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Comment by sokoloff | Hacker News Reader

In the 80s, we were borrowing money for mortgages (secured by houses with tenants and 20% downpayments) at rates over 15%.

I don’t find yields over 10% given the current economic climate to be unreasonable or evidence of “desperation” on the part of sellers. I would probably find rates of under 10% as evidence of desperation on the part of buyers...

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In order to draw a conclusion, we should look at the _real_ interest rate vs. the nominal one.

Market inflation expectations are very low:

https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T10YIE

Which means these high yields are more of a sign of high risk of default than of high inflation. :-(

Real interest rate depends on inflation which is an invented phenomenon of the 20th century. Inflation wasn't relevant in the preceding century and might not be relevant in 21st century either.

At least not in the current form it is measure as a CPI while ignoring asset price inflation in real estate and stock markets.

Whether that is a bug or feature remains to be seen, but for most people a psychological effect of large inflation has been present at least since the last big ceisia in 2008. Banks keep flooding the economy with new QE money and asset prices and rent payments keep increasing. Many people are not able to afford housing and birth rates plummet for not being able to have stability necessary to raise a family.

Whether somebody adds a patch to the inflation theory such as the concept of Biflation (inflation in asset prices, deflation in cheap goods manufactured by robots and imported from China at the same time) or throws thr concept of inflation out of the window completely is the question for economists for this century.

> while ignoring asset price inflation in real estate and stock markets.

Do you have any data to back this up? Some quick math shows annualized S&P 500 Return with dividends reinvested from april 2010 to april 2020 are 9.694% [0] which is entirely in line with historical returns [1]. Housing price per square foot hasn't really changed for most people either [2].

[0]: https://dqydj.com/sp-500-return-calculator/

[1]: https://en.wikipedia.org/wiki/S%26P_500_Index#Performance

[2]: https://www.supermoney.com/inflation-adjusted-home-prices/

Your premise is quickly disprovable with reference to historical inflation data from many countries. Maybe try the Bank of England, they have data that goes back a ways.

OTOH perhaps we should give the author of The Wealth of Nations more credit for having anticipated the phenomenon of inflation back in 1776.

Well, the economy is deflating fast, which means the riskfree rate is in the toilet. The current 10% is equivalent to closer to 30%-35% in the early 80s.

The fact that the economy is "pretty bad" doesn't necessarily imply that all rates should be low or high. They can be either very high (inflation) or very low (deflation), and both are not good signs.

> The current 10% is equivalent to closer to 30%-35% in the early 80s.

Could you explain this more?

I don't know about the 30%-35% number exactly, but the idea they're getting at is what is the "real" interest rate. Interest rates are all relative. If you can take a loan out at a 15% interest rate is that bad? Well if a bank is offering you a savings rate of 20% - congratulations you just made a lot of money.

https://fred.stlouisfed.org/series/TB3MS

Take a look at the T-bill rates in the 80s. To straight-faced say "I'm not concerned about these rates," and make a comparison to interest rates in the 80s is ignorant at best. There was an intentional effort by the government to raise rates in order to fight inflation. We are so far removed from the interest rate environment of the 80s...

Real interest rate are ususally defined as Nominal Rate-Inflation, so with inflation at virtually zero, the real rate is 10% for them. To be 35% we would need deflation of roughly that much. Though a 10% real rate is bad enough.

If the fed rate is 15% and you have to pay 17%, you're a (sub) 2% risk. If the fed rate is zero, and you pay 10%, you're a much bigger risk...

My dad built our house in 1971 and the rate for his mortgage was 6% but less than ten years later it was 21.25%, crazy! Even the 6% was a stretch he has to join a co-op. It was kind of like an early Habitat for Humanity but your group did it all yourself.

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