Rates during The Great Depression – deflation with rising real rates |

Rates during The Great Depression – deflation with rising real rates

A reader recently asked me if there was a period in time when a country faced increasing rates in a deflationary environment. Yes – the Great Depression. I’m not in the Great Depression camp, although I think there are scary similarities. Yet, I think there is a value to understanding the market mechanisms throughout historical periods and the impact decisions can have, especially the unintended consequences. Below is a chart of the inflation rates, along with nominal and real interest rates. Could we now face the same deflationary period? There is certainly a risk of that occurring. Even if it’s not THAT bad, another challenge will be that we’re already facing low nominal yields, with limited capacity for additional maneuvering.

Food for thought as we try to wrap our heads around the different scenarios going forward for the next 1, 3, 5, 10 years and longer.

The problem in the early 1930′s was that the rate of inflation was negative; i.e., there was deflation instead of inflation. This meant that borrowers would have to pay back more valuable dollars than the ones they borrowed.

YEAR	PRICE INDEX	RATE OF INFLATION %	NOMINAL INTEREST RATE %	REAL INTEREST RATE %
1929	13.12		5.85
1930	12.60	-3.96	3.59	7.87
1931	11.34	-10.00	2.64	14.04
1932	10.05	-11.38	2.73	15.92
1933	9.78	-2.96	1.73	4.54

Source: http://www.sjsu.edu/faculty/watkins/dep1929.htm

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Tags: 1930's interest rates, economic history, great depression, interest rates, nominal rates, real rates