Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
-
- Posts: 403
- Joined: Fri Sep 15, 2017 1:33 pm
Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
I've been reading about the high double digit inflation of the 70s and 80s. But what makes that seem a little less scary is that I'm finding out CDs were also paying out double digits, it seems like there were times you could buy a CD that would pay a higher rate than current inflation! That almost seems preferable to today's environment where CDs pay 1% at most while inflation is running at 5%. If erosion of savings can be limited, it seems like a high level of inflation could be tolerable.
I'm curious, could/would there be conditions where inflation goes even higher (closer to double digits) while interest rates remain as low as today? Because that scenario seems like the true nightmare. Is this all contingent on the Fed? I'm thinking the only way something like this could happen is if for some reason the Fed decides double digit inflation is "ok" and keeps interest rates anchored at a low level.
I personally think this is unlikely, but if inflation were to creep even higher while interest rates remain low, would stocks basically be the only asset class that would do well? Maybe also TIPS/I-bonds as well?
Related to this, it seems like I-bonds are a very reliable instrument to protect against higher and higher inflation, but for some reason I never hear about them outside of Bogleheads. Even when so many articles are being written about inflation right now, I rarely hear about I-bonds. Is there a reason for this?
I'm curious, could/would there be conditions where inflation goes even higher (closer to double digits) while interest rates remain as low as today? Because that scenario seems like the true nightmare. Is this all contingent on the Fed? I'm thinking the only way something like this could happen is if for some reason the Fed decides double digit inflation is "ok" and keeps interest rates anchored at a low level.
I personally think this is unlikely, but if inflation were to creep even higher while interest rates remain low, would stocks basically be the only asset class that would do well? Maybe also TIPS/I-bonds as well?
Related to this, it seems like I-bonds are a very reliable instrument to protect against higher and higher inflation, but for some reason I never hear about them outside of Bogleheads. Even when so many articles are being written about inflation right now, I rarely hear about I-bonds. Is there a reason for this?
-
- Posts: 15363
- Joined: Fri Apr 10, 2015 12:29 am
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Do you think participants in treasury auctions would buy newly issued treasuries at low single digit rates if inflation is persisting at double digit levels?
-
- Posts: 49
- Joined: Fri Feb 03, 2017 2:48 pm
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Why not? They buy them now.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Yes. Well, maybe not at this extreme but this did happen in the 50s. Long term US treasuries were issued well below expected inflation. People were more risk adverse back then. There are other examples out there.Northern Flicker wrote: ↑Sat Sep 18, 2021 4:53 pm Do you think participants in treasury auctions would buy newly issued treasuries at low single digit rates if inflation is persisting at double digit levels?
There are other structural issues that could come into play. However if that happened I would not be worrying about inflation. I would be focusing on the structural issues.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
No, investors have to buy them at those prices because the Fed is buying them to keep the rates down. The Fed is manipulating what should be the market price by buying up the supply.
There is no free lunch.
-
- Posts: 15363
- Joined: Fri Apr 10, 2015 12:29 am
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
We don't have persistent double digit inflation. But if elevated inflation does persist, we will see how the bond market responds.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Hypothetically, sure. Extremely negative (near dbl-digit) real rates along with nominal rates around 0% would do it. Never say never.
- asset_chaos
- Posts: 2629
- Joined: Tue Feb 27, 2007 5:13 pm
- Location: Melbourne
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Google "financial repression". A policy of keeping real interest rates low/negative in order to inflate away government debts has been used in the past and so could be used again, perhaps is being used now.
Regards, |
|
Guy
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
You can look up the various interest rates and inflation rates over past time periods. The late 70's to early 80's had high inflation, but was coupled with high interest rates. The 40's to early 1950's had high inflation but low interest rates. So, it's happened before.
