Will Interest Rates Reach 50 in the Future?

"Never say Never"

However, it is highly unlikely that interest rates in the US will rise to 50. If they do, high interest rates will be the consequence, not the cause, and a plethora of bad will have already occurred by then.

Interest Rates as a Consequence, Not Cause

Interest rates are a consequence of inflation or the lack thereof, not a cause of inflation. This means that whenever we see interest rates rising, it typically indicates that the economy is dealing with higher inflation rates.

50% Interest Rates Implies Economic Collapse

Interest rates at 50% suggest a failed economy with runaway inflation. While theoretically possible, it is currently an unlikely scenario for several reasons.

Global Macro-Economics and the Unlikelihood of Such a Crisis

No one can accurately predict such a monumental shift, as economics is not a pure science. However, observing the global macroeconomics presents little likelihood of such a crisis occurring in the immediate future.

Understanding Interest Rates: A Simple Explanation

Interest rates are a complex calculation involving several components. Here’s a simplified breakdown of what goes into an interest rate:

1. Real Return

Interest rates represent a rent on money. All else being equal, you would prefer $1.00 now over the same amount next year because of the value of money appreciating over time. This real return is a fundamental component of interest rates.

2. Credit Risk

There is also the credit risk factor, which accounts for the possibility that the borrower might not pay back the loan. This risk needs to be factored into the interest rate, hence an additional cost for providing this insurance to the lender.

3. Inflation

Higher inflation means that your future dollars will be worth less than your current dollars. To compensate for this loss in purchasing power, lenders require a higher interest rate to ensure they get back the same real dollars in the future.

Can Any Nation Have 45% Inflation?

If interest rates were to reach 50%, it would imply that inflation has surged to an astronomical 45%. This level of inflation is typically seen in runaway economies like Germany in the 1930s or Zimbabwe today. Do you believe any nation will experience 45% inflation levels in the near future?

If the answer is that no nation can sustain such high inflation, it further decreases the likelihood of 50% interest rates.

Conclusion

The economic landscape, driven by various macroeconomic factors, does not currently support the idea of interest rates reaching 50%. A combination of inflation, credit risk, and the simple mechanics of interest rates suggest that a 50% interest rate scenario is highly unlikely, if not impossible, in the near future.

While it is important to always stay vigilant and prepared, the current state of the global economy makes such a dramatic shift less probable. Stay informed and continue monitoring the economic indicators.