Dod101 wrote:I suppose there is room to speculate how much interest rates will drop. Once the world has adjusted to higher rates, I hope they do not fall too far. We cannot live on 'free' borrowings for ever and I do not think it is healthy to do so anyway.
The worlds potentially turning Japanese.
Pre September 21st 1931 and money was gold, Sovereign Pound coins, alongside One Pound notes. Gold being finite and inflation broadly averaged 0%, so depositing your gold such as lending it to the state, in return provided safe storage and interest - a real rate of return. Bonds and stocks broadly yielded similar total returns, so many opted for the simpler option of just depositing their gold (money) for interest in safe options such as government bonds. But then on the 21st September 1931 Parliament had to rush through legislation and did so in less than 7 hours in order to decouple Pound notes from gold, you could no longer go into a bank and ask to withdraw your deposit as gold sovereigns and instead had to accept Pound notes. Fiat currency where the Pound became backed by nothing other than 'confidence'. Which opened up the option for printing/spending - that devalues all other notes in circulation, benefits the printer, costs everyone else. Inflation being biased upward, as though it were just another form of taxation. Bonds went from real return assets to broadly being 0% real (but in a volatile manner over decade+ long periods).
Whist central banks are supposed to be 'independent' they're not, smoke and mirrors. Japan's central bank pretty much buys up all of the bonds that the treasury issue. Fundamentally a internal debt is not a problem, rather its just a money redistribution matter. If in a family a brother owes his sister £1000, that's not a external issue, just a internal family issue. Japan's debt to GDP (income/earnings) is a multiple factor, but doesn't really matter. Others such as the US and UK are also beginning along those same lines, why bother with borrowing gold/money when as fiat money you can just print/spend. No need for Gilts other than for accounting purposes, along with forcing pension funds also having to buy them so as to gain access to indirect taxation of pension funds.
If state bonds pay high rates so banks have to compete with that. At low/0% state bond yields that competition is near zero (other than for savers/investors the security of lending to the state is higher than compared to lending to others such as banks).
State (Gilt) interest rates are still low, if not lower than before. 0% interest when inflation is 2% is -2% real. 4% interest when inflation is 10% is -6% real. Whilst not putting banks under pressure to compete.
Broadly lending or borrowing nowadays washes, neither borrows or lenders consistently win, it alternates. So much so that HMRC don't even bother taxing capital gains on Gilts as that's a zero sum game, tendency to just cost overall if taxes were to be applied for no overall broad benefit. From the high interest rate periods of the 1980's we've seen a transition down to very low rates, lender won, even those who held cash deposits beat inflation by around 2%/year real. Great for all assets, bonds, houses, stocks ...etc. But that's now flipped, where negative real yields may persist for perhaps a decade or two, maybe more, that puts downside pressures on assets, houses/stocks/etc. No longer a case of dead-easy to win, even if you just held cash deposits, more a case of even to preserve purchase power of money set aside today to be spent later being more of a challenge. One possible means to do that is to become a borrower, benefit from negative real yields. If you locked into a 2% 10 year mortgage agreement a few years back, assuming such were on offer, then high inflation combined with fixed low rate interest is/was a winner.
'We' can live on free-borrowings, fundamentally however 'we' is the state, we the people do not have the same access to such free-money anywhere near as easily. It is possible still, but with time it will become like inflation linked savings bonds/certificates, withdrawn from general retail access.
One possibility is that the state/BoE have done a good job of convincing that high inflation is just short term, and kept wage increases and interest rates low, but where that inflation could become ingrained, such that rates might start to rise. Or inflation could fall, enabling interest rates to remain much the same.
'We' can live on free-borrowing - at least for decades, as equally as how we lived on positive real-yields for decades 1980's to mid 2000's - its just business as normal (cycles). Alongside that taxation also tends to correlate. 1980's to 2000's declining taxation, counter cycles and taxation tends to rise (typically towards 40% basic rate taxation, that uni-grads in effect pay in combined 20% taxation, 12% NI, 9% "grad tax" (sorry - I know you don't like that term). Others will be dragged into that, such as deflated away allowances, eroded by inflation ...etc.