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IMO this is the end game. Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaw

IMO this is the end game. Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general. Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents. I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again. I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then... Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.

samsonradu 7y ago
You kind of described Japan’s economy.
- bboygravity 7y ago
  Japan's a known potential model of the future of the European economy as they're demographically about 15 years ahead of Europe. Would make sense to some extend.
  - Yetanfou 7y ago
    Japan has close to zero immigration where Europe has a large migration from countries with a much higher birth rate. For Japan this implies that their population will shrink while staying ethnically homogeneous while the European population is likely to increase and diversify. Europe will see more ethno-religiously motivated conflict, Japan will suffer from having a decreasing work force which needs to take care of an increasing number of people in need of care. If Japan continues on this path they'll eventually dwindle as a country and stand the risk of being conquered by one of its more populous neighbours. Europe should have a long hard look what happened in Lebanon when that country was torn apart by a civil war [1] between different ethnic and religious groups. [1] https://en.wikipedia.org/wiki/Lebanese_Civil_War https://en.wikipedia.org/wiki/Lebanese_Civil_War
    - oblio 7y ago
      Which neighboring country could mount a huge amphibious assault against a developed island nation with still 100+ million people? The only threat is China and China's aging too...
      - Yetanfou 7y ago
        China, Russia and possibly Korea (which army is far larger than Japan's) come to mind. While Japan still does have 100+ million people the population is going to shrink and those who live there are getting older and older. The low birth rate will make it hard for Japan to maintain a standing army, the ageing population also makes it harder to maintain a reserve force.
        oblio 7y ago
        Russia has 20 million people more than Japan and its population is also aging rapidly. Korea? Which one? North Korea? Please :-)
        Yetanfou 7y ago
- simula67 7y ago
  The difference with Japan is that while they have a large amount of debt, they also have large amounts of assets. Japan is the world's largest creditor nation : https://en.wikipedia.org/wiki/Net_international_investment_position https://en.wikipedia.org/wiki/Net_international_investment_p.... If you look at that list, you will find that US is the most indebted country in the world and that many Western countries tend to be very indebted.
deleted 7y ago
[deleted]
sword_smith 7y ago
bboygravity: I agree with everything you just said except that deflation is bad for the economy in general. It doesn't have to be. The Guilded Age (Belle Epoque in Europe), 1871-1914 had several percentages of deflation each year and this was a period where a massive number of people went from being poor farmers to middle class city dwellers and the period saw a massive growth in productivity. Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.
- maze-le 7y ago
  I think the main reason behind the better economic situation in the 1871-1914 period was not a deflationary economy, but the steady increase in factory output -- the industrialization was on its height -- and medical knowledge -- proper sanitation, proper medical procedures, hygiene. Add to that the benefits Europe and the US reaped from colonial imperialism: the "masses" gained access to commodities like sugar, tea, coffee but also cheap alcohol and opium. Usually it was not a gradual improvement in the lifes of common people from poor farmers to well-off middle class. By far the most people not employed in the agrarian sector were working class (working in factories, mines, etc.) and their situation was, compared to today, a hellish nightmare: overcrowded slums, poor access to water and medicine, unstable food-supply. These conditions only improved slightly by the end of that period, usually out of pressure/fear of socialist/communist mass agitation. ----- You are right, the life of most people living in that time period improved significantly. But I would say despite of a deflationary economy, not because of it. And only a minimal percentage of those were middle class.
  - lawn 7y ago
    Couldn't you use the same argument against inflation as well? That the improved life and economic growth in the 20th and 21th centuries have been driven by technological advances, and not by the inflationary economy?
baybal2 7y ago
My employer is paying for really expensive publications on economics for electronics industry. Some of the best paid economists in the world say to avoid capex with longer than 5 year payback time as rates are almost destined to go up due to multiple strong factors, including emerging markets becoming more attractive investments.
hourislate 7y ago
We can add Canada to the list. If Interest rates were to rise just a few percent, it would bankrupt the entire country.
- Yetanfou 7y ago
