Historical Periods of High Inflation: Interest Rates?

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

Post Reply
User avatar
tomfoolery
Executive Member
Executive Member
Posts: 1081
Joined: Fri Mar 06, 2020 9:47 pm
Contact:

Historical Periods of High Inflation: Interest Rates?

Post by tomfoolery » Sun Jun 06, 2021 12:08 pm

When we had high inflation in the past, what were *real* interest rates like?

It’s my understanding we had high inflation in the 70s and the Fed jacked up interest rates to attempt to tame inflation.

My specific desire for understanding is real returns for cash accounts. When we had high inflation in the past, were savings account yielding negative 5% real return?

I’m trying to be a filthy market timer, because as a long-time registered Democrat I think I know better than everyone else, and I’m wondering if sticking with risk assets until interest rates rise is a good bet. As opposed to leaving risk assets when rising rates are promised by the fed.

I suspect that at some point in the near future, the Fed will say they will begin tapering bond purchases, which may make rates rise slightly. Currently, interest rates are yielding a minimum negative return of 5% annually.

So even if the fed tapers purchases and rates rise slightly, and we are *only* losing 4% per year in a savings account, I’d still rather have risk assets like stocks and REITs because losing a guaranteed 4% is for the birds.

So in the past, when we had 5% to 10% inflation, were savings accounts at least keeping pace with inflation? I’m guessing the fed had to raise interest rates well above inflation for inflation to stop. For example, it seems prudent for me to be very stock and REIT heavy unless the risk-free savings rate was at least 3% real return. Which would mean an 8% jump in short term interest rates from now.

Although such a jump may also crash the stock market due to increasing corporate borrowing costs.
💉P💉R💉I 💉D💉E💉
User avatar
Tyler
Executive Member
Executive Member
Posts: 2003
Joined: Sat Nov 12, 2011 3:23 pm
Contact:

Re: Historical Periods of High Inflation: Interest Rates?

Post by Tyler » Sun Jun 06, 2021 12:43 pm

tomfoolery wrote:
Sun Jun 06, 2021 12:08 pm

My specific desire for understanding is real returns for cash accounts. When we had high inflation in the past, were savings account yielding negative 5% real return?

No.
Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
https://portfoliocharts.com/2017/05/12/ ... -investor/
User avatar
Hal
Executive Member
Executive Member
Posts: 957
Joined: Tue May 03, 2011 1:50 am

Re: Historical Periods of High Inflation: Interest Rates?

Post by Hal » Sun Jun 06, 2021 12:49 pm

Hi Tom,

Regarding real interest rates, head over to Tylers site. Attached is a screenshot that may be of some use.
If you after more detailed information, have a look at the Trading Economics site -> https://tradingeconomics.com/united-states/indicators

It's 3AM here so back to bed for me!

Edit: Tyler posted while I was writing this up. ;D
Attachments
100% USD.png
100% USD.png (116.8 KiB) Viewed 566 times
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
User avatar
tomfoolery
Executive Member
Executive Member
Posts: 1081
Joined: Fri Mar 06, 2020 9:47 pm
Contact:

Re: Historical Periods of High Inflation: Interest Rates?

Post by tomfoolery » Sun Jun 06, 2021 12:55 pm

Tyler wrote:
Sun Jun 06, 2021 12:43 pm
tomfoolery wrote:
Sun Jun 06, 2021 12:08 pm

My specific desire for understanding is real returns for cash accounts. When we had high inflation in the past, were savings account yielding negative 5% real return?

No.
So it seems we might be on new territory for cash, because of never before seen levels of market manipulation by the Fed?

I would argue actual inflation is 10% or more, but would concede that 5% is the number if it brings more people on the same terms to this discussion. So cash is yielding 0% while inflation is >= 5%, which means a loss of at least 5% in cash.

And it's a weird position because cash is only so low of a rate because of government manipulation. Which means while government is manipulating rates, you are guaranteed to lose 5% or more per year sitting in cash.

But once government stops manipulating rates, your cash will maybe go back to just earning nothing (e.g. not losing money), but the rest of assets may tumble due to higher interest rates negatively impacting stocks, bonds, and gold.

It seems like a game of chicken where those who think the Fed has to stop this game will hold some (or maybe a lot of) cash. But at a guaranteed loss of 5% per year until this happens. Meanwhile others are holding no cash, holding more risk assets, seeing them rise 30% a year, and even if they crash 50%, it might have been better than losing 5% in cash per year, depending on how long this game of chicken lasts.
💉P💉R💉I 💉D💉E💉
User avatar
Tortoise
Executive Member
Executive Member
Posts: 2633
Joined: Sat Nov 06, 2010 2:35 am

Re: Historical Periods of High Inflation: Interest Rates?

