ELI5... will we see runway inflation and interest rates

[370Z]

I know dick all about economics.

Given what's happening, will we see runway inflation and rising interest rates and increasing devaluation our dollar?

I fear for the return of 20 % interest like we had back in 80s....or am I just being stupid?

[civicHB]

I also don't know much, but the whole world is used to cheap money now. IF rates were to even jump to 6-7% it would mean many Canadians not being able to afford their mortgages. I can't even imagine a 10% interest rate on a 300k mortgage. Interest alone would be 30k a year that is not sustainable.

Our dollar is in for a struggle though. I don't know if it gets much worse, but I see it in the 1.4-1.6 range until the volatility in the market subsidizes.

This quote is hidden because you are ignoring this member. Show Quote

I know dick all about economics.

Given what's happening, will we see runway inflation and rising interest rates and increasing devaluation our dollar?

I fear for the return of 20 % interest like we had back in 80s....or am I just being stupid?

[ExtraSlow]

well, one way to look at it is what would happen in each scenario. if interest rates went to 20%, the real estate market would have to crash, and property values would need to go down 50% or more. Otherwise, nobody would be able to afford the mortgages.

I kind of think the world is addicted to cheap money, and interest rates will stay pretty low for decades. But I'm not an economist.

[Buster]

Interest rates cannot go up as much because of sovereign debt servicing as the mortgage market.

[mr2mike]

I see negative interest rates soon in the short term.

Hopefully our resident Mortgage Broker can chime in as to why we're not seeing mortgage interest rates dropping with the fed interest rate cuts?

[Manhattan]

There was a NPR podcast recently about a "natural" interest rate which is what the interest rate would be without any government intervention. And that rate is about 2%. The reason its so low is mostly due to demographics. Lots of boomers needing income buying up fixed income assets including bonds leading to super low yields. Obviously that demographic isn't changing anytime soon...even with this virus outbreak. So the expectation is rates will remain low.

Govt is also dead set on propping up the housing and equity markets so no party in charge will want to be responsible for collapsing those markets with higher interest rates.

Lastly when financial crisis hit in '08 the US feds used QE/printing money to solve liquidity problems and the biggest risk was inflation...well it didn't happen and they're trying it again.

[Buster]

Inflation is also a built in solution to pension problems.

[Xtrema]

This quote is hidden because you are ignoring this member. Show Quote

Lastly when financial crisis hit in '08 the US feds used QE/printing money to solve liquidity problems and the biggest risk was inflation...well it didn't happen and they're trying it again.

Something that only US can do due to USD dominance.

But while official inflation numbers are low, I remember consumer prices did increase quick fast during US visits during Obama's QEs.

[ianmcc]

I would only be worried if the US starts minting trillion dollar coins.

[suntan]

This quote is hidden because you are ignoring this member. Show Quote

There was a NPR podcast recently about a "natural" interest rate which is what the interest rate would be without any government intervention. And that rate is about 2%. The reason its so low is mostly due to demographics. Lots of boomers needing income buying up fixed income assets including bonds leading to super low yields. Obviously that demographic isn't changing anytime soon...even with this virus outbreak. So the expectation is rates will remain low.

Govt is also dead set on propping up the housing and equity markets so no party in charge will want to be responsible for collapsing those markets with higher interest rates.

Lastly when financial crisis hit in '08 the US feds used QE/printing money to solve liquidity problems and the biggest risk was inflation...well it didn't happen and they're trying it again.

General inflation didn't happen. The housing market however experienced tremendous inflation. Makes sense as housing purchases are almost always leveraged, and it was the banks that were the recipients of the results of QE.

Compare that to previous attempts at stimulating the economy, which usually feed M0 (they literally print more money), which most certainly leads to ludicrous inflation (e.g. present day Venezuela). QE is an attempt to increase certain lenders' money supply and thusly should not affect M0-3 in a way where money is brought in too quickly.

Same thing happened in Japan, where QE was invented. The money gained was used to prop up companies though.

Yay Finance degree.

[pheoxs]

Interest will never hit 5% or higher for many decades to come. It would bankrupt a substantial part of our country and decimate our economy. We're basically trapped because people have so much debt nowadays and the solution to any kind of slowdown is to just drop interest rates again.