* 2% mortgage, 2% real growth and 2% inflation
* 7% mortgage, 0% real growth and 5% inflation
If we wind up in stagflation we may still have low real interest rates but everyone will be having a bad time.
Is it a lack of global economic growth because of natural resource depletion?
For example, you could probably get away with a loan for 18% real if you can sail to America and (leaving politics/historical atrocities aside for a moment) come back with a ship full of gold.
If I had to take a loan with a rate that high I don't think I could possibly pay it back (if it's enough money) without multiple jobs or somehow getting lucky. I don't know that my labor could produce enough.
I actually think an underrated piece of this is that investments have become far less capital intensive. Business in previous economic cycles required a huge amount of capital to begin and maintain: railroads, oil, manufacturing all require enormous sums of capital to continue. Conversely, the dominant businesses in this economic cycle are all Internet based. Google, Meta, etc could run for 1,000 years without substantial cash need, it's a far less capital intensive model. You can see this reflected statistically: the FCF yield of the S&P 500 is 2x what it was in 1990.
If businesses need far less cash than before yet remain highly productive, it stands to reason real interest rates would drop: the demand for capital by economic drivers has gone down, while the supply of capital has increased through FCF gains.
The key insight is that savings and investment opportunities are two sides of a single market. Demand and supply. Savings grow reliably and opportunities do not, so demand for investment opportunities outstrips supply of investment opportunities. Therefore, the opportunities get more expensive = lower rate of return.
The world in increasingly having more supply of money (savings) than before.
It doesn't look like from a median household perspective, but we have a glut of overall money