8 ms·

The ‘suprasecular’ stagnation

78 points by lkrubner 8y ago

kcorbitt 8y ago
TL;DR: real interest rates have been falling for as long as we have records (going back to the 15th century) once you average out some cyclical volatility. Implication is that people waiting for interest rates to bounce back up significantly from their post-great-recession, post-QE lows should probably not expect them to return to anywhere near their historical levels. As a personal saver/investor, the upshot for me is that just because a certain level of retirement savings would have been enough to generate a comfortable income in historical simulations, doesn't mean that it will necessarily be enough to support me in the ultra-low-interest-rates future. So I should probably save more before retiring than I otherwise might.
- barbegal 8y ago
  Or should you just save more than the average person and hope that when you reach retirement higher taxes or deflation helps you out.
- garmaine 8y ago
  Or you should be investing in stocks rather than collecting usury.
  - garmaine 8y ago
    I'm not sure why I'm being downvoted? This article is about real the return component, aka usury, of interest rates on T-bills, and by extension savings accounts. The return rates of private equities (stocks) is not tied to this number.
    - paganel 8y ago
      I didn’t downvote you, but reading your comment it looked like you treated interest-based incomes as somehow morally “bad” (at least judging by your use of the term “usury”) and you contrasted that with stock-exchanged-based incomes which, as a result, were painted in a morally “better” light. There were probably some HN-ers who didn’t like that emotional approach. Now, your opinion in itself isn’t wrong, it’s what the majority of long-term investors suggest, afaik, but I personally think that those investors (including Buffet) have been “blinded” by the exceptional economical and political run of the US as a country in the last 70 or so years. Had they been active at the start of the 20th century and had they invested in the Russian, Chinese or even German stock-exchange their funds would have been completely wiped out by now, after they themselves would have probably died horrific deaths because of the capitals they held (the case in Russia after 1917 and China after 1948).
      - garmaine 8y ago
        It is unfortunate that the term has both moral character but also a precise meaning that is correct here -- excessive interest in excess of the risk premium. There is unfortunately no common / non-technical word that conveys that meaning (excessive interest beyond risks). The savings account interest rate is collected usury--as an FDIC insured deposit account the risk to the account holder is precisely zero, yet a return is nevertheless extracted. That's usury as the term was coined to mean, minus the historical moralistic baggage.
        mikeash 8y ago
        My dictionary defines it as "the illegal action or practice of lending money at unreasonably high rates of interest." It gives no alternate definition. If that isn't what you meant then I think you should use a different word.
        garmaine 8y ago
        it Is what I meant, except for the illegal part which I believe is a bad definition here, and emphasis on the fact that “unreasonable” is up for debate. In many circles any real interest rate (meaning beyond the risk premium) is an economic rent and therefore unreasonable and correctly described as usury. Whether it is legal or not depends on the jurisdiction.
        mikeash 8y ago
        If it’s not illegal then it’s not usury, sort of like how it’s not murder if it’s legal to kill that person.
        garmaine 8y ago
        The term usury has religious origins predating the modern concept of law. It is a term used by law not invented for it.
    - lkrubner 8y ago
      I didn't downvote you, but it would be reasonable to downvote you simply because your original sentence doesn't express a full idea. You could have added another sentence or two to explain what the advantage of the stock market is. However, your follow up also seems inaccurate: "interest rates on T-bills" The article covers a period of 700 years, so clearly more than T-bills are under discussion.
raverbashing 8y ago
Economic growth usually means a combination of: - You're selling products/services to more people (either internal growth or exporting more) - You're being more efficient Localized growths might happen as in a new product that people buy (or is replacing an old product) Now, in a world that seems to be hitting a population limit in the next years, forecasted real growth is anything but obvious. Efficiency can improve but there's a ceiling.
- Zigurd 8y ago
  Higher consumption seems locked in since everyone wants, and believes they can get, a middle class life. Efficiency has to go into overdrive or we overheat the planet. But, by conventional measures of output, efficiency can be recessionary. Phones and phone service will continue to decline in cost long after the market is saturated. We are headed for either a marvelous soft landing enabled by efficiency and population stability, or we are headed for a crunch with a return to mass starvation, an energy crisis, and economic crisis in general. It's really not obvious which will happen.