Here's a growth chart of $10,000 invested in T-Bills, IT Gov Bonds, LT Gov Bonds adjusted for inflation:
MStar Link
Here's a growth chart of $10,000 invested in T-Bills, IT Gov Bonds, LT Gov Bonds adjusted for inflation:
MStar Link
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
-
- Posts: 9479
- Joined: Sun Oct 08, 2017 7:16 pm
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
We have not yet seen inflation comparable to the 1970s. I was there. This is nothing.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
In general, higher inflation coupled with low interest rates is consistent with a so-called “supply shock,” i.e. the choking off of supply of some or all, staple or discretionary, products, coupled with low or anemic growth. Prices are rising, but not due to robust demand, but rather to restricted supply; central bank loth to raise rates, not because inflation is tame, but because economic growth is sputtering.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
I think one participant will keep buying at low single digit rates, in fact I think their commitment to buying bonds that few others want is likely to foster inflation while attempting to keep interest rates down.Northern Flicker wrote: ↑Sat Sep 18, 2021 4:53 pm Do you think participants in treasury auctions would buy newly issued treasuries at low single digit rates if inflation is persisting at double digit levels?
70% Global Stocks / 30% Bonds
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Doesn't matter. IIRC the BOJ buys almost all Japanese Treasuries.Northern Flicker wrote: ↑Sat Sep 18, 2021 4:53 pm Do you think participants in treasury auctions would buy newly issued treasuries at low single digit rates if inflation is persisting at double digit levels?
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
No. Stocks would not likely do well in the short to intermediate term during high inflation. Rising inflation without robust economic and wage growth can retard the economic environment, aka stagflation.Lynx310650 wrote: ↑Sat Sep 18, 2021 4:51 pm I personally think this is unlikely, but if inflation were to creep even higher while interest rates remain low, would stocks basically be the only asset class that would do well? Maybe also TIPS/I-bonds as well?
?
TIPS and I-bonds might match inflation (assuming published CPI is accurate) but they won't likely move enough to make up for losses elsewhere. Though long term TIPS could move significantly if there is a flight to inflation safety.
In a rising inflation without rising rates scenario I am still bullish on precious metals and natural resource producers. Foreign currencies, unhedged foreign stocks (if the inflation is localized), or the Asset Class That May Not Be Named may be an answer too.
-
- Posts: 105
- Joined: Sun Sep 12, 2021 5:18 pm
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
I remember those high interest rates in 1982, I believe it was 1982 when 30 year US government bonds carried 14%+ interest rates and FDIC insured CD's carried even higher rates. From hindsight it would have been a good time to buy 30 year government bonds as US debt is noncallable to lock in 14% interest for 30 years. I'm only aware of one individual that did indeed purchase some of those 14% interest bonds and I was doing about 300 individual tax returns at the time. Of the few that had money to invest, most said they were waiting for higher rates as money market rates were even higher. However inflation was 10%+ so if held in a taxable account and paid 1/3 of the interest in federal and state income taxes was not keeping up with inflation. Retail stores that were slow to raise prices and made say 5%net or less on sales due to recession, became insolvent and closed or went bankrupt as profit was not enough to pay the taxes on income and have enough money to replace the inventory that cost 10%+ more to replace. Yes, hard to believe can go broke making a profit, but can during periods of high inflation. It was not a pretty picture, and some never recovered financially.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
I was just out of college then and didn't really have any money to speak of so I never really had any opportunity to actually buy the bonds or CDs that were paying double digits but as I recall they were not the least bit tempting. The reasons were;Lynx310650 wrote: ↑Sat Sep 18, 2021 4:51 pm I've been reading about the high double digit inflation of the 70s and 80s. But what makes that seem a little less scary is that I'm finding out CDs were also paying out double digits, it seems like there were times you could buy a CD that would pay a higher rate than current inflation!
1) It was not at all clear when or if inflation would peak and start declining. Even with a double digit interest rate locking your money up for a few years was very risky.
2) There were few if any tax advantaged accounts so your after tax returns would be a lot less. Even if you were getting a double digit bond or CD the after tax return could be a lot lower. Tax rates were higher then and while not many people actually paid them some tax brackets were over 50%.