Post by Tortoise » Sun Jun 06, 2021 1:34 pm

If CPI underestimates actual inflation now, did it also underestimate actual inflation back in the 1970s?

The historical charts of the real return of cash seem to rely on the accuracy of the government’s official measure of inflation.
User avatar
tomfoolery
Executive Member
Executive Member
Posts: 1081
Joined: Fri Mar 06, 2020 9:47 pm
Contact:

Re: Historical Periods of High Inflation: Interest Rates?

Post by tomfoolery » Sun Jun 06, 2021 1:45 pm

Tortoise wrote:
Sun Jun 06, 2021 1:34 pm
If CPI underestimates actual inflation now, did it also underestimate actual inflation back in the 1970s?

The historical charts of the real return of cash seem to rely on the accuracy of the government’s official measure of inflation.
Good question.

I know CPI books were cooked in the last 20 to 30 years to undercount inflation. What I dont know is if they went back historically and re-calculated old CPI based on the new algorithms. Or if the algorithm change:

Such as substitution goods
Such as homeowner rental equivalent

Was only proactive going forward in time or did they retroactively cook the old books too?

Not that it matters much since even the government will say official CPI is 5% or more this year using cooked books. It's already at 4.2% I believe? Which would mean even compared to historical standards, if books were cooked back then, we're in uncharted territory.
💉P💉R💉I 💉D💉E💉
User avatar
Hal
Executive Member
Executive Member
Posts: 957
Joined: Tue May 03, 2011 1:50 am

Re: Historical Periods of High Inflation: Interest Rates?

Post by Hal » Sun Jun 06, 2021 5:03 pm

Tortoise wrote:
Sun Jun 06, 2021 1:34 pm
If CPI underestimates actual inflation now, did it also underestimate actual inflation back in the 1970s?

The historical charts of the real return of cash seem to rely on the accuracy of the government’s official measure of inflation.

Don't think so. Believe the calculations were changed in the 80's.
Look up John Williams from Shadow Stats - he recalculates the inflation rate using the earlier methodology.
He states the real rate is around 11%

https://usawatchdog.com/inflation-implo ... -williams/
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
D1984
Executive Member
Executive Member
Posts: 561
Joined: Tue Aug 16, 2011 7:23 pm

Re: Historical Periods of High Inflation: Interest Rates?

Post by D1984 » Sun Jun 06, 2021 5:47 pm

tomfoolery wrote:
Sun Jun 06, 2021 12:08 pm
When we had high inflation in the past, what were *real* interest rates like?

It’s my understanding we had high inflation in the 70s and the Fed jacked up interest rates to attempt to tame inflation.

My specific desire for understanding is real returns for cash accounts. When we had high inflation in the past, were savings account yielding negative 5% real return?

I’m trying to be a filthy market timer, because as a long-time registered Democrat I think I know better than everyone else, and I’m wondering if sticking with risk assets until interest rates rise is a good bet. As opposed to leaving risk assets when rising rates are promised by the fed.

I suspect that at some point in the near future, the Fed will say they will begin tapering bond purchases, which may make rates rise slightly. Currently, interest rates are yielding a minimum negative return of 5% annually.

So even if the fed tapers purchases and rates rise slightly, and we are *only* losing 4% per year in a savings account, I’d still rather have risk assets like stocks and REITs because losing a guaranteed 4% is for the birds.

So in the past, when we had 5% to 10% inflation, were savings accounts at least keeping pace with inflation? I’m guessing the fed had to raise interest rates well above inflation for inflation to stop. For example, it seems prudent for me to be very stock and REIT heavy unless the risk-free savings rate was at least 3% real return. Which would mean an 8% jump in short term interest rates from now.

Although such a jump may also crash the stock market due to increasing corporate borrowing costs.
From 1946-1951 savings accounts and safe cash equivalents most certainly weren't keeping pace with inflation....especially during 1946-47 and mid-1950 through most of 1951; an investor in T-Bills during this period lost around 25% in real terms IIRC with bank savings accounts not doing a whole lot better. During the 1970s T-Bills generally at least kept up with inflation with the exception of the period from late 1973 to late 1978 or early 1979.

