Author Topic: basic question about low interest rates and inflation...  (Read 4758 times)

FuckRx

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basic question about low interest rates and inflation...
« on: April 24, 2014, 09:22:33 AM »

let's say one puts money in a low interest rate savings account, 0.5% or whatever. If that money sits there for 3 years and inflation is let's say 3% then wouldn't that money be worth less in 3 years?

NewStachian

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Re: basic question about low interest rates and inflation...
« Reply #1 on: April 24, 2014, 09:44:12 AM »
Yes. But, you already know that =P

FuckRx

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Re: basic question about low interest rates and inflation...
« Reply #2 on: April 24, 2014, 10:17:15 AM »

wtf! so by leaving my money in a savings account i lose money?? why the shit would i do that? because that's a guaranteed loss isn't it? why wouldn't i risk it on equity or at the very least bonds or something where i have at least some sort of a chance of increasing it's value. yes the argument for liquidity but 3 years of liquidity are gonna cost me money.

NewStachian

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Re: basic question about low interest rates and inflation...
« Reply #3 on: April 24, 2014, 10:21:36 AM »
And it only took 376 posts to figure that out! Rofl. Nice troll!

But, you're right. I think it blows the minds of most people on this forum.

I had a 5.5% interest rate savings account in the early 2000's... great place to keep my money at the time... (4.5% with a 1-year 1% boost for starting the account)

FrugalSpendthrift

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Re: basic question about low interest rates and inflation...
« Reply #4 on: April 24, 2014, 10:27:04 AM »
why wouldn't i risk it on equity or at the very least bonds or something where i have at least some sort of a chance of increasing it's value.
Because it is a risk.  You could lose even more money.

frugalecon

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Re: basic question about low interest rates and inflation...
« Reply #5 on: April 24, 2014, 10:30:32 AM »
Welcome to what is known as "financial repression," in which savers are forced to accept negative interest rates in safe, liquid investments.

An alternate approach is to stash the emergency fund in a vehicle like a 5-year CD with modest early withdrawal penalties.

It will be interesting to see how long this period continues. There was similar financial repression after WWII, and interest rates were quite low for a long time.

TreeTired

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Re: basic question about low interest rates and inflation...
« Reply #6 on: April 24, 2014, 05:35:09 PM »
Perhaps you would prefer deflation and negative interest rates.  Then you could pay your bank to hold your cash for you.

ajcoleman22

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Re: basic question about low interest rates and inflation...
« Reply #7 on: April 27, 2014, 05:35:28 AM »
It also works both ways. If you have a loan (ex: a mortgage) at a lower interest rate than inflation you make money. Just make sure you on the correct side of the equation.

marty998

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Re: basic question about low interest rates and inflation...
« Reply #8 on: April 27, 2014, 06:10:37 AM »
Perhaps you would prefer deflation and negative interest rates.  Then you could pay your bank to hold your cash for you.

The concept of negative real interest rates, whilst odd, has one very glaringly obvious intention behind it - to get people spending their savings in the hope of restarting a sick economy.

A couple of years ago we were on the verge of seeing negative nominal rates. Now that would have been very interesting indeed to see the effects.

With negative real rates, it doesn't click for most people that they are being screwed by the silent killer named inflation. With negative nominal rates....well. It's all of a sudden obvious.

hodedofome

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Re: basic question about low interest rates and inflation...
« Reply #9 on: April 27, 2014, 04:09:56 PM »
It also works both ways. If you have a loan (ex: a mortgage) at a lower interest rate than inflation you make money. Just make sure you on the correct side of the equation.

True but you're just screwing your creditor at that point. That never ends up well for anyone if a lot of people benefit from that.

Our clients have never understood that either. They feel good if they screw us out of a few bucks. That's great for them until we go out of business. Then where will they be?

beltim

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Re: basic question about low interest rates and inflation...
« Reply #10 on: April 27, 2014, 04:14:17 PM »
It also works both ways. If you have a loan (ex: a mortgage) at a lower interest rate than inflation you make money. Just make sure you on the correct side of the equation.

True but you're just screwing your creditor at that point. That never ends up well for anyone if a lot of people benefit from that.


Why would this situation indicate the customer screwing the creditor, instead of the creditor making unprofitable loans in an unsustainable business model?

sol

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Re: basic question about low interest rates and inflation...
« Reply #11 on: April 27, 2014, 04:39:26 PM »
Yes, low interest rates are designed to devalue cash holdings.  That's the whole point of keeping rates low, to encourage you to spend your money now while it is worth more instead of saving it for tomorrow when everything will cost more but you'll still have the same number of dollars.

dmn

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Re: basic question about low interest rates and inflation...
« Reply #12 on: April 28, 2014, 02:11:49 AM »
To be fair, the low interest rates are not only designed to make people spend, but also to make comanies invest. With interest rates below inflation, any investment that does not lose money looks like a good idea.

Ideally, low interest rates would make companies build more factories, this would increase demand for concrete and construction labor, and the economy would restart not on consumer debt but on real investments.

DaKini

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Re: basic question about low interest rates and inflation...
« Reply #13 on: April 28, 2014, 02:40:58 AM »
Is there a rigging going on to force people out of cash in preparation of a short deflationary environment which then suddenly switsches ofer to hyperinflation once the big money is invested at the deflations peak?

It totally looks like this is going on in the EU currently. German Government is discussing the abolishment of the cold progression (currently deffered to next year according to the radio show i heard this morning). Cold progression is a way for the government to sack in relatively more money when you receive a pay upgrade (i.e. the marginal tax rate climbs depending on the total salary); this causes border effects where people can end up with less money in their pockets despite receiving a pay check rise.
This means more cash for the government for at least another year... which may be more worth due to deflation.

grantmeaname

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Re: basic question about low interest rates and inflation...
« Reply #14 on: April 28, 2014, 05:10:24 AM »
Cold progression is a way for the government to sack in relatively more money when you receive a pay upgrade (i.e. the marginal tax rate climbs depending on the total salary); this causes border effects where people can end up with less money in their pockets despite receiving a pay check rise.
This means more cash for the government for at least another year... which may be more worth due to deflation.
Maybe I'm misunderstanding your tax system, but since it appears to be a marginal tax system that should be impossible.

DaKini

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Re: basic question about low interest rates and inflation...
« Reply #15 on: April 28, 2014, 05:17:38 AM »
Cold progression is a way for the government to sack in relatively more money when you receive a pay upgrade (i.e. the marginal tax rate climbs depending on the total salary); this causes border effects where people can end up with less money in their pockets despite receiving a pay check rise.
This means more cash for the government for at least another year... which may be more worth due to deflation.
Maybe I'm misunderstanding your tax system, but since it appears to be a marginal tax system that should be impossible.
No, what you say is correct. I somewhat oversimplified it accidentally; the right term i refer to is "Bracket creep": http://en.wikipedia.org/wiki/Fiscal_drag#Bracket_creep

grantmeaname

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Re: basic question about low interest rates and inflation...
« Reply #16 on: April 28, 2014, 05:19:52 AM »
Ah. That's big here too.