Post by youngjasper on Sept 30, 2020 1:02:40 GMT
Sept 16, 2020 15:35:15 GMT @codewhacker said:
High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below market real interest rates.www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Liquidation-of-Government-Debt-42610
Quick PDF of the paper:
pubdocs.worldbank.org/en/204171447864136853/DEC-Lecture-Series-Carmen-Reinhart-presentation.pdf
The author
carmenreinhart.com/
Some thoughts I would appreciate feedback on please.
This seems to be the path the Fed Chairman Powell has laid out, a path of low interest rates and a hoped for rising costs of goods. The Fed has said it will continue to keep interest rates low and as the cost of goods is projected to rise slowly we can expect interest rates to remain low for a long time. I wonder what would cause the cost of goods to jump in price quickly? We know that food and fuel have risen as a result of Covid because of demand/supply issues. I suppose if Biden wins the impact of rising wages, Biden supports unions, and increased taxes will achieve the goal.
It is possible low interest rates raise the possibility of long term problems in the housing market as it creates opportunities for home buyers that are not qualified to purchase but are given a pass through low interest rates. Low interest rates potentially also will have a negative affect of raising real estate prices as demand outstrips supply, this creates a bubble in home values. Hmm, lots of unqualified home owners buying homes with inflated prices, what could go wrong?
Cost of goods will go up as demand goes up. Demand goes up as demand outpaces supply. If supply grows in step with demand, theoretically, equilibrium should be maintained without an increase in price.
Since my wife does the grocery shopping, I don’t have my finger on the pulse of food prices. I do know restaurants are increasing prices, at least in my area. That may be a result of the limit of capacity forced upon the businesses by the governor and/or mayor – or a matter of survival. Regardless, those prices are definitely increasing.
I see fuel prices being less today than pre-covid. That may be my area, but with the airline demand pummeled, which is a significant draw on oil demand, I don’t see fuel prices increasing for a while. Unfortunately for me because that is my income.
Low interest rates are typically beneficial to the housing market and high interest rates are detrimental. The problems low interest rates can cause however are in adjustable rate mortgages when a family qualifies at today’s low rates, but gets caught when the rates go up. I don’t see as many of those as I did in the past, fortunately. But I am sure there are some out there.
Low interest rates can cause rising real estate prices as you say because of increased demand with the lower loan payments from the lower interest rates, and we have seen that the last number of years. However, I do not think we are in a bubble, yet. There was such a trough in real estate prices that most of the increase has covered that. Yes, we are still above where we were before the decline, but not bubble territory, yet. My area has actually seen a bit of a back-off in pricing.
You are definitely correct in saying lots of unqualified homeowners buying homes with inflated prices can cause a problem. That is the bubble. And we have seen that recently. I don’t yet see the irrational exuberance on the lending side as we did before, but rest assured it will happen. It always does. Lenders forget the lessons of the past and let the competitive environment take them down the road to greater risk as they ignore all the signs. You are wise to be mindful.