5 ms·

> "Inflation benefits people in debt" Only if that debt is at fixed rates of interest, like corporate bonds or a fixed-rate mortgage. If your rate is variable,

> "Inflation benefits people in debt" Only if that debt is at fixed rates of interest, like corporate bonds or a fixed-rate mortgage. If your rate is variable, then inflation leads to higher interest rates which increases the cost of servicing that debt. Note that the US mortgage market is unusual in that 30-year fixed rates are quite common. In most of the world, mortgages are variable-rate, or fixed for much shorter periods.

gymbeaux 4y ago
Actually, higher inflation doesn’t necessarily correspond to higher variable interest rates. Indirectly, yea, but only because the fed is raising the benchmark rate to “fight inflation”.
- lazide 4y ago
  No one is going to write a mortgage for a lower rate than inflation unless they’re crazy (so the gov’t might, but even then not usually!). They’d be signing up to 100% burn their cash doing so. Inflation absolutely impacts mortgage rates, and all other lending.
  - luckylion 4y ago
    So the standard mortgage rate is agreed on as "official inflation rate + x%"?
    - lazide 4y ago
      Nope. But ‘cost of money’ + x% (where x% is based on risk of repayment, and cost of money includes inflation) is a hard rule for a lender to avoid without going bankrupt. Lenders who go bankrupt tend to not be lenders very long.
      - luckylion 4y ago
        Oh, you mean for long-term high inflation, right? I mistook that to apply to today. Someone who signed a mortgage 5 years ago should be pretty happy if their salary kept up with inflation, wouldn't they?
        lazide 4y ago
        Oh for sure, assuming they got a fixed rate. Inflation that starts AFTER the loan was written/that wasn’t priced in to the loan helps the debtor. The lender, not so much. So mortgages written today need to include the lenders best guess about future inflation, or they’ll expect to go bankrupt in the future. Which is generally a bad business practice. They also have to give competitive rates, or someone else will end up writing that loan, and they’ll be out of business due to lack of customers. As the future is unpredictable, that is of course a risky business unless they’re a special entity like the Fed that can do whatever it wants.
    - refurb 4y ago
      No, but lenders demand interest in excess of inflation. Inflation can be transitory, so just because its 7% now doesnt mean a 10 year bond has to be more. And the mortgage interest rate is set by the bond market, because thats who funds mortgages in the end (see Fannie and Freddie).
      - lazide 4y ago
        FYI, while the Fed was doing QE, they were buying almost all mortgage bonds. That was a core part of the program. It’s in the trillions. So yes, what you’re describing is true - but it has been extremely distorted for a very long time, intentionally. [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] [https://www.cbo.gov/system/files/2022-09/57519-balance-sheet.pdf https://www.cbo.gov/system/files/2022-09/57519-balance-sheet...]
  - looping__lui 4y ago
    I totally have a mortgage rate that was lower than inflation at the time because it was sth like 0.7% above market rate for 20 years fixed… Banks don’t care about the real value of money the way normal people do. Borrow 100k, pay 1% interest, buy a piece of stone and sell it for 200k after a couple of decades because of inflation and pay back a banks 100k: they are happy because the math adds up.
    - lazide 4y ago
      well, except the math doesn’t actually add up in that case for anyone ‘real’ including any bank using normal lending sources, as that 100k paid back is now worth far less than 100k back when the loan was written. The reality is that for a long time the Fed was using QE to buy up mortgage bonds written at nearly arbitrarily low rates. Bonds that no one else would buy/fund because the odds of losing money were too great. They’d been doing so since ‘09 or thereabouts to keep that market liquid. So they were willingly taking the risk of money destruction, and as the one entity that could do so, that’s pretty good. They’re probably the only one that could really do so without going bankrupt, as they are the only entity that can ‘create’ money arbitrarily in the system. It’s around 2.6 trln dollars right now [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] The vast majority of the banks haven’t been underwriting mortgages themselves for a very long time, and the ones that were had been getting put in scarier and scarier positions because of the Fed’s actions. Right now, the entire sector is in the process of imploding because the Fed has stopped doing what it was before, and trying to push the markets back to reflect a more realistic cost of money, which of course dries up demand as prices are still based on ‘free cash’ as the benchmark - https://www.bloomberg.com/news/articles/2022-08-19/mortgage-lenders-are-starting-to-go-broke-as-loan-volumes-plunge https://www.bloomberg.com/news/articles/2022-08-19/mortgage-...
      - looping__lui 4y ago
        Thats the problem. The FEDs gave the banks the money for free. And we gave it to them for free as well because we didn’t get any savings on our accounts… Those who borrowed money and bought assets literally took a tiny little bite from everybodys savings account every year..
  - gymbeaux 4y ago
    I don’t think so… I mean which inflation figure are you talking about? The one that happens to be about what a 30-year mortgage would also be right now? That’s not usually the case. Mortgage rates are “fed benchmark” + a couple percentage points. Beyond that, correlation to inflation is coincidental.
    - lazide 4y ago
      See my other comments - the fed has been intervening as part of QE since ‘07-‘09 and until recently. they gradually tapered then stopped Dec ‘22. No surprise that mortgage rates started doing weird stuff about then eh? The relationships to the fed funds rate is also because that is the rate a bank or other big entity can always borrow at, and the fed is happy to ‘print’ as much money as necessary to satiate all qualified applicants at that rate.

