Q: While investment interest rates are at historical lows, is it as disastrous as some investors believe?

Periods of high interest rates are usually accompanied by higher inflation. So while you may be getting a good return from interest, the value of the principal is falling.

As interest is taxed, you are effectively paying tax on the declining value of the principal, decreasing the actual net return.

A: Thanks for making two important points.

The first is about the link between interest rates and inflation, which is obvious in our graph. The graph also shows that there was a long period in the 1970s and early 80s when inflation — as measured by the consumer price index or CPI — was considerably higher than bank deposit rates.

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