Also, where are you getting -5% real rates from? Inflation was around 4.2% year-over-year from April 2020 to April 2021 but much of that was due to base effects (since inflation was depressed year-over-year in April and May of 2020 this means that any Y-O-Y reading will be starting from a lot lower base than normal if you start from those months; see https://www.forbes.com/sites/georgecalh ... 86c0516be2 . I would be a lot more concerned about CPI inflation if by August or September--since that's when base effects will almost entirely stop effecting inflation readings since inflation was back on its pre-early 2020/pre-COVID trend by that point--it's still showing any more than a 3.0% or 3.1% year-over-year rise...although I'd also look at the Atlanta Fed's "Sticky Price CPI" to see how much of this is getting anchored into inflation expectations--and thus risking setting off a 1970s style wage-margin-price spiral--vs how much is just due to temporary supply chain disruptions as the economy fully kicks back into gear).
User avatar
tomfoolery
Executive Member
Executive Member
Posts: 1081
Joined: Fri Mar 06, 2020 9:47 pm
Contact:

Re: Historical Periods of High Inflation: Interest Rates?

Post by tomfoolery » Sun Jun 06, 2021 6:28 pm

D1984 wrote:
Sun Jun 06, 2021 5:47 pm
9.

Also, where are you getting -5% real rates from? Inflation was around 4.2% year-over-year from April 2020 to April 2021 but much of that was due to base effects (since inflation was depressed year-over-year in April and May of 2020 this means that any Y-O-Y reading will be starting from a lot lower base than normal if you start from those months; see https://www.forbes.com/sites/georgecalh ... 86c0516be2 .
What a wonderful way to measure inflation. It's not really 4.2% because it dipped just beforehand by 1% so it's really only 3%.

Perhaps if CPI hits double digits by end of the year, instead of looking at annual inflation we can look at 10 year average. Because then inflation would still only be about 3% over ten years.

And if this transitory inflation hits double digit levels for more than a few years, perhaps we can measure inflation as an average over the last 100 years.

And if inflation hits Venezeula levels, perhaps we can look at median inflation per year over last century.

Nothing to worry about.
💉P💉R💉I 💉D💉E💉
User avatar
vnatale
Executive Member
Executive Member
Posts: 6197
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Historical Periods of High Inflation: Interest Rates?

Post by vnatale » Sun Jun 06, 2021 8:53 pm

tomfoolery wrote:
Sun Jun 06, 2021 12:08 pm

When we had high inflation in the past, what were *real* interest rates like?

It’s my understanding we had high inflation in the 70s and the Fed jacked up interest rates to attempt to tame inflation.

My specific desire for understanding is real returns for cash accounts. When we had high inflation in the past, were savings account yielding negative 5% real return?

I’m trying to be a filthy market timer, because as a long-time registered Democrat I think I know better than everyone else, and I’m wondering if sticking with risk assets until interest rates rise is a good bet. As opposed to leaving risk assets when rising rates are promised by the fed.

I suspect that at some point in the near future, the Fed will say they will begin tapering bond purchases, which may make rates rise slightly. Currently, interest rates are yielding a minimum negative return of 5% annually.

So even if the fed tapers purchases and rates rise slightly, and we are *only* losing 4% per year in a savings account, I’d still rather have risk assets like stocks and REITs because losing a guaranteed 4% is for the birds.

So in the past, when we had 5% to 10% inflation, were savings accounts at least keeping pace with inflation? I’m guessing the fed had to raise interest rates well above inflation for inflation to stop. For example, it seems prudent for me to be very stock and REIT heavy unless the risk-free savings rate was at least 3% real return. Which would mean an 8% jump in short term interest rates from now.

Although such a jump may also crash the stock market due to increasing corporate borrowing costs.


My memory says that federal law capped savings accounts rates at 5 1/4%.

When money market funds came out in the early 80s, their rates paralleled what we were being charged for interest.

But savings accounts were FDIC backed while money market funds were not.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
D1984
Executive Member
Executive Member
Posts: 561
Joined: Tue Aug 16, 2011 7:23 pm

Re: Historical Periods of High Inflation: Interest Rates?

Post by D1984 » Sun Jun 06, 2021 9:09 pm

tomfoolery wrote:
Sun Jun 06, 2021 6:28 pm
D1984 wrote:
Sun Jun 06, 2021 5:47 pm
9.

Also, where are you getting -5% real rates from? Inflation was around 4.2% year-over-year from April 2020 to April 2021 but much of that was due to base effects (since inflation was depressed year-over-year in April and May of 2020 this means that any Y-O-Y reading will be starting from a lot lower base than normal if you start from those months; see https://www.forbes.com/sites/georgecalh ... 86c0516be2 .
What a wonderful way to measure inflation. It's not really 4.2% because it dipped just beforehand by 1% so it's really only 3%.

Perhaps if CPI hits double digits by end of the year, instead of looking at annual inflation we can look at 10 year average. Because then inflation would still only be about 3% over ten years.

