is a negative interest rate the same as inflation?
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is a negative interest rate the same as inflation?
For the two cases:
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
Thanks
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
Thanks
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Re: is a negative interest rate the same as inflation?
Are you implying that ALL fixed income assets in both cases would have the same interest rate? (Either negative or zero).SemiRetire wrote: ↑Wed Oct 27, 2021 1:01 am For the two cases:
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
Thanks
You're really getting beyond the realm of reality here.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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Re: is a negative interest rate the same as inflation?
Interest rate is what you get for holding a bond, i.e. loaning your money to someone. Of course, different bonds have different interest rates, so "the interest rate" is often for Treasuries. These are bonds sold by the U.S. Government, i.e. you make a loan to them.
Inflation is an increase in how much things cost, the most common measure is the CPI, the Consumer Price Index. This is tricky, because different things increase at different amounts, e.g. maybe gasoline and heating oil go up a lot, food goes up a little, the cost of TVs goes down. There's also the fact that "a computer" today is different than "a computer" from a few years ago: you get more computing power for less money, so does that count as price going down?
The point is, both numbers are complicated, and any actual interest rate you receive, or change in cost of things you actually buy, won't be the same as the reported numbers.
So:
Negative interest rate of 5% means, I loan you $1000 today, you pay me back $950 in a year, and use that to buy the goods you need a year from now, which cost the same as today.
Interest rate of 0% means I loan you $1000 today, you pay me back $1000 in a year, but everything costs 5% more.
So they're roughly equivalent.
BIG CAVEAT: people reported an interest rate of 5.4% recently. That's BACKWARD LOOKING, i.e. costs in October 2021 are 5.4% higher than in October 2020. Interest rates are FORWARD LOOKING: The yield on a 1 year treasury is 0.14%. So if I loan the government $1000 today, then in a year I get $1001.40. Last year was very unusual (COVID, lockdowns), and people don't expect next year to be the same.
Inflation is an increase in how much things cost, the most common measure is the CPI, the Consumer Price Index. This is tricky, because different things increase at different amounts, e.g. maybe gasoline and heating oil go up a lot, food goes up a little, the cost of TVs goes down. There's also the fact that "a computer" today is different than "a computer" from a few years ago: you get more computing power for less money, so does that count as price going down?
The point is, both numbers are complicated, and any actual interest rate you receive, or change in cost of things you actually buy, won't be the same as the reported numbers.
So:
Negative interest rate of 5% means, I loan you $1000 today, you pay me back $950 in a year, and use that to buy the goods you need a year from now, which cost the same as today.
Interest rate of 0% means I loan you $1000 today, you pay me back $1000 in a year, but everything costs 5% more.
So they're roughly equivalent.
BIG CAVEAT: people reported an interest rate of 5.4% recently. That's BACKWARD LOOKING, i.e. costs in October 2021 are 5.4% higher than in October 2020. Interest rates are FORWARD LOOKING: The yield on a 1 year treasury is 0.14%. So if I loan the government $1000 today, then in a year I get $1001.40. Last year was very unusual (COVID, lockdowns), and people don't expect next year to be the same.
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Re: is a negative interest rate the same as inflation?
In theory yes, in either case you are stuck with less spending power than you began with. Charlie Munger commented on the negative interest rates here: https://youtu.be/b0HSsiA8X80SemiRetire wrote: ↑Wed Oct 27, 2021 1:01 am For the two cases:
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
Thanks
Charlie said he didn't like them and that it makes him nervous but that there is nothing you can do about it. Berkshire Hathaway holds over $120 billion in cash and bonds (insurance risk is a big business for them).
Currently I think there is over $10 trillion+ worldwide invested in negative interest rate sovereign debt. Coupled with high inflation it is a tough pill to swallow for adding safety to your portfolio mix.