  - digi_owl 8y ago
    When it comes to efficiency there is a certain observed paradox to consider: https://en.wikipedia.org/wiki/Jevons_paradox https://en.wikipedia.org/wiki/Jevons_paradox The original observation involved the increased efficiency of extracting coal, and the subsequent boom in its use thanks to the drop in price, but can be generalized. Basic thing was that as the price of coal dropped, because more of it was extracted than before, uses that previous was considered unprofitable were put into practice.
    - paganel 8y ago
      Adding to your coal example, let’s suppose that we somehow magically make all cars run on solar or renewable energy that has costs aproaching 0. What will most likely happen is that people will drive even more, we will have to build exponentially more roads (building a road is pretty polluting by itself, in terms of the materials being used) and the ecosystem will be even more threatened compared to now.
Hermel 8y ago
Real interest rates are basically the "price of capital". The question is: is it the demand side that is weakening (i.e. there are fewer and fewer worthwhile projects with reasonable returns) or is it the supply of capital that has grown (i.e. more and more people seeking to invest their capital)?
- tomrod 8y ago
  Supply of capital increases can be: 1. More people (as you state), which is likely to happen in a growing population with wealth equality. 2. More capital per person engaged in the capital market, also grows with population but at a slower rate -- this is a more likely outcome in markets overlapping areas of high wealth inequality. If you have 3X increase in the amount of capital seeking funds, the risk aversion of the median participant is going to be very different in each of those scenarios, and therefore dictate relative rates. These days, the common wisdom is to pay into a huge fund of money (401(k) and similar into index funds) which mitigates a lot of the individual risk to investors.
- maxerickson 8y ago
  There's also just more capital in the world per person, it isn't just a matter of a larger population.
- nabla9 8y ago
  It's a good question. Capital intensity (aka "capital deepening") is the is the ratio of capital needed in relation to other factors of production. The long term trend seems to be that capital intensity is growing. Increasing capital intensity increases the the productivity of labor even if the worker is not "more productive" in the sense the term is commonly understood. Factory that replaces 1000 workers in a manufacturing line with 10 workers looking monitors all day long higher labor productivity because they produce more GDP per hour worked. This is probably one of the reasons why productivity increase is not transferring fully into wage increase (wage share is decreasing). Capital intensity growing would increase the return of capital if everything else would stay the same. But if people are paid less, they consume less. If the household final consumption expenditure deceases, government final consumption expenditure (or NGO's) must take the slack or final demand decreases and capital gains decrease. In a closed economy (or import export balance): wages + other benefits + taxes => demand that produces capital gains in the private sectors. It's impossible to say how it turns to be unless you know the relevant coefficients.
tomrod 8y ago
My $0.02: equilibrium interest rates represent the risk market participants are willing to pay for/be paid for funds to be locked up in other ventures. Two factors probably drive a long-term overall decrease in this rate: improvements to the standard of living in people able to engage in that market drives additional funds into that market (possible in times of extreme inequality or in times of equality), and external decreases in risk (trust in the rule of law, insurance, etc.). If we can consume both at better quality and more quantity now, there is less incentive to invest in the future, and thus economic growth matches population.
phreeza 8y ago
I wonder what Thomas Pickety would say about this. If I understand correctly, this would mean that r is tending towards zero, while g may or may not be affected, but it could conceivably lead to a long term r<g situation, meaning more equality in society.
- danharaj 8y ago
  It's hard to imagine how. I think more likely g<r but it will also stagnate, leading to instability of the entire system. I suppose r<g could be the case if economic growth is no longer driven by capital investment, perhaps because it is too costly to figure out where to allocate capital to get returns. But such a situation is so different from the past that you ought not call it capitalism anymore. I don't think capitalism is at it's structural limit quite yet. The world is still yet big enough that there are markets to develop and capture.
  - 5DFractalTetris 8y ago