  Add Sweden as well, same story here. The national bank (Riksbanken) can not increase interest rates because it would have disastrous consequences for the large majority of over-extended loan takers. The low interest rates in their turn lead to the value of the Swedish currency plummeting. No matter what they do, a 'correction' is unavoidable - either the Swedish crown goes to junk status or the number of foreclosures and bankruptcies will skyrocket, followed by the collapse of the housing market, followed by the collapse of those banks which have to write down all those loans with real-estate backing.
  - WillPostForFood 7y ago
    If you have a fixed rate loan, inflation is amazing. It is like free money. Inflation: bails out debtors, punishes savers Deflation: punishes debtors, rewards savers
    - izend 7y ago
      Fixed rate loans are only 5 year max in Canada, so yes its great for 5 years but after that have to refinance at the new market rate.
      - WillPostForFood 7y ago
        Yes, good point. The standard 30 year fixed loan in the US is not common internationally.
  - ptr 7y ago
    I’m not so sure that a rate hike would be devastating for Swedish loan takers; banks typically don’t give out loans to households that can’t handle large increases. Real estate prices would probably come down a bit, but people would hardly be forced to sell as long as they keep their income. People with large loans typically have large financial buffers. I’m also suspecting that politicians will step in with deductions, etc.
tom_mellior 7y ago
> Also deflation is the number 1 enemy of central banks and the economy in general. I've always thought this was a weird claim, put this simply. Consumer electronics and computers have been deflationary for ever: You can always get a better TV, phone, or computer for less money if you are willing to wait for a year. Yet people can't stop buying them. Because they want them enough. Deflation should only hurt businesses producing stuff that customers aren't really interested in. > businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) I would expect that on business loans you don't just pay interest, you are also expected to regularly pay back actual fractions of the principal. But I admit that I don't know how this works. > The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.
- Retric 7y ago
  The real issue in a deflationary situation loans effectively become more not less expensive vs 0 inflation situations. Lending always carries the risk of not being paid back, where you can always just keep your own money. So, a 100$ loan needs to return the original 100$ + the risk + some incentive not to use this money for something else. Thus loans are effectively the absolute value of (inflation or deflation rates) + a constant factor.
- bboygravity 7y ago
  > I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier. There are 2 ways to make a profit on a property investment: 1. Sell at a higher price in the future which offsets all of the costs of holding the property (rented out or not). 2. Rent out at a higher monthly price than whatever the monthly cost is (cost spread out over whatever your investment horizon is), right now. Number 2 means (assuming the house was purchased on credit, which at negative interest rates it should always be as much as possible) that you as the renter(s) are paying back the owners credit he took out for the house, the house's maintenance, the owner's house insurance and taxes and all other costs + THE APPRECIATION IN VALUE OF THE HOUSE FOR THE TIME YOU RENT (higher housing prices = higher monthly rent) + a profit. When you buy a house, you're not giving the owner 30 years worth of rent. You're giving the owner the value of the house, which is way less than the accumulated rent would be over 30 years. Buying a house (on credit) is only ever a net loss if the house's value goes down significantly for whatever reason. Reasons can be: uninsured destruction (war, fire, bad renters) or deflation (due to oversupply of houses such as is the case in Japan right now or due to the overall economy going bad). In other words: assuming a healthy economy, buying a property as an investment (with a 15 - 30 year investment horizon to be able to spread all initial costs over a longer period of time) is ALWAYS a win assuming you can find renters. In the current market (at least in most cities of Western Europe) you will always find renters, because a significant part of the population who would like to buy a house simply can't get the credit they need to buy a house close to where their employment is. Due to the housing prices being too inflated relative to average income from employment. Summary: housing prices higher than the credit people can afford = people can't get credit to buy a house = lots of renters on the market (people rent instead) = makes it interesting to own houses to rent out for profit = housing prices higher = poor people can't get credit to buy a house = lots of renters on the market and so on. See what's happening? Those who can afford real estate investments start receiving an ever larger portion of the income of people who can't afford real estate investments. AKA: the poor and middle class get poorer and the rich get richer.

