Thread

1. bwb · 1789586180 · focus · HN ↗

   Get ready for a fun ride my friends :)

   Fun ride =

   Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification).

   Government debt is high in several key economies, and the bond market is being saturated with AI-related bonds, as well as possibly people finally tired of lending the USA/France/UK money at low rates and demanding higher ones. And with higher interest rates and bonds rolling over it means more and more money going to pay for the debt, rather than core services.

   Wild cards lurking in the bushes... AI, AGI, RSI.

   And yonder you have a nuclear power floundering; its only source of hard currency is being rightfully degraded, and its leadership delusional.

   And the one to watch IMO... Russian wheat export ability: wheat prices are up considerably, and combined with inflation from oil, this is the kind of stuff that creates waves of political change like the Arab Spring.

   1. leptons · 1789586770 · focus · HN ↗

      This comment isn't helpful. Please explain for those of us without a degree in economics.

      1. iamnothere · 1789587523 · focus · HN ↗

         Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, and possibly consumer defaults on loans and mortgages.

         Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.

         Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.

         Edit: wow, I really set off a discussion with this. See replies below for clarification on mortgage rates, which is the least important part anyways. Also, I should note that a lot of the above is a worst case scenario, if energy isn’t solved soon and especially if bonds don’t respond to the hike, leading to further hikes.

         1. tossandthrow · 1789588477 · focus · HN ↗

            Neutral for buyers? Absolutely not.

            As a buyer you rather want to take out a loan in a high interest rate environment than a low interest rate environment, given that the monthly payment is the same.

            1000 usd extra paid towards your mortgage actually makes a difference when the rate is 15% compared to when it is 1.5%

            1. iamflimflam1 · 1789589788 · focus · HN ↗

               This really doesn’t make sense.

               Higher interest rates mean the monthly payment is higher. You need to pay back the principal + the interest.

               1. bluGill · 1789591041 · focus · HN ↗

                  He assumed that the payment is the same meaning the principal for the same house went down and so this is neutral. If your payment is the same it doesn't matter what is principal vs interest. In the best cases rates go down in the future and then you refinance and your payment goes way down.

                  House prices tend to be "sticky", so that assumption is probably wrong. People who own a house often cannot afford to sell for the current value since it won't pay off their loan and leave enough money left over for a replacement house so they avoid moving. Eventually things get bad enough that they "sell short", but that takes a credit hit so you don't want to do that until the loss is large (and in turn you gain more).

                  1. iamflimflam1 · 1789635503 · focus · HN ↗

                     Maybe the mortgage system is different in the US.

                     But if you have a 25 year term on a loan for a $500,000

                     Approx numbers:

                     5%: $2922 monthly, total paid: $876,885

                     10%: $4543 monthly, total paid: $1,353,000.

                     1. bluGill · 1789653711 · focus · HN ↗

                        You didn't do the same math.

                        Given a $1500 monthly payment and a 30 year loan (30 year is most common in the US), at 5% loan is $279,400; at 10% the loan is for 170,900.

                        1. maattdd · 1789653835 · focus · HN ↗

                           How is 10% less than 5% ?

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