People that bought long term bonds at the peak did very well but that was a risky investment at the time.
-
- Posts: 403
- Joined: Fri Sep 15, 2017 1:33 pm
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Wouldn't we just be in a supercharged version of where we are now, where investors pile into stock due to poor yields on "safe" investments? I feel like stocks and real estate would just continue to go up.000 wrote: ↑Sat Sep 18, 2021 8:32 pmNo. Stocks would not likely do well in the short to intermediate term during high inflation. Rising inflation without robust economic and wage growth can retard the economic environment, aka stagflation.Lynx310650 wrote: ↑Sat Sep 18, 2021 4:51 pm I personally think this is unlikely, but if inflation were to creep even higher while interest rates remain low, would stocks basically be the only asset class that would do well? Maybe also TIPS/I-bonds as well?
?
TIPS and I-bonds might match inflation (assuming published CPI is accurate) but they won't likely move enough to make up for losses elsewhere. Though long term TIPS could move significantly if there is a flight to inflation safety.
In a rising inflation without rising rates scenario I am still bullish on precious metals and natural resource producers. Foreign currencies, unhedged foreign stocks (if the inflation is localized), or the Asset Class That May Not Be Named may be an answer too.
-
- Posts: 2979
- Joined: Sun Aug 25, 2019 7:16 am
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
As noted above, never say never...perhaps it could occur again in the case of a cattywampus world.
From what I can find, in 1864 inflation was running at an estimated 24% a year in the Union; interest on US notes was 7.3%.
In the Confederacy, it was a tad different; inflation fell for a short period in the year 1864 despite war due to the Confederate Currency Reform Act of 1864:currency greater than $5 (CSD) were converted into bonds paying 4 percent; currency not converted by April 1 would be exchanged for a new bills at a ratio of 2 for 3; this caused prices to temporarily decline.). Later bonds were issued which could not keep up with inflation. (Interest bearing currency was tried in the CSA in 1862/1863 but it didn't get the desired results.)
The CSA's monetary policy was generally to print money to finance the war whereas the Union used bonds and taxes. (Meanwhile, I still have CSA bonds which have not recovered their face value.)
From what I can find, in 1864 inflation was running at an estimated 24% a year in the Union; interest on US notes was 7.3%.
In the Confederacy, it was a tad different; inflation fell for a short period in the year 1864 despite war due to the Confederate Currency Reform Act of 1864:currency greater than $5 (CSD) were converted into bonds paying 4 percent; currency not converted by April 1 would be exchanged for a new bills at a ratio of 2 for 3; this caused prices to temporarily decline.). Later bonds were issued which could not keep up with inflation. (Interest bearing currency was tried in the CSA in 1862/1863 but it didn't get the desired results.)
The CSA's monetary policy was generally to print money to finance the war whereas the Union used bonds and taxes. (Meanwhile, I still have CSA bonds which have not recovered their face value.)
Last edited by Mr. Rumples on Sat Sep 18, 2021 9:23 pm, edited 1 time in total.
"History is the memory of time, the life of the dead and the happiness of the living." Captain John Smith 1580-1631
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
If we continue to see debasement without an impact to productivity or purchasing power of wages, maybe. But that impact already seems to be happening and would seem at least somewhat likely to continue under your hypothetical.Lynx310650 wrote: ↑Sat Sep 18, 2021 9:16 pm Wouldn't we just be in a supercharged version of where we are now, where investors pile into stock due to poor yields on "safe" investments? I feel like stocks and real estate would just continue to go up.
-
- Posts: 15363
- Joined: Fri Apr 10, 2015 12:29 am
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
The Fed has been committed to fighting inflation since early 1980's, and has clearly stated that they will do so if the current accelerated inflation does not prove transitory. They have some potent tools for doing so.z3r0c00l wrote: ↑Sat Sep 18, 2021 8:24 pmI think one participant will keep buying at low single digit rates, in fact I think their commitment to buying bonds that few others want is likely to foster inflation while attempting to keep interest rates down.Northern Flicker wrote: ↑Sat Sep 18, 2021 4:53 pm Do you think participants in treasury auctions would buy newly issued treasuries at low single digit rates if inflation is persisting at double digit levels?
