Current thinking - Real interest rates MUST go below zero over the next 20 years.

I think we are now in a MMT light paradigm - Countries aren't yet admitting it, but the real value of the debt will never be paid back.

G7 Countries public gross debt (https://en.wikipedia.org/wiki/List_of_countries_by_public_debt)

Japan - 223%

Italy - 113%

France - 98.5%

Canada - 89.7%

United Kingdom - 87.0

United States - 82.3

Germany - 64%

Other countries of interest

Australia - 47%

China - 47%

Brazil - 78%

India - 70%

Indonesia – 33%

At only a 2% interest rate, servicing this loan would be 4.46% of GDP for Japan and 1.28% of GDP per year for Germany. Currently pretty well every major economy has near zero interest rates and has been involved in significant financial stimulus through quantitative easing.

Put simply, I just can’t see countries paying this back without the real amount reducing. In order to reduce these debt levels to manageable amounts, there must be significant inflation over interest rates. I think that central banks are aware of this – they wouldn’t mind higher inflation.

If central banks put up interest rates (and Governments Government allowed this), I think that the Governments would respond by printing money to pay for debt if needed. I think that Governments are a lot less scared of this than they were in the past.

I think also there is a bit of a race to the bottom in terms of: If one government devalues their currency, their exporters receive a competitive advantage. I can’t see that other governments would allow this to happen in a massive way without response.  

I also can’t see substantial GDP growth except through massive automation and AI (which may happen in the next 20 years).

Essentially, major inflation or no major inflation, we’re looking at negative real interest rates for a substantial period of time, unless debt is rendered smaller vs gdp by substantial economic growth.

One thing I am yet to fully understand is what something like say – 10% inflation and 8% interest rates would look like for the equity market.

Working through the theory in my head, if there is inflation, businesses should (on average) increase in value at a rate equal to this inflation (ignoring any changes to the business).

Similarly, money in the bank should theoretically have a -ve 2% expected value p.a.

In theory this seems to mean that it is still positive for equities as DCFs should be considering that expected value in their calculations (when considering inflation).  

According to most commentators, however, there seems to be the assumption that higher interest rates would be bad for equities.

I don’t think the market has a solid understanding of any of this, so I’m expecting volatility, but mathematically I can’t see how inflation without a recession is bad for equities, so I think I come to the conclusion that equities aren’t overvalued substantially. (if at all)

I'd be very interested in your thoughts here and for you to try and shred my ideas. I'm trying to get my head around everything. My portfolio is currently positioned for inflation.