This leads me to a question I have been asking myself since the 08/09 GFC: DO CENTRAL BANKERS WANT INVESTORS TO REALLOCATE MORE OF THEIR PORTFOLIO MIX TO THE RISKIER SIDE VIA EASING THE MONETARY SUPPLY?
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Re: is a negative interest rate the same as inflation?
(if you suffer from a visual disability then my comments below are not justified, and my apologies in advance)Jack&Warren disciple wrote: ↑Wed Oct 27, 2021 8:44 am
This leads me to a question I have been asking myself since the 08/09 GFC: DO CENTRAL BANKERS WANT INVESTORS TO REALLOCATE MORE OF THEIR PORTFOLIO MIX TO THE RISKIER SIDE VIA EASING THE MONETARY SUPPLY?
Can I just ask you not to write in capitals like that?
By an old tradition of internet posts, dating back to Usenet, I believe, it is the equivalent of yelling.
It is very jarring, and if there is any way to persuade me not to take what you say seriously, that is it.
When, in fact, at the top of the posting window, we have bold, italic and underline-- to use for emphasis-- and I use them all the time. And if you do a reply to me, then you will see the html code.
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Re: is a negative interest rate the same as inflation?
So it sounds like the answer is yes.
Thanks.
Thanks.
Re: is a negative interest rate the same as inflation?
The easy way I think of it:
Real interest rate = Nominal (coupon) interest rate - inflation
So inflation is a component of the calculation that can cause the real interest rate to be negative.
Real interest rate = Nominal (coupon) interest rate - inflation
So inflation is a component of the calculation that can cause the real interest rate to be negative.
Re: is a negative interest rate the same as inflation?
No.SemiRetire wrote: ↑Wed Oct 27, 2021 1:01 am For the two cases:
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
Imagine all my assets are in cash.
Consider the effects on real purchasing power in case 1 versus case 2.
This isn't just my wallet. It's an organizer, a memory and an old friend.
Re: is a negative interest rate the same as inflation?
SemiRetire wrote: ↑Wed Oct 27, 2021 1:01 am For the two cases:
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
Thanks
I think I disagree with respect to purchasing power.
Case 1 Assumptions:
- $10,000 of funds to purchase widgets
- 3% inflation on goods
- 0% interest rate earned on $10,000
Code: Select all
Year value of the cost per widget # widgets can
$10,000 with 3% inflation be purchased
------ -------------- ------------------- ---------------
0 $10,000 $100.00 100.00
1 $10,000 $103.00 97.09
2 $10,000 $106.09 94.26
3 $10,000 $109.27 91.51
4 $10,000 $112.55 88.85
5 $10,000 $115.93 86.26
6 $10,000 $119.41 83.75
7 $10,000 $122.99 81.31
8 $10,000 $126.68 78.94
9 $10,000 $130.48 76.64
10 $10,000 $134.39 74.41
11 $10,000 $138.42 72.24
12 $10,000 $142.58 70.14
13 $10,000 $146.85 68.10
14 $10,000 $151.26 66.11
15 $10,000 $155.80 64.19
16 $10,000 $160.47 62.32
17 $10,000 $165.28 60.50
18 $10,000 $170.24 58.74
19 $10,000 $175.35 57.03
20 $10,000 $180.61 55.37
- $10,000 of funds to purchase widgets
- 0% inflation on goods
- negative 3% interest rate earned on $10,000
Code: Select all
Year value of the cost per widget # widgets can
$10,000 with 0% inflation be purchased
------ -------------- ------------------- ---------------
0 $10,000.00 $100.00 100.00
1 $9,700.00 $100.00 97.00
2 $9,409.00 $100.00 94.09
3 $9,126.73 $100.00 91.27
4 $8,852.93 $100.00 88.53
5 $8,587.34 $100.00 85.87
6 $8,329.72 $100.00 83.30
7 $8,079.83 $100.00 80.80
8 $7,837.43 $100.00 78.37
9 $7,602.31 $100.00 76.02
10 $7,374.24 $100.00 73.74
11 $7,153.01 $100.00 71.53
12 $6,938.42 $100.00 69.38
13 $6,730.27 $100.00 67.30
14 $6,528.36 $100.00 65.28
15 $6,332.51 $100.00 63.33
16 $6,142.54 $100.00 61.43
17 $5,958.26 $100.00 59.58
18 $5,779.51 $100.00 57.80
19 $5,606.13 $100.00 56.06
20 $5,437.94 $100.00 54.38
Edit: forgot to include "negative" in Case 2 interest rate. Corrected.