    I agree that capitalism is not at its structural limit, I imagine within the next 50 years ideological descriptions of resource management (capitalism, communism, syndicalism, etc.) will begin disappearing in favor of something like "Keep feeding the replicators." The human and environmental costs of competing economic ideologies don't have much tangible payoff, and discussions of capital are illusory compared to real measures of human happiness. If a guy was like "I can't grow grain here but with a small material surplus the people here can live happily and have families and exhaust the local mineral reserve for whomever needs it," at least to me the answer would be, "Provide them with a small material surplus." I program computers but would have to take a pay cut and assume large debts, etc., to begin operating a fruit orchard and wood mill. I might become happier, but the economic value of that decision and whether or not I would survive it economically is unclear. However, this seems to have nothing to do with economic systems, at least to me.
  - cinquemb 8y ago
    Yeah, I think "r > g" is more likely. The article talks about the "risk-free rate" (ie. bonds/CD's etc) which is not really "r" (which could vary widely for individuals/groups/institutions). The "risk-free rate" seems like it has alot more in common with g than r. I think the problem is that our nations are having globally is that "g" (refers to the growth in the national income) is declining, which to me says that governments/nations are becoming increasingly inefficient at allocating capital overall compared to the likes of rentec, two-sigma, etc.(especially as capital becomes less sticky to a particular nation).
adventured 8y ago
The stagnation represents the end of peak globalism, right before it flips back to growing nationalism (underway now). This cycle will continue to repeat. Increased nationalism will bring about more war, general national conflict and invention. The easy gains from globalism for this cycle have been mostly tapped out. Tension and competition between nations will spur a new wave of innovation. Just as one example, the US and China will increasingly race each other for every advantage they can manage. Globalism is increased tranquility and a lowering of friction at a cost of dynamism, nationalism is a nasty irritant that produces pearls at a cost of stability and peacefulness. Despite the desire by some to view nationalism as evil, it's as natural a part of the cycle as globalism, and just as required. The nationalism flip occurs because as you get toward the end of the globalism expansion cycle, the entropy hits lows, the possible gains from the globalism cycle get exhausted, and the people that were comforted by the prior gains, grow restless in the stagnation. High levels of entropy are a requirement for great technological leaps forward and great societal change, as people prefer to go to sleep in their comfort otherwise, stagnating. Globalism spreads comfort (distributes gains - technological, process, etc - made by some nations across most nations), nationalism riles survival responses and increases desperation.
- JimboOmega 8y ago
  The argument is for a trend far beyond that; that perhaps those cycles do matter but there is a 700 year trend in one direction. Even the globalism to nationalism trends that drove both world wars (after common wisdom thought them impossible since economies were too linked) is really a small factor, at least in the analysis of the article. I don't even think that your analysis is correct in a broader context. The fall of the Roman Empire and the rise of manoralism (and constant conflict in Europe) was not innovation and didn't particularly drive it. The staunch nationalism of the Chinese empire didn't drive innovation (though it did mean less conflict). WWII may have held in it (or pushed forward) the seeds of much great innovation - rocket science, computing, plastics, antibiotics, nuclear science, etc. But what innovation would have occurred without it? What would the lives lost have contributed? I don't think it's fair to say that rapid change is only possible in such an environment of conflict. Great advances occurred in the interwar years, too.
rossdavidh 8y ago
Hypothesis (for which I have zero supporting data): the long term trend towards lower interest rates is the result of the disappearance of a risk premium for lack of liquidity. In other words, you used to have to worry about both losing your money in a long-term way (e.g. the government you loaned it to defaulted, the business you loaned it to went bust) and not having access at the moment you need it (the government/business is solvent, but it's not come due yet, and nobody wants to buy your bond). As financial markets have gotten bigger and more sophisticated, the risk of the latter has diminished. So, eventually the dropping of interest rates will plateau at a non-zero value, reflecting only the risk of outright default, since the risk of nobody wanting to buy just now becomes vanishingly small as the market gets broader and broader (perhaps as broad as the entire planet's saving population). Again, zero supporting data, just a hypothesis.
- twic 8y ago
  A related theory i've heard is that of the "central bank bid": the idea that we now know that if asset prices collapse, central banks will step in and buy enough to prop prices up. That means the downside risk of those assets is much less than it would seem, and investors therefore demand lower returns from them.
tomxor 8y ago
I totally read that as "the superscalar stagnation"!... unsatisfied, :(
deleted 8y ago
[deleted]

