"Sound unfamiliar? It is exactly what no government in Europe, including the UK, is remotely thinking about."
I'd have completely agreed with you up until last week, but the ECB's new policy (QE for longer) appears to go against that.
Having said that, I'd suggest that at the first sign of inflation, the Germans/Bundesbank will insist the ECB taper QE and start raising interest rates.
As you pointed out in a previous podcast, rising interest rates will fix Ireland's house price inflation.
Thanks! Good point about the ECB but I guess my thesis is that both arms of policy have to be flat out. Fiscal orthodoxy lingers I’m afraid. I hope I’m wrong!
Chris - Thanks for an interesting article. Two questions which perhaps you and Jim could clarify
1. If interest rates increase then so does the interest payments Governments repay for their borrowings - how are increased payments repaid by Governments ? Possibly with increased taxes which reduce the benefit of the increased wages? I appreciate the impact of this depends on the scale of interest rate increase.
2. In relation to house prices in Ireland - I agree with the impact of low interest rates, but is there also a contributory factor of people hoarding land to limit housing supply? Perhaps higher interest rates may nudge those landowners to release land to pay for increased interest charges ?
Higher interest rates today will increase future government borrowing costs. The exiting stock of debt is not affected until it is rolled over or repaid. Inflation, which is what will/could cause higher rates will ,easy to lower real value of the debt and higher taxes. So it’s swings and roundabouts.
Land hoarding is an issue and there should be ‘use it or lose it’ rules. Including extra taxes in unused land..
Thanks Chris - hear you on the current debt (fixed rate interest bond) - missed that :). On the younger folk taking up their pitch forks - I read Eric Lonergan's / Mark Blyth's Angry economics and there's some interesting proposals for future public wealth management akin to Norway but using methods such as Citizen's Wealth Fund with debt for low interest bonds to be invested long term and the 'digital tax' (not the type the OECD / EU are proposing) related to funds from public auditions of 5G waveband spectrum. Cheers
If interest rates go up, presumably bond yields will follow, so stay out of bonds until the rates have risen? That still seems to be more than a year away? Similarly, once interest rates rise, leveraged property becomes expensive, however in Ireland the magic number for mortgage applications is currently not entirely the rate, which is still relatively high compared with wholesale rates, but the income multiple, which is already under populist upward pressure. The likelihood is that that stays the same, inflation in incomes could continue to support house prices, despite mortgage interest increases. What do you think? Thanks
Thanks a million! There are so many ways this could go - my hunch, only that, is that rates will stay low for a good while for the factors that I mention. If real incomes do rise strongly, as you say, this could offset any rise in bond/mortgage rates. It is worth noting that the rise in house prices is pretty much a global phenomenon so would seem to have a common cause: my number one suspect is low rates.
Chris, superb piece as always.
Just to delve a little deeper into one point
"Sound unfamiliar? It is exactly what no government in Europe, including the UK, is remotely thinking about."
I'd have completely agreed with you up until last week, but the ECB's new policy (QE for longer) appears to go against that.
Having said that, I'd suggest that at the first sign of inflation, the Germans/Bundesbank will insist the ECB taper QE and start raising interest rates.
As you pointed out in a previous podcast, rising interest rates will fix Ireland's house price inflation.
Thanks! Good point about the ECB but I guess my thesis is that both arms of policy have to be flat out. Fiscal orthodoxy lingers I’m afraid. I hope I’m wrong!
Chris - Thanks for an interesting article. Two questions which perhaps you and Jim could clarify
1. If interest rates increase then so does the interest payments Governments repay for their borrowings - how are increased payments repaid by Governments ? Possibly with increased taxes which reduce the benefit of the increased wages? I appreciate the impact of this depends on the scale of interest rate increase.
2. In relation to house prices in Ireland - I agree with the impact of low interest rates, but is there also a contributory factor of people hoarding land to limit housing supply? Perhaps higher interest rates may nudge those landowners to release land to pay for increased interest charges ?
Higher interest rates today will increase future government borrowing costs. The exiting stock of debt is not affected until it is rolled over or repaid. Inflation, which is what will/could cause higher rates will ,easy to lower real value of the debt and higher taxes. So it’s swings and roundabouts.
Land hoarding is an issue and there should be ‘use it or lose it’ rules. Including extra taxes in unused land..
Thanks Chris - hear you on the current debt (fixed rate interest bond) - missed that :). On the younger folk taking up their pitch forks - I read Eric Lonergan's / Mark Blyth's Angry economics and there's some interesting proposals for future public wealth management akin to Norway but using methods such as Citizen's Wealth Fund with debt for low interest bonds to be invested long term and the 'digital tax' (not the type the OECD / EU are proposing) related to funds from public auditions of 5G waveband spectrum. Cheers
Great article
If interest rates go up, presumably bond yields will follow, so stay out of bonds until the rates have risen? That still seems to be more than a year away? Similarly, once interest rates rise, leveraged property becomes expensive, however in Ireland the magic number for mortgage applications is currently not entirely the rate, which is still relatively high compared with wholesale rates, but the income multiple, which is already under populist upward pressure. The likelihood is that that stays the same, inflation in incomes could continue to support house prices, despite mortgage interest increases. What do you think? Thanks
Thanks a million! There are so many ways this could go - my hunch, only that, is that rates will stay low for a good while for the factors that I mention. If real incomes do rise strongly, as you say, this could offset any rise in bond/mortgage rates. It is worth noting that the rise in house prices is pretty much a global phenomenon so would seem to have a common cause: my number one suspect is low rates.