gymbeaux 4y ago

Actually, higher inflation doesn’t necessarily correspond to higher variable interest rates. Indirectly, yea, but only because the fed is raising the benchmark rate to “fight inflation”.

lazide 4y ago
No one is going to write a mortgage for a lower rate than inflation unless they’re crazy (so the gov’t might, but even then not usually!). They’d be signing up to 100% burn their cash doing so. Inflation absolutely impacts mortgage rates, and all other lending.
- luckylion 4y ago
  So the standard mortgage rate is agreed on as "official inflation rate + x%"?
  - lazide 4y ago
    Nope. But ‘cost of money’ + x% (where x% is based on risk of repayment, and cost of money includes inflation) is a hard rule for a lender to avoid without going bankrupt. Lenders who go bankrupt tend to not be lenders very long.
    - luckylion 4y ago
      Oh, you mean for long-term high inflation, right? I mistook that to apply to today. Someone who signed a mortgage 5 years ago should be pretty happy if their salary kept up with inflation, wouldn't they?
      - lazide 4y ago
        Oh for sure, assuming they got a fixed rate. Inflation that starts AFTER the loan was written/that wasn’t priced in to the loan helps the debtor. The lender, not so much. So mortgages written today need to include the lenders best guess about future inflation, or they’ll expect to go bankrupt in the future. Which is generally a bad business practice. They also have to give competitive rates, or someone else will end up writing that loan, and they’ll be out of business due to lack of customers. As the future is unpredictable, that is of course a risky business unless they’re a special entity like the Fed that can do whatever it wants.
  - refurb 4y ago
    No, but lenders demand interest in excess of inflation. Inflation can be transitory, so just because its 7% now doesnt mean a 10 year bond has to be more. And the mortgage interest rate is set by the bond market, because thats who funds mortgages in the end (see Fannie and Freddie).
    - lazide 4y ago
      FYI, while the Fed was doing QE, they were buying almost all mortgage bonds. That was a core part of the program. It’s in the trillions. So yes, what you’re describing is true - but it has been extremely distorted for a very long time, intentionally. [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] [https://www.cbo.gov/system/files/2022-09/57519-balance-sheet.pdf https://www.cbo.gov/system/files/2022-09/57519-balance-sheet...]
- looping__lui 4y ago
  I totally have a mortgage rate that was lower than inflation at the time because it was sth like 0.7% above market rate for 20 years fixed… Banks don’t care about the real value of money the way normal people do. Borrow 100k, pay 1% interest, buy a piece of stone and sell it for 200k after a couple of decades because of inflation and pay back a banks 100k: they are happy because the math adds up.
  - lazide 4y ago
    well, except the math doesn’t actually add up in that case for anyone ‘real’ including any bank using normal lending sources, as that 100k paid back is now worth far less than 100k back when the loan was written. The reality is that for a long time the Fed was using QE to buy up mortgage bonds written at nearly arbitrarily low rates. Bonds that no one else would buy/fund because the odds of losing money were too great. They’d been doing so since ‘09 or thereabouts to keep that market liquid. So they were willingly taking the risk of money destruction, and as the one entity that could do so, that’s pretty good. They’re probably the only one that could really do so without going bankrupt, as they are the only entity that can ‘create’ money arbitrarily in the system. It’s around 2.6 trln dollars right now [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] The vast majority of the banks haven’t been underwriting mortgages themselves for a very long time, and the ones that were had been getting put in scarier and scarier positions because of the Fed’s actions. Right now, the entire sector is in the process of imploding because the Fed has stopped doing what it was before, and trying to push the markets back to reflect a more realistic cost of money, which of course dries up demand as prices are still based on ‘free cash’ as the benchmark - https://www.bloomberg.com/news/articles/2022-08-19/mortgage-lenders-are-starting-to-go-broke-as-loan-volumes-plunge https://www.bloomberg.com/news/articles/2022-08-19/mortgage-...
    - looping__lui 4y ago
      Thats the problem. The FEDs gave the banks the money for free. And we gave it to them for free as well because we didn’t get any savings on our accounts… Those who borrowed money and bought assets literally took a tiny little bite from everybodys savings account every year..
- gymbeaux 4y ago
  I don’t think so… I mean which inflation figure are you talking about? The one that happens to be about what a 30-year mortgage would also be right now? That’s not usually the case. Mortgage rates are “fed benchmark” + a couple percentage points. Beyond that, correlation to inflation is coincidental.
  - lazide 4y ago
    See my other comments - the fed has been intervening as part of QE since ‘07-‘09 and until recently. they gradually tapered then stopped Dec ‘22. No surprise that mortgage rates started doing weird stuff about then eh? The relationships to the fed funds rate is also because that is the rate a bank or other big entity can always borrow at, and the fed is happy to ‘print’ as much money as necessary to satiate all qualified applicants at that rate.