78 points by lkrubner 8y ago

TL;DR: real interest rates have been falling for as long as we have records (going back to the 15th century) once you average out some cyclical volatility. Implication is that people waiting for interest rates to bounce back up significantly from their post-great-recession, post-QE lows should probably not expect them to return to anywhere near their historical levels. As a personal saver/investor, the upshot for me is that just because a certain level of retirement savings would have been enough to generate a comfortable income in historical simulations, doesn't mean that it will necessarily be enough to support me in the ultra-low-interest-rates future. So I should probably save more before retiring than I otherwise might.

barbegal 8y ago
Or should you just save more than the average person and hope that when you reach retirement higher taxes or deflation helps you out.
garmaine 8y ago
Or you should be investing in stocks rather than collecting usury.
- garmaine 8y ago
  I'm not sure why I'm being downvoted? This article is about real the return component, aka usury, of interest rates on T-bills, and by extension savings accounts. The return rates of private equities (stocks) is not tied to this number.
  - paganel 8y ago
    I didn’t downvote you, but reading your comment it looked like you treated interest-based incomes as somehow morally “bad” (at least judging by your use of the term “usury”) and you contrasted that with stock-exchanged-based incomes which, as a result, were painted in a morally “better” light. There were probably some HN-ers who didn’t like that emotional approach. Now, your opinion in itself isn’t wrong, it’s what the majority of long-term investors suggest, afaik, but I personally think that those investors (including Buffet) have been “blinded” by the exceptional economical and political run of the US as a country in the last 70 or so years. Had they been active at the start of the 20th century and had they invested in the Russian, Chinese or even German stock-exchange their funds would have been completely wiped out by now, after they themselves would have probably died horrific deaths because of the capitals they held (the case in Russia after 1917 and China after 1948).
    - garmaine 8y ago
      It is unfortunate that the term has both moral character but also a precise meaning that is correct here -- excessive interest in excess of the risk premium. There is unfortunately no common / non-technical word that conveys that meaning (excessive interest beyond risks). The savings account interest rate is collected usury--as an FDIC insured deposit account the risk to the account holder is precisely zero, yet a return is nevertheless extracted. That's usury as the term was coined to mean, minus the historical moralistic baggage.
      - mikeash 8y ago
        My dictionary defines it as "the illegal action or practice of lending money at unreasonably high rates of interest." It gives no alternate definition. If that isn't what you meant then I think you should use a different word.
        garmaine 8y ago
        it Is what I meant, except for the illegal part which I believe is a bad definition here, and emphasis on the fact that “unreasonable” is up for debate. In many circles any real interest rate (meaning beyond the risk premium) is an economic rent and therefore unreasonable and correctly described as usury. Whether it is legal or not depends on the jurisdiction.
        mikeash 8y ago
        If it’s not illegal then it’s not usury, sort of like how it’s not murder if it’s legal to kill that person.
        garmaine 8y ago
        The term usury has religious origins predating the modern concept of law. It is a term used by law not invented for it.
  - lkrubner 8y ago
    I didn't downvote you, but it would be reasonable to downvote you simply because your original sentence doesn't express a full idea. You could have added another sentence or two to explain what the advantage of the stock market is. However, your follow up also seems inaccurate: "interest rates on T-bills" The article covers a period of 700 years, so clearly more than T-bills are under discussion.

raverbashing 8y ago

Economic growth usually means a combination of: - You're selling products/services to more people (either internal growth or exporting more) - You're being more efficient Localized growths might happen as in a new product that people buy (or is replacing an old product) Now, in a world that seems to be hitting a population limit in the next years, forecasted real growth is anything but obvious. Efficiency can improve but there's a ceiling.

