From: Ronald Raygun 
Subject: Re: Woolwich offset mortgage... reduce term or monthly payments?
Newsgroups: uk.finance
Date: Sun, 05 Oct 2003 17:22:40 GMT

Tim wrote:

> "Ronald Raygun" wrote
>>  some people would have you believe we
>> might be in for a spot of negative inflation,
>> ...
>> safe as a deposit account (in that the value of
>> your investment can only go up, not down).
> 
> Are you sure "the value of your investment can only go up, not down"?

Pretty sure, though comparing with deposit accounts was perhaps
sailing a bit close to the wind.  It all depends on what the real
interest rate is relative to inflation.  If inflation goes negative,
and loan interest rates don't, then debt will grow in real terms,
and therefore repayments will be a very good investment, since they
will reduce the amount by which the debt will grow.  If inflation
is positive and large, then the debt will shrink in real terms,
and though loan interest rates are likely to exceed inflation,
it's just about conceivable that investing in repayments could
produce poorer return than investing in something that will
hold its value.

> Is it not conceivable that, if indeed inflation does go negative, that
> interest rates may also go negative??

Indeed.  Deposit interest rates would probably just stop at zero and
not actually go negative, but they would likely be replaced with a
charge for looking after your money.  Loan interest rates would be
unlikely to go negative.

> Is it also not conceivable that interest may possibly be lower (or more
> negative) than inflation?
> [The 1970's spring to mind!]

Yes, it's conceivable.  Whether it actually happened in the 70s I don't
know.  Short blips excepted, what probably happened is that gross
interest rates may have been just over inflation, but tax thereon may
have made the net rate negative.