The risks of buying with record low interest rates

[blahblahblah]

High interest rates do not mean high prices.

Certainly high interest rates will exert downward pressure on prices of those goods which are purchased on credit. However, interest rates are high in inflationary environments (like the US in the 70s). Although salaries lag inflation, they eventually catch up. I know this isn’t a pleasant thought but it may occur, especially since the US is so dependent on capital inflow from foreign countries. If they want to keep selling t-bills, they won’t be able to keep rates low forever.

[JWM in SD]

JWM in SD

“However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.”

Oh really??? Salaries will go up in an inflationary environment? How about an environment where your job is in constant danger of outsourcing and downsizing because the corporation cannot predict it’s future costs adequately?

Repeat after me…there will be no wage inflation. Why? Because Bernanke and the Fed will not allow it to happen.

Get that out of your head right now because is completely wrong.

[JWM in SD]

JWM in SD

“However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.”

Oh really??? Salaries will go up in an inflationary environment? How about an environment where your job is in constant danger of outsourcing and downsizing because the corporation cannot predict it’s future costs adequately?

Repeat after me…there will be no wage inflation. Why? Because Bernanke and the Fed will not allow it to happen.

Get that out of your head right now because is completely wrong.

[JWM in SD]

JWM in SD

“However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.”

Oh really??? Salaries will go up in an inflationary environment? How about an environment where your job is in constant danger of outsourcing and downsizing because the corporation cannot predict it’s future costs adequately?

Repeat after me…there will be no wage inflation. Why? Because Bernanke and the Fed will not allow it to happen.

Get that out of your head right now because is completely wrong.

[JWM in SD]

JWM in SD

“However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.”

Oh really??? Salaries will go up in an inflationary environment? How about an environment where your job is in constant danger of outsourcing and downsizing because the corporation cannot predict it’s future costs adequately?

Repeat after me…there will be no wage inflation. Why? Because Bernanke and the Fed will not allow it to happen.

Get that out of your head right now because is completely wrong.

[JWM in SD]

JWM in SD

“However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.”

Oh really??? Salaries will go up in an inflationary environment? How about an environment where your job is in constant danger of outsourcing and downsizing because the corporation cannot predict it’s future costs adequately?

Repeat after me…there will be no wage inflation. Why? Because Bernanke and the Fed will not allow it to happen.

Get that out of your head right now because is completely wrong.

[blahblahblah]

Get that out of your head right now because is completely wrong.

I hope you’re right. Still, there are two possible ways this can play out — inflationary or deflationary. Right now it is headed towards the deflationary scenario with each fed rate cut. But an inflationary scenario is always possible. Remember that salaries increase only nominally in an inflationary environment, and that companies will be receiving inflated nominal values for their products as well. In a high-inflation environment, salaries and prices can be constant or even decreasing in real terms. Inflation is an easy and ever-popular way for governments to get rid of debt, by reducing the value of the currency the debt is denominated in. That’s why I’m so suspicious that the guys running the show will choose that old favorite from the playbook…

[blahblahblah]

Get that out of your head right now because is completely wrong.

I hope you’re right. Still, there are two possible ways this can play out — inflationary or deflationary. Right now it is headed towards the deflationary scenario with each fed rate cut. But an inflationary scenario is always possible. Remember that salaries increase only nominally in an inflationary environment, and that companies will be receiving inflated nominal values for their products as well. In a high-inflation environment, salaries and prices can be constant or even decreasing in real terms. Inflation is an easy and ever-popular way for governments to get rid of debt, by reducing the value of the currency the debt is denominated in. That’s why I’m so suspicious that the guys running the show will choose that old favorite from the playbook…

[blahblahblah]

Get that out of your head right now because is completely wrong.

I hope you’re right. Still, there are two possible ways this can play out — inflationary or deflationary. Right now it is headed towards the deflationary scenario with each fed rate cut. But an inflationary scenario is always possible. Remember that salaries increase only nominally in an inflationary environment, and that companies will be receiving inflated nominal values for their products as well. In a high-inflation environment, salaries and prices can be constant or even decreasing in real terms. Inflation is an easy and ever-popular way for governments to get rid of debt, by reducing the value of the currency the debt is denominated in. That’s why I’m so suspicious that the guys running the show will choose that old favorite from the playbook…

[blahblahblah]

Get that out of your head right now because is completely wrong.

I hope you’re right. Still, there are two possible ways this can play out — inflationary or deflationary. Right now it is headed towards the deflationary scenario with each fed rate cut. But an inflationary scenario is always possible. Remember that salaries increase only nominally in an inflationary environment, and that companies will be receiving inflated nominal values for their products as well. In a high-inflation environment, salaries and prices can be constant or even decreasing in real terms. Inflation is an easy and ever-popular way for governments to get rid of debt, by reducing the value of the currency the debt is denominated in. That’s why I’m so suspicious that the guys running the show will choose that old favorite from the playbook…

[blahblahblah]

Get that out of your head right now because is completely wrong.