Zigurd 8y ago
Higher consumption seems locked in since everyone wants, and believes they can get, a middle class life. Efficiency has to go into overdrive or we overheat the planet. But, by conventional measures of output, efficiency can be recessionary. Phones and phone service will continue to decline in cost long after the market is saturated. We are headed for either a marvelous soft landing enabled by efficiency and population stability, or we are headed for a crunch with a return to mass starvation, an energy crisis, and economic crisis in general. It's really not obvious which will happen.
- digi_owl 8y ago
  When it comes to efficiency there is a certain observed paradox to consider: https://en.wikipedia.org/wiki/Jevons_paradox https://en.wikipedia.org/wiki/Jevons_paradox The original observation involved the increased efficiency of extracting coal, and the subsequent boom in its use thanks to the drop in price, but can be generalized. Basic thing was that as the price of coal dropped, because more of it was extracted than before, uses that previous was considered unprofitable were put into practice.
  - paganel 8y ago
    Adding to your coal example, let’s suppose that we somehow magically make all cars run on solar or renewable energy that has costs aproaching 0. What will most likely happen is that people will drive even more, we will have to build exponentially more roads (building a road is pretty polluting by itself, in terms of the materials being used) and the ecosystem will be even more threatened compared to now.

Hermel 8y ago

Real interest rates are basically the "price of capital". The question is: is it the demand side that is weakening (i.e. there are fewer and fewer worthwhile projects with reasonable returns) or is it the supply of capital that has grown (i.e. more and more people seeking to invest their capital)?

tomrod 8y ago
Supply of capital increases can be: 1. More people (as you state), which is likely to happen in a growing population with wealth equality. 2. More capital per person engaged in the capital market, also grows with population but at a slower rate -- this is a more likely outcome in markets overlapping areas of high wealth inequality. If you have 3X increase in the amount of capital seeking funds, the risk aversion of the median participant is going to be very different in each of those scenarios, and therefore dictate relative rates. These days, the common wisdom is to pay into a huge fund of money (401(k) and similar into index funds) which mitigates a lot of the individual risk to investors.
maxerickson 8y ago
There's also just more capital in the world per person, it isn't just a matter of a larger population.
nabla9 8y ago
It's a good question. Capital intensity (aka "capital deepening") is the is the ratio of capital needed in relation to other factors of production. The long term trend seems to be that capital intensity is growing. Increasing capital intensity increases the the productivity of labor even if the worker is not "more productive" in the sense the term is commonly understood. Factory that replaces 1000 workers in a manufacturing line with 10 workers looking monitors all day long higher labor productivity because they produce more GDP per hour worked. This is probably one of the reasons why productivity increase is not transferring fully into wage increase (wage share is decreasing). Capital intensity growing would increase the return of capital if everything else would stay the same. But if people are paid less, they consume less. If the household final consumption expenditure deceases, government final consumption expenditure (or NGO's) must take the slack or final demand decreases and capital gains decrease. In a closed economy (or import export balance): wages + other benefits + taxes => demand that produces capital gains in the private sectors. It's impossible to say how it turns to be unless you know the relevant coefficients.

tomrod 8y ago

My $0.02: equilibrium interest rates represent the risk market participants are willing to pay for/be paid for funds to be locked up in other ventures. Two factors probably drive a long-term overall decrease in this rate: improvements to the standard of living in people able to engage in that market drives additional funds into that market (possible in times of extreme inequality or in times of equality), and external decreases in risk (trust in the rule of law, insurance, etc.). If we can consume both at better quality and more quantity now, there is less incentive to invest in the future, and thus economic growth matches population.

phreeza 8y ago

I wonder what Thomas Pickety would say about this. If I understand correctly, this would mean that r is tending towards zero, while g may or may not be affected, but it could conceivably lead to a long term r<g situation, meaning more equality in society.

