regresssion model to automatically multiply their index by an adjustment factor to match CPI - and that adjustment factor has only gotten smaller and smaller (ie their index reports higher inflation growth than CPI) as time went on.

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.

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.

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

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


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

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.

"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/ It is one of my least popular explorable explanation but also one of my favorites.

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