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
If they raise rates to control inflation they will go broke. If they don’t we will go broke. Which one do you think they will choose?
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
The Fed has a 2% inflation target. The new average inflation rate targeting regime means that they can tolerate temporary overshoot but if higher inflation is sustained, their mandate would require them to act decisively. The whole point of an inflation target is that it is meant to be a long-term commitment and this has been the central pillar of modern central banking for decades. I find it unthinkable that they would just abandon their central target in case of sustained inflation. In practice, that might mean increasing interest rates and causing asset prices to crash across the board but if that's what they have to do, that's what they have to do.
-
- Posts: 1823
- Joined: Fri Jun 07, 2019 2:00 am
- Location: Florida
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
They're stuck...
Because at all costs they want to prevent this ^^ from happening.In practice, that might mean increasing interest rates and causing asset prices to crash across the board but if that's what they have to do, that's what they have to do.
Given the current scenario something is going to have to give.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
I'm going to go with an alternative hypothesis:
https://www.cbo.gov/publication/57339
The link is projected budget deficits by year. You can see massive deficits in 2020 and 2021, around 13-15% of GDP. These deficits largely stabilized demand, which was their goal. But because people weren't working supply shrank, leading to inflation.
Years going out these %'s get much smaller. These are projections based on existing legislation. One could assume with various proposals floating around that the percents could increase, but probably not a lot, unless the economy tanks.
It's not unreasonable to assume that inflation will moderate, somewhat after a certain time. But it could take a couple of years to work it's way through.
It's not the fed buying bonds that is inflationary. It's the extra demand created by the debt that is inflationary. But the fed buying bonds enables the govt to create more debt and have a ready buyer and keep rates from rising too much.
https://www.cbo.gov/publication/57339
The link is projected budget deficits by year. You can see massive deficits in 2020 and 2021, around 13-15% of GDP. These deficits largely stabilized demand, which was their goal. But because people weren't working supply shrank, leading to inflation.
Years going out these %'s get much smaller. These are projections based on existing legislation. One could assume with various proposals floating around that the percents could increase, but probably not a lot, unless the economy tanks.
It's not unreasonable to assume that inflation will moderate, somewhat after a certain time. But it could take a couple of years to work it's way through.
It's not the fed buying bonds that is inflationary. It's the extra demand created by the debt that is inflationary. But the fed buying bonds enables the govt to create more debt and have a ready buyer and keep rates from rising too much.
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
Preventing sustained inflation over the target is basically their main mandate whereas it's not even part of their job to worry about asset prices per se. They would have to go incredibly off-script to prioritize the latter over the former.
rossington wrote: ↑Sun Sep 19, 2021 1:45 amThey're stuck...
Because at all costs they want to prevent this ^^ from happening.In practice, that might mean increasing interest rates and causing asset prices to crash across the board but if that's what they have to do, that's what they have to do.
Given the current scenario something is going to have to give.
-
- Posts: 1085
- Joined: Tue Jul 13, 2021 3:15 pm
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
The Fed would be the only buyer.Northern Flicker wrote: ↑Sat Sep 18, 2021 4:53 pm Do you think participants in treasury auctions would buy newly issued treasuries at low single digit rates if inflation is persisting at double digit levels?
- oldcomputerguy
- Moderator
- Posts: 17932
- Joined: Sun Nov 22, 2015 5:50 am
- Location: Tennessee
Re: Could we have an environment with high (double digit) inflation with low interest rates? If so, why?
This topic has derailed into a discussion of US economic policy, and so is locked. See: Non-actionable (Trolling) Topics
If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include: US or world economic, political, tax, health care and climate policies
There is only one success - to be able to spend your life in your own way. (Christopher Morley)