I hope you’re right. Still, there are two possible ways this can play out — inflationary or deflationary. Right now it is headed towards the deflationary scenario with each fed rate cut. But an inflationary scenario is always possible. Remember that salaries increase only nominally in an inflationary environment, and that companies will be receiving inflated nominal values for their products as well. In a high-inflation environment, salaries and prices can be constant or even decreasing in real terms. Inflation is an easy and ever-popular way for governments to get rid of debt, by reducing the value of the currency the debt is denominated in. That’s why I’m so suspicious that the guys running the show will choose that old favorite from the playbook…

[Eugene]

However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.

For starters, 10-year is at 3.6% today even though we’re not in a deflationary environment. (At least not in the strict sense of the word) Interest rates are so low because we have a bear market in stocks, resulting in flight to safety. Flight to safety temporarily overrides any deflationary/inflationary mechanisms that might be otherwise going on.

http://finance.yahoo.com/q/bc?t=6m&s=%5ETNX&l=on&z=m&q=l&c=&c=%5EGSPC

Bear market will end eventually and at that point 10-year yields will likely go back into 4-5% land, if not higher.

Secondly, interest rates may go up if spread between 10-year and mortgage increases. This will happen if GSEs start experiencing financial problems.

Now, about an inflationary environment. Inflation results in higher long-term interest rates, higher wages, and depreciated currency. The effect on long-term interest rates and exchange rates is immediate (investors’ expectations can change overnight). The effect on wages is drawn-out and delayed. In fact monetary expansion does NOT lead to wage inflation as long as there is substantial unemployment. Only when the unemployment is low, monetary expansion will start to translate into higher wages for everyone.

[Eugene]

However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.

For starters, 10-year is at 3.6% today even though we’re not in a deflationary environment. (At least not in the strict sense of the word) Interest rates are so low because we have a bear market in stocks, resulting in flight to safety. Flight to safety temporarily overrides any deflationary/inflationary mechanisms that might be otherwise going on.

http://finance.yahoo.com/q/bc?t=6m&s=%5ETNX&l=on&z=m&q=l&c=&c=%5EGSPC

Bear market will end eventually and at that point 10-year yields will likely go back into 4-5% land, if not higher.

Secondly, interest rates may go up if spread between 10-year and mortgage increases. This will happen if GSEs start experiencing financial problems.

Now, about an inflationary environment. Inflation results in higher long-term interest rates, higher wages, and depreciated currency. The effect on long-term interest rates and exchange rates is immediate (investors’ expectations can change overnight). The effect on wages is drawn-out and delayed. In fact monetary expansion does NOT lead to wage inflation as long as there is substantial unemployment. Only when the unemployment is low, monetary expansion will start to translate into higher wages for everyone.

[Eugene]

However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.

For starters, 10-year is at 3.6% today even though we’re not in a deflationary environment. (At least not in the strict sense of the word) Interest rates are so low because we have a bear market in stocks, resulting in flight to safety. Flight to safety temporarily overrides any deflationary/inflationary mechanisms that might be otherwise going on.

http://finance.yahoo.com/q/bc?t=6m&s=%5ETNX&l=on&z=m&q=l&c=&c=%5EGSPC

Bear market will end eventually and at that point 10-year yields will likely go back into 4-5% land, if not higher.

Secondly, interest rates may go up if spread between 10-year and mortgage increases. This will happen if GSEs start experiencing financial problems.

Now, about an inflationary environment. Inflation results in higher long-term interest rates, higher wages, and depreciated currency. The effect on long-term interest rates and exchange rates is immediate (investors’ expectations can change overnight). The effect on wages is drawn-out and delayed. In fact monetary expansion does NOT lead to wage inflation as long as there is substantial unemployment. Only when the unemployment is low, monetary expansion will start to translate into higher wages for everyone.

[Eugene]

However, interest rates won’t go up unless we are in an inflationary environment. In an inflationary environment, salaries will increase too so that will put upward pressure again on home prices.

For starters, 10-year is at 3.6% today even though we’re not in a deflationary environment. (At least not in the strict sense of the word) Interest rates are so low because we have a bear market in stocks, resulting in flight to safety. Flight to safety temporarily overrides any deflationary/inflationary mechanisms that might be otherwise going on.

http://finance.yahoo.com/q/bc?t=6m&s=%5ETNX&l=on&z=m&q=l&c=&c=%5EGSPC

Bear market will end eventually and at that point 10-year yields will likely go back into 4-5% land, if not higher.

Secondly, interest rates may go up if spread between 10-year and mortgage increases. This will happen if GSEs start experiencing financial problems.

Now, about an inflationary environment. Inflation results in higher long-term interest rates, higher wages, and depreciated currency. The effect on long-term interest rates and exchange rates is immediate (investors’ expectations can change overnight). The effect on wages is drawn-out and delayed. In fact monetary expansion does NOT lead to wage inflation as long as there is substantial unemployment. Only when the unemployment is low, monetary expansion will start to translate into higher wages for everyone.

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