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

Agreed.

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.

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)

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.

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...

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.

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:

https://i.imgur.com/sec7wZz.png

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

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

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.

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

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.

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?

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.

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.

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.

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.

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.

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

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.

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.

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.

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%.

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.

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.

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.

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

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.

"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.

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?

> 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.

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.

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

>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.

> 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.

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

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.

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.

> 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 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).

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.

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

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.

> 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?

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

> 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.

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.

> 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.

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

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