It's particularly good for those with debt, and the low rates are quite unattractive for those with savings, but please feel free to prove otherwise.
Low interest rates drive up asset values => As asset values are driven up, borrowers take on larger nominal debts => Deflation increases the NPV of payments against debt
Take a loan of $100 on a term of 20 years and instead of thinking about it from the point of view of the chump who has taken out the loan, think about it as the bank thinks about it: as an asset backed security (or covered bond, if you will).
You can take the bond pricing formula, and substitute inflation for the coupon rate ( or the delta of the coupon and inflation):
The lower the inflation, the more the security is worth to the bank, and the less it is worth to the issuer.
While the low rates are unattractive for savers, the key is the difference between the interest rate and the inflation(deflation) rate. If prices are deflating faster than interest rates are falling, the saver still comes out ahead.
Trollie
10 Oct 2016, 07:53 PM
You're in f***ing denial, it's ALWAYS been about household income. As soon as women were allowed into the work force households had 2 incomes not 1.
You might want to sit this one out. It's a long way above your pay grade.
b_b
10 Oct 2016, 07:48 PM
Plus those with debt have more cash left over because they are paying less for food and energy.
Low interest rates drive up asset values => As asset values are driven up, borrowers take on larger nominal debts => Deflation increases the NPV of payments against debt
Not necessarily. Anyone with assets and loans against those assets is making out like a bandit as the cost of those debts is plunging.
In addition, if asset prices rise solely because debt is cheap then why are houses half price in Brisbane and even less in Adelaide, why are Perth house prices going down when money is getting cheaper. There have to be local reasons.
It actually raises some questions for me. I can clear all debts, but it's probably not worth my while to do that. Buying more assets instead becomes more attractive as rates go lower. In fact they don't even have to fall, just remain low for a long time, and I expect them to do that.
Take risks - if you win you will become wealthy, if you lose you will become wise
Early 90s. I was saving on pre grad and graduate wages. First house cost 6 x my income when I bought, and was cheaper than the Sydney median house price. Initial mortgage rate was around 10%. I took in house mates who paid me rent that helped pay off that first house mortgage.
For Aussie property bears, "denial", is not just a long river in North Africa.....
Low interest rates drive up asset values => As asset values are driven up, borrowers take on larger nominal debts => Deflation increases the NPV of payments against debt
Take a loan of $100 on a term of 20 years and instead of thinking about it from the point of view of the chump who has taken out the loan, think about it as the bank thinks about it: as an asset backed security (or covered bond, if you will).
You can take the bond pricing formula, and substitute inflation for the coupon rate ( or the delta of the coupon and inflation):
The lower the inflation, the more the security is worth to the bank, and the less it is worth to the issuer.
While the low rates are unattractive for savers, the key is the difference between the interest rate and the inflation(deflation) rate. If prices are deflating faster than interest rates are falling, the saver still comes out ahead.
You might want to sit this one out. It's a long way above your pay grade. But the NPV of their debt is increasing.
But the NPV of other living costs are decreasing.
So the issue comes down to asset prices. The belief asset prices fall in a deflationary environment is an assumption. That is not always the case.
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