Re: is a negative interest rate the same as inflation?
Yes, if you use the approximation real = nominal - inflation.
1) -.05 = -.05 - 0
2) -.05 = 0 - .05
No, if you use the more accurate (1+real) = (1+nominal)/(1+inflation).
1) (1-.05) = (1-.05)/(1+0)
2) (1-.04762) = (1+0)/(1+.05)
Ron
1) -.05 = -.05 - 0
2) -.05 = 0 - .05
No, if you use the more accurate (1+real) = (1+nominal)/(1+inflation).
1) (1-.05) = (1-.05)/(1+0)
2) (1-.04762) = (1+0)/(1+.05)
Ron
Money is fungible |
Abbreviations and Acronyms
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Re: is a negative interest rate the same as inflation?
For the two cases:
“1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?“
Will have to look more into that.
Thanks.
“1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?“
Interesting. I had forgotten that completely.
Will have to look more into that.
Thanks.
Re: is a negative interest rate the same as inflation?
Why is inflation worse? You can buy more widgets in the inflation example.csmath wrote: ↑Sun Oct 31, 2021 1:25 pmSemiRetire wrote: ↑Wed Oct 27, 2021 1:01 am For the two cases:
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
ThanksI think I disagree with respect to purchasing power.
Case 1 Assumptions:
- $10,000 of funds to purchase widgets
- 3% inflation on goods
- 0% interest rate earned on $10,000
Case 2 Assumptions:Code: Select all
Year value of the cost per widget # widgets can $10,000 with 3% inflation be purchased ------ -------------- ------------------- --------------- 0 $10,000 $100.00 100.00 1 $10,000 $103.00 97.09 2 $10,000 $106.09 94.26 3 $10,000 $109.27 91.51 4 $10,000 $112.55 88.85 5 $10,000 $115.93 86.26 6 $10,000 $119.41 83.75 7 $10,000 $122.99 81.31 8 $10,000 $126.68 78.94 9 $10,000 $130.48 76.64 10 $10,000 $134.39 74.41 11 $10,000 $138.42 72.24 12 $10,000 $142.58 70.14 13 $10,000 $146.85 68.10 14 $10,000 $151.26 66.11 15 $10,000 $155.80 64.19 16 $10,000 $160.47 62.32 17 $10,000 $165.28 60.50 18 $10,000 $170.24 58.74 19 $10,000 $175.35 57.03 20 $10,000 $180.61 55.37
- $10,000 of funds to purchase widgets
- 0% inflation on goods
- negative 3% interest rate earned on $10,000
Conclusion: Inflation is worse in this vacuum.Code: Select all
Year value of the cost per widget # widgets can $10,000 with 0% inflation be purchased ------ -------------- ------------------- --------------- 0 $10,000.00 $100.00 100.00 1 $9,700.00 $100.00 97.00 2 $9,409.00 $100.00 94.09 3 $9,126.73 $100.00 91.27 4 $8,852.93 $100.00 88.53 5 $8,587.34 $100.00 85.87 6 $8,329.72 $100.00 83.30 7 $8,079.83 $100.00 80.80 8 $7,837.43 $100.00 78.37 9 $7,602.31 $100.00 76.02 10 $7,374.24 $100.00 73.74 11 $7,153.01 $100.00 71.53 12 $6,938.42 $100.00 69.38 13 $6,730.27 $100.00 67.30 14 $6,528.36 $100.00 65.28 15 $6,332.51 $100.00 63.33 16 $6,142.54 $100.00 61.43 17 $5,958.26 $100.00 59.58 18 $5,779.51 $100.00 57.80 19 $5,606.13 $100.00 56.06 20 $5,437.94 $100.00 54.38
Edit: forgot to include "negative" in Case 2 interest rate. Corrected.
