10% interest rates: mortgage ruin or inevitable adjustment

Rates at 10%: madness or inevitable adjustment?

With inflation persisting and official rates refusing to take off, the question of whether it would be good for rates to rise above 10% has sparked a heated exchange of views. The starting point is clear: buying a home depends on the price and the mortgage rate; when rates are high, banks lend less and prices tend to fall. The contradiction arises when you consider that savers could buy cheap if rates rose sharply, but that very thing would ruin variable-rate mortgage holders and choke off business investment.

The impact on the real economy

A 10% interest rate would have devastating consequences for a leveraged economy. The argument goes that it would ruin variable-rate mortgage holders, bring private investment to a near standstill and push companies with long-term debt into bankruptcy. In addition, equities would plummet, hitting global pensions tied to them. Several analyses conclude that the debt-fuelled circus would come crashing down. Higher rates would also make any refinancing more expensive, for companies and states alike, which is considered unviable except under runaway inflation.

The social cost of a sharp hike

A rate escalation would have a domino effect on consumption. With 1% hikes, frivolous spending would be cut; at 2%, fresh fish would become a photo opportunity; at 3%, it would be spaghetti and canned tuna; at 4%, goodbye to fruit; and at 5%, the car would stay in the garage. Beyond that, social unrest is speculated. This scenario illustrates just how much consumption is propped up by cheap credit, and how a restrictive monetary policy would hit families hard.

Savers vs debtors: opposing positions

Savers with deposits and money market funds want rates to rise, since they earn a return. It also benefits those with fixed-rate debt, because their payments don't get more expensive. However, those who have been prudent and avoided debt could buy a home more cheaply if prices fall, though that depends on wages not soaring. Inflation is the key factor: if incomes rise, debt is liquidated, but if they don't, the adjustment is brutal.

The inflation trap and real rates

The terminology of high or low rates is questioned: what matters is whether they are above or below real inflation. One participant argues that real inflation in Spain is 20% a year, far above the official figure, and that rates have always been below that real inflation, with the exception of Volcker. This situation benefits debtors and punishes savers, but it also creates distortions and bad investments.

The historical precedent and the future

It is recalled that during the 1978 oil crisis the Federal Reserve raised rates as high as 22%, although others point to 18% in 1980-81. That episode served to bring inflation under control, but at the cost of a recession. Today, with far higher global debt, repeating that recipe seems impossible without triggering a systemic crisis. The discussion drifts towards whether inflation is the least painful way to liquidate debt, even if it amounts to silent theft from savers.

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In short, most agree that 10% rates are today a science-fiction scenario, but the debate reveals the fragility of an economy addicted to cheap credit and the tension between savers and debtors in an environment of persistent inflation.