And if this transitory inflation hits double digit levels for more than a few years, perhaps we can measure inflation as an average over the last 100 years.

And if inflation hits Venezeula levels, perhaps we can look at median inflation per year over last century.

Nothing to worry about.
Did you not even read what was in the attached link? My point (and the point of the author of the page I linked) was that you shouldn't merely look at one or two data points that are exactly 12 months from an artificially depressed bottom and then start worrying that the inflationary sky is falling and/or assume it's a given that we soon will be seeing double-digit inflation.....what you are seeing is likely a temporary blip caused by starting--when measuring on a 12 months year-over-year basis--from a lower level than normal. We had similar Y-O-Y spikes/temporary rises/blips (just that I can recall from when I started paying attention to this sort of thing....I'm sure there were plenty before that too) that were for a short time above the Fed's preferred 2% or so comfort zone in 2005, 2006, 2008, 2011, and early 2017 and every one of those turned out to be transitory rather than the start of "here comes the 1970s all over again".

FWIW Y-O-Y inflation from Apr 2019 to Apr 2020 was barely positive (around 0.3%); given that the Fed is aiming for 2 to 2.5% an increase of 4.2% for Y-O-Y Apr '20 to Apr '21 would put us basically at or a tiny bit above trend. If anything, the May '21 Y-O-Y inflation reading might even be a bit higher than the April '21 figure since the May '20 reading was the nadir. After that, though, I would only start being seriously worried if by mid to late autumn we still see both CPI, core CPI, sticky CPI, and PCE all at an above-trend level and continuing to accelerate much beyond the high 2% or low 3% range....at that point the Fed should probably start putting on the monetary brakes.

Look, it sucks that you missed out on the chance to buy a house in a HCOL area a decade or so ago and now said house is even less affordable but whose fault is that? Did someone put a gun to your head and tell you not to buy a home or else they'd blow your brains out? You could've bought a property but for whatever reason, you chose not to. Don't blame "inflation" or the Fed for an investing decision you chose to make or not make.

Finally, if you are really so concerned about being able to afford real estate then--back when you chose not to buy a home--why did you not instead invest in something that would directly benefit from rising real estate prices.....say:

A. Case-Shiller Index futures that most closely matched the locality you wanted to buy in (these futures exist for eleven major US metro areas and have been around and traded on the CME since the late 2000s) which IIRC was California,

or

B. Something like the Residential REIT Index ETF (ticker REZ) or individual SFR focused REITs like AMH or Colony Starwood (the latter of which got bought out by Invitation Homes which is ticker symbol INVH), or even a mostly apartment focused but with a bit in SFRs/duplexes/fourplexes REIT like EQR.

In the case of Option A. You would've in theory see your investment appreciate at roughly the price of housing in the metro area/s you chose (minus the implied financing costs on the futures which would be very little because rates were pretty low over this period) although the level of demand/supply of futures contract buyers i.e. whether the futures contracts were typically in contango or backwardation depending on whether more people wanted to buy or sell a particular city's future could affect this too; in the case of Option B. your investment would actually have appreciated at slightly more than the San Diego metro area prices and roughly equal to the LA metro area real estate prices (at least judging by the Case Shiller indices for those two metro areas) and not quite as much as SF prices but it sure would've beat holding cash.

For that matter, as much as you make you should be considered an "accredited investor" and therefore should've had access to the privately traded real estate investment funds that Blackrock and the other institutional buyers were putting together back in the early to mid 2010s (in other words you could've gotten a piece of the action by investing with the same institutional investors that were snapping up single-family homes left and right back ten years ago).
Kevin K.
Executive Member
Executive Member
Posts: 344
Joined: Mon Apr 26, 2010 2:37 pm

Re: Historical Periods of High Inflation: Interest Rates?

Post by Kevin K. » Mon Jun 07, 2021 10:53 am

This worthwhile post about measuring inflation and personal experience of it just arrive in my email inbox this morning (it's from one of the few finance/ER blogs I follow regularly):

https://www.caniretireyet.com/personal-inflation-rate/

I think it's a good complement to D1984's insightful post above in this thread and (I hope) also a worthwhile bookend to some of the sky-is-falling speculation shared elsewhere in the thread. For me anyway the points made here about personal rate of inflation vs. government metrics, along with Tyler's important article on the role of cash and its greatly underestimated role in combatting inflation, are much-needed voices of reason amidst all of the inflation hysteria being fanned by financial pundits of late.

As Chris Mamula points out in the linked article, a lot of it comes down to being able to avoid a lot of the effects of inflation by being flexible, frugal and adaptable in one's thinking and spending.
Post Reply