Re: is a negative interest rate the same as inflation?
Uhh... yeah what you said lol Apparently I don't like widgets?Nate7out wrote: ↑Mon Nov 01, 2021 8:46 amWhy is inflation worse? You can buy more widgets in the inflation example.csmath wrote: ↑Sun Oct 31, 2021 1:25 pmSemiRetire wrote: ↑Wed Oct 27, 2021 1:01 am For the two cases:
1) negative interest rate of say 5 percent apR (stipulate inflation=0 here)
2) inflation rate of 5 percent apR (interest rate = 0)
Are the two conditions in terms of real purchasing power equal?
ThanksI think I disagree with respect to purchasing power.
Case 1 Assumptions:
- $10,000 of funds to purchase widgets
- 3% inflation on goods
- 0% interest rate earned on $10,000
Case 2 Assumptions:Code: Select all
Year value of the cost per widget # widgets can $10,000 with 3% inflation be purchased ------ -------------- ------------------- --------------- 0 $10,000 $100.00 100.00 1 $10,000 $103.00 97.09 2 $10,000 $106.09 94.26 3 $10,000 $109.27 91.51 4 $10,000 $112.55 88.85 5 $10,000 $115.93 86.26 6 $10,000 $119.41 83.75 7 $10,000 $122.99 81.31 8 $10,000 $126.68 78.94 9 $10,000 $130.48 76.64 10 $10,000 $134.39 74.41 11 $10,000 $138.42 72.24 12 $10,000 $142.58 70.14 13 $10,000 $146.85 68.10 14 $10,000 $151.26 66.11 15 $10,000 $155.80 64.19 16 $10,000 $160.47 62.32 17 $10,000 $165.28 60.50 18 $10,000 $170.24 58.74 19 $10,000 $175.35 57.03 20 $10,000 $180.61 55.37
- $10,000 of funds to purchase widgets
- 0% inflation on goods
- negative 3% interest rate earned on $10,000
Conclusion: Inflation is worse in this vacuum.Code: Select all
Year value of the cost per widget # widgets can $10,000 with 0% inflation be purchased ------ -------------- ------------------- --------------- 0 $10,000.00 $100.00 100.00 1 $9,700.00 $100.00 97.00 2 $9,409.00 $100.00 94.09 3 $9,126.73 $100.00 91.27 4 $8,852.93 $100.00 88.53 5 $8,587.34 $100.00 85.87 6 $8,329.72 $100.00 83.30 7 $8,079.83 $100.00 80.80 8 $7,837.43 $100.00 78.37 9 $7,602.31 $100.00 76.02 10 $7,374.24 $100.00 73.74 11 $7,153.01 $100.00 71.53 12 $6,938.42 $100.00 69.38 13 $6,730.27 $100.00 67.30 14 $6,528.36 $100.00 65.28 15 $6,332.51 $100.00 63.33 16 $6,142.54 $100.00 61.43 17 $5,958.26 $100.00 59.58 18 $5,779.51 $100.00 57.80 19 $5,606.13 $100.00 56.06 20 $5,437.94 $100.00 54.38
Edit: forgot to include "negative" in Case 2 interest rate. Corrected.
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Re: is a negative interest rate the same as inflation?
Negative interest rates would make US bond holders very happy because the price of bonds would have to go up ginormously.
Inflation would make bond holders sad and then glad because US bond returns would go down in the short term but would then go up in the long term.
So...my vote is that they are completely different things.
Inflation would make bond holders sad and then glad because US bond returns would go down in the short term but would then go up in the long term.
So...my vote is that they are completely different things.