danharaj 8y ago
It's hard to imagine how. I think more likely g<r but it will also stagnate, leading to instability of the entire system. I suppose r<g could be the case if economic growth is no longer driven by capital investment, perhaps because it is too costly to figure out where to allocate capital to get returns. But such a situation is so different from the past that you ought not call it capitalism anymore. I don't think capitalism is at it's structural limit quite yet. The world is still yet big enough that there are markets to develop and capture.
- 5DFractalTetris 8y ago
  I agree that capitalism is not at its structural limit, I imagine within the next 50 years ideological descriptions of resource management (capitalism, communism, syndicalism, etc.) will begin disappearing in favor of something like "Keep feeding the replicators." The human and environmental costs of competing economic ideologies don't have much tangible payoff, and discussions of capital are illusory compared to real measures of human happiness. If a guy was like "I can't grow grain here but with a small material surplus the people here can live happily and have families and exhaust the local mineral reserve for whomever needs it," at least to me the answer would be, "Provide them with a small material surplus." I program computers but would have to take a pay cut and assume large debts, etc., to begin operating a fruit orchard and wood mill. I might become happier, but the economic value of that decision and whether or not I would survive it economically is unclear. However, this seems to have nothing to do with economic systems, at least to me.
- cinquemb 8y ago
  Yeah, I think "r > g" is more likely. The article talks about the "risk-free rate" (ie. bonds/CD's etc) which is not really "r" (which could vary widely for individuals/groups/institutions). The "risk-free rate" seems like it has alot more in common with g than r. I think the problem is that our nations are having globally is that "g" (refers to the growth in the national income) is declining, which to me says that governments/nations are becoming increasingly inefficient at allocating capital overall compared to the likes of rentec, two-sigma, etc.(especially as capital becomes less sticky to a particular nation).

adventured 8y ago

The stagnation represents the end of peak globalism, right before it flips back to growing nationalism (underway now). This cycle will continue to repeat. Increased nationalism will bring about more war, general national conflict and invention. The easy gains from globalism for this cycle have been mostly tapped out. Tension and competition between nations will spur a new wave of innovation. Just as one example, the US and China will increasingly race each other for every advantage they can manage. Globalism is increased tranquility and a lowering of friction at a cost of dynamism, nationalism is a nasty irritant that produces pearls at a cost of stability and peacefulness. Despite the desire by some to view nationalism as evil, it's as natural a part of the cycle as globalism, and just as required. The nationalism flip occurs because as you get toward the end of the globalism expansion cycle, the entropy hits lows, the possible gains from the globalism cycle get exhausted, and the people that were comforted by the prior gains, grow restless in the stagnation. High levels of entropy are a requirement for great technological leaps forward and great societal change, as people prefer to go to sleep in their comfort otherwise, stagnating. Globalism spreads comfort (distributes gains - technological, process, etc - made by some nations across most nations), nationalism riles survival responses and increases desperation.

JimboOmega 8y ago
The argument is for a trend far beyond that; that perhaps those cycles do matter but there is a 700 year trend in one direction. Even the globalism to nationalism trends that drove both world wars (after common wisdom thought them impossible since economies were too linked) is really a small factor, at least in the analysis of the article. I don't even think that your analysis is correct in a broader context. The fall of the Roman Empire and the rise of manoralism (and constant conflict in Europe) was not innovation and didn't particularly drive it. The staunch nationalism of the Chinese empire didn't drive innovation (though it did mean less conflict). WWII may have held in it (or pushed forward) the seeds of much great innovation - rocket science, computing, plastics, antibiotics, nuclear science, etc. But what innovation would have occurred without it? What would the lives lost have contributed? I don't think it's fair to say that rapid change is only possible in such an environment of conflict. Great advances occurred in the interwar years, too.

rossdavidh 8y ago

Hypothesis (for which I have zero supporting data): the long term trend towards lower interest rates is the result of the disappearance of a risk premium for lack of liquidity. In other words, you used to have to worry about both losing your money in a long-term way (e.g. the government you loaned it to defaulted, the business you loaned it to went bust) and not having access at the moment you need it (the government/business is solvent, but it's not come due yet, and nobody wants to buy your bond). As financial markets have gotten bigger and more sophisticated, the risk of the latter has diminished. So, eventually the dropping of interest rates will plateau at a non-zero value, reflecting only the risk of outright default, since the risk of nobody wanting to buy just now becomes vanishingly small as the market gets broader and broader (perhaps as broad as the entire planet's saving population). Again, zero supporting data, just a hypothesis.

twic 8y ago
A related theory i've heard is that of the "central bank bid": the idea that we now know that if asset prices collapse, central banks will step in and buy enough to prop prices up. That means the downside risk of those assets is much less than it would seem, and investors therefore demand lower returns from them.

tomxor 8y ago

I totally read that as "the superscalar stagnation"!... unsatisfied, :(

deleted 8y ago

[deleted]