samsonradu 7y ago

You kind of described Japan’s economy.

bboygravity 7y ago
Japan's a known potential model of the future of the European economy as they're demographically about 15 years ahead of Europe. Would make sense to some extend.
- Yetanfou 7y ago
  Japan has close to zero immigration where Europe has a large migration from countries with a much higher birth rate. For Japan this implies that their population will shrink while staying ethnically homogeneous while the European population is likely to increase and diversify. Europe will see more ethno-religiously motivated conflict, Japan will suffer from having a decreasing work force which needs to take care of an increasing number of people in need of care. If Japan continues on this path they'll eventually dwindle as a country and stand the risk of being conquered by one of its more populous neighbours. Europe should have a long hard look what happened in Lebanon when that country was torn apart by a civil war [1] between different ethnic and religious groups. [1] https://en.wikipedia.org/wiki/Lebanese_Civil_War https://en.wikipedia.org/wiki/Lebanese_Civil_War
  - oblio 7y ago
    Which neighboring country could mount a huge amphibious assault against a developed island nation with still 100+ million people? The only threat is China and China's aging too...
    - Yetanfou 7y ago
      China, Russia and possibly Korea (which army is far larger than Japan's) come to mind. While Japan still does have 100+ million people the population is going to shrink and those who live there are getting older and older. The low birth rate will make it hard for Japan to maintain a standing army, the ageing population also makes it harder to maintain a reserve force.
      - oblio 7y ago
        Russia has 20 million people more than Japan and its population is also aging rapidly. Korea? Which one? North Korea? Please :-)
        Yetanfou 7y ago
simula67 7y ago
The difference with Japan is that while they have a large amount of debt, they also have large amounts of assets. Japan is the world's largest creditor nation : https://en.wikipedia.org/wiki/Net_international_investment_position https://en.wikipedia.org/wiki/Net_international_investment_p.... If you look at that list, you will find that US is the most indebted country in the world and that many Western countries tend to be very indebted.

deleted 7y ago

[deleted]

sword_smith 7y ago

bboygravity: I agree with everything you just said except that deflation is bad for the economy in general. It doesn't have to be. The Guilded Age (Belle Epoque in Europe), 1871-1914 had several percentages of deflation each year and this was a period where a massive number of people went from being poor farmers to middle class city dwellers and the period saw a massive growth in productivity. Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.

maze-le 7y ago
I think the main reason behind the better economic situation in the 1871-1914 period was not a deflationary economy, but the steady increase in factory output -- the industrialization was on its height -- and medical knowledge -- proper sanitation, proper medical procedures, hygiene. Add to that the benefits Europe and the US reaped from colonial imperialism: the "masses" gained access to commodities like sugar, tea, coffee but also cheap alcohol and opium. Usually it was not a gradual improvement in the lifes of common people from poor farmers to well-off middle class. By far the most people not employed in the agrarian sector were working class (working in factories, mines, etc.) and their situation was, compared to today, a hellish nightmare: overcrowded slums, poor access to water and medicine, unstable food-supply. These conditions only improved slightly by the end of that period, usually out of pressure/fear of socialist/communist mass agitation. ----- You are right, the life of most people living in that time period improved significantly. But I would say despite of a deflationary economy, not because of it. And only a minimal percentage of those were middle class.
- lawn 7y ago
  Couldn't you use the same argument against inflation as well? That the improved life and economic growth in the 20th and 21th centuries have been driven by technological advances, and not by the inflationary economy?

baybal2 7y ago

My employer is paying for really expensive publications on economics for electronics industry. Some of the best paid economists in the world say to avoid capex with longer than 5 year payback time as rates are almost destined to go up due to multiple strong factors, including emerging markets becoming more attractive investments.

hourislate 7y ago

We can add Canada to the list. If Interest rates were to rise just a few percent, it would bankrupt the entire country.

Yetanfou 7y ago
Add Sweden as well, same story here. The national bank (Riksbanken) can not increase interest rates because it would have disastrous consequences for the large majority of over-extended loan takers. The low interest rates in their turn lead to the value of the Swedish currency plummeting. No matter what they do, a 'correction' is unavoidable - either the Swedish crown goes to junk status or the number of foreclosures and bankruptcies will skyrocket, followed by the collapse of the housing market, followed by the collapse of those banks which have to write down all those loans with real-estate backing.
- WillPostForFood 7y ago
  If you have a fixed rate loan, inflation is amazing. It is like free money. Inflation: bails out debtors, punishes savers Deflation: punishes debtors, rewards savers
  - izend 7y ago
    Fixed rate loans are only 5 year max in Canada, so yes its great for 5 years but after that have to refinance at the new market rate.
    - WillPostForFood 7y ago
      Yes, good point. The standard 30 year fixed loan in the US is not common internationally.
- ptr 7y ago
  I’m not so sure that a rate hike would be devastating for Swedish loan takers; banks typically don’t give out loans to households that can’t handle large increases. Real estate prices would probably come down a bit, but people would hardly be forced to sell as long as they keep their income. People with large loans typically have large financial buffers. I’m also suspecting that politicians will step in with deductions, etc.

tom_mellior 7y ago

> Also deflation is the number 1 enemy of central banks and the economy in general. I've always thought this was a weird claim, put this simply. Consumer electronics and computers have been deflationary for ever: You can always get a better TV, phone, or computer for less money if you are willing to wait for a year. Yet people can't stop buying them. Because they want them enough. Deflation should only hurt businesses producing stuff that customers aren't really interested in. > businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) I would expect that on business loans you don't just pay interest, you are also expected to regularly pay back actual fractions of the principal. But I admit that I don't know how this works. > The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.

Retric 7y ago
The real issue in a deflationary situation loans effectively become more not less expensive vs 0 inflation situations. Lending always carries the risk of not being paid back, where you can always just keep your own money. So, a 100$ loan needs to return the original 100$ + the risk + some incentive not to use this money for something else. Thus loans are effectively the absolute value of (inflation or deflation rates) + a constant factor.
bboygravity 7y ago
> I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier. There are 2 ways to make a profit on a property investment: 1. Sell at a higher price in the future which offsets all of the costs of holding the property (rented out or not). 2. Rent out at a higher monthly price than whatever the monthly cost is (cost spread out over whatever your investment horizon is), right now. Number 2 means (assuming the house was purchased on credit, which at negative interest rates it should always be as much as possible) that you as the renter(s) are paying back the owners credit he took out for the house, the house's maintenance, the owner's house insurance and taxes and all other costs + THE APPRECIATION IN VALUE OF THE HOUSE FOR THE TIME YOU RENT (higher housing prices = higher monthly rent) + a profit. When you buy a house, you're not giving the owner 30 years worth of rent. You're giving the owner the value of the house, which is way less than the accumulated rent would be over 30 years. Buying a house (on credit) is only ever a net loss if the house's value goes down significantly for whatever reason. Reasons can be: uninsured destruction (war, fire, bad renters) or deflation (due to oversupply of houses such as is the case in Japan right now or due to the overall economy going bad). In other words: assuming a healthy economy, buying a property as an investment (with a 15 - 30 year investment horizon to be able to spread all initial costs over a longer period of time) is ALWAYS a win assuming you can find renters. In the current market (at least in most cities of Western Europe) you will always find renters, because a significant part of the population who would like to buy a house simply can't get the credit they need to buy a house close to where their employment is. Due to the housing prices being too inflated relative to average income from employment. Summary: housing prices higher than the credit people can afford = people can't get credit to buy a house = lots of renters on the market (people rent instead) = makes it interesting to own houses to rent out for profit = housing prices higher = poor people can't get credit to buy a house = lots of renters on the market and so on. See what's happening? Those who can afford real estate investments start receiving an ever larger portion of the income of people who can't afford real estate investments. AKA: the poor and middle class get poorer and the rich get richer.