15 ms·

Global real interest rates and the ‘suprasecular’ decline, 1311–2018 (2020)

134 points by panax 6y ago

panax 6y ago
"since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed" " Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory. " "if historical trends are extrapolated, R-G will soon reach permanently negative territory –a first since at least medieval times." "Whatever the precise dominant driver – simply extrapolating such long-term historical trends suggests that negative real rates will not just soon constitute a “new normal” – they will continue to fall constantly. By the late 2020s, global short-term real rates will have reached permanently negative territory. By the second half of this century, global long-term real rates will have followed."
- AndrewBissell 6y ago
  Extrapolating a trend (even a 700 year long one) into the indefinite future is a fraught exercise, as is attempting to read it as benign just because it has perhaps been so in the past. Remind me, who was it that wrote about the tendency of the rate of the profit to fall over the long term, until the point it provokes a crisis?
  - hardlianotion 6y ago
    Yes, you’d greatly prefer to understand why.
  - Context_free 6y ago
    You can find the answer here https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit... This is the first thing that came to my mind as well...the current data on falling rentier rates, crises of political economy etc. makes sense in light of that old model.
  - casualrandomcom 6y ago
    That one actually predicted the First World War. I am actually with you on the first sentence but your counterexample is weak at best
- AnimalMuppet 6y ago
  "To (negative) infinity, and beyond!"
Jkvngt 6y ago
Monetization of debt means hyperinflation these days. Free, easy money.u
voodootrucker 6y ago
It took me a while to get it, but this all works in the opposite direction as well. The time value of money can be negative: A dollar today can be worth more than a dollar tomorrow. It's not pretty. When the pie is shrinking the incentives get ugly rapidly. Let's hope this can be a "good" deleveraging, we fix metrics that don't positively correlate with non-zero-sum productivity growth, and on top of that pull the next rabbit out of the hat where we can keep exponential growth happening for another cycle (spacex, EVs, etc). Otherwise, we'll be fighting over a shrinking pie, which is nature's way of adjusting the population to the modified carrying capacity.
- bananaboi 6y ago
  I think you meant to say "A dollar tomorrow can be worth more than a dollar today".
  - sudosysgen 6y ago
    That would be positive time value.
    - ahepp 6y ago
      I believe it would be negative time value? It is generally assumed that in an inflationary economy, a dollar today is worth more than a dollar tomorrow The post above seems to talk about deflation. It's possible we're just using a different sign convention (or perhaps I've missed something more fundamental)
      - sudosysgen 6y ago
        Yeah, I do think we're just using different sign conventions here, because of inflation and opportunity cost a dollar today should be worth more than a dollar tomorrow.
        chordalkeyboard 6y ago
monadic3 6y ago
Debt forgiveness also used to be a thing.
hardlianotion 6y ago
“ suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.” Them’s fighting words.
- VinLucero 6y ago
  I thought the same thing. I need to go deeper and understand how this contrasts with Piketty. Anyone have a TL;DR for this thread?
Zenst 6y ago
Many factors for the decline in interest rates, but past few decades 80's onwards I would factor in: 1) The recessions of the 70's and subsequent bumps showed that high interest rates in such times hurt the populas deeply. 2) Lower interest rates enable economic stimulus 3) QE can be used to keep interest rates down and stimulate the money, so it may stimulate the economy. The future - we are seeing things like negative interest rates come into play. Personal view is the whole shift to silly low interest rates has driven people away from responsible money management and from a save for a rainy day towards have now pay tomorrow. The real downside is that low interest rates discourage savings and those that do save are now not so well off.
kristopolous 6y ago
This isn't surprising. Risk and rates are related and there's been an increase in stability and decrease in risk throughout the centuries. As far as a stable society goes, low interest rates are a good sign Even amidst this terrible pandemic, no country has collapsed, nobody has gone to war, currencies haven't been debased, all protests have more or less been handled, nothing is truly out of control. Mass death and failure, yes, but the banks are still open, the lights are still on, the trash is still going out, your mail is still arriving... Things are more or less still operational
- xwdv 6y ago
  A plane crashed in Indonesia.
- phkahler 6y ago
  the US budget deficit is rising, soon out of control IMHO. Raising rates is no longer viable without severe consequences. Nobody has seemed to realize that it's the rate of change in interest rates that has an effect, not the absolute level of them (within reason). The stock market is one giant bubble. People talk occasionally about negative interest rates, and wonder how A) that might work and B) how not to have people realize what a house of cards it all is. But sure, rates are low and everything is great!
  - anewaccount2021 6y ago
    Rates can never rise. Americans and American corporations are too indebted with no room to finance increased debt servicing costs. The dilemma is the longer rates stay low, the more debt is piled on. Ultimately there must be a complete reset.
    - phkahler 6y ago
      Yes. The 2008 bubble popped when the fed made an abrupt upward change in rates. Because housing prices vary inversely with rates, that put people under water. Now imagine the same effect with corporate and government finances on a much larger scale.
u678u 6y ago
Not sure why they stopped at 2018. They've gone down a lot more since then.
- throw0101a 6y ago
  If the paper was published in 2020, that probably means they spend 2019 working on it and doing the research, so the last full year's worth of data they had would have been 2018.
xyzzy4 6y ago
It’s probably due to life expectancy rising. Income has more value when converted to a lump sum if you’re expected to live longer.
lettergram 6y ago
Don’t need interest rates when they print money. If you would like to learn more: http://anuparty.org/on-interest-slavery/ http://anuparty.org/on-interest-slavery/ Effectively, banks can lend on margin. They put 10% down, you pay back 100% of the loan + some little interest. What does that mean? They can loan out 10x the money they have, and people pay it back in full, 10x their return. Each of those have a small bit of interest and fees. Making them a nice cushy income stream. The FES can also just create money with a click. This devalues all the other dollars slightly, but then those funds can be shared. Overall, this isn’t surprising.
- beckingz 6y ago
  Banks don't just get free money from the government. They have to go almost bankrupt first.
- pas 6y ago
  At least for the last few decades the limiting factor for money creation was interest rate, not the fractional reserve requirement. Since there's a very active overnight market for lending excess reserves banks just borrow reserves if they need more to meet the requirements. This is the rate that central banks influence. In the UK the fractional reserve requirement is 0% for example. Lending is entirely risk-weighted ROI limited.
perfunctory 6y ago
> suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record. capital returns != interest rates
- snidane 6y ago
  > capital returns != interest rates What makes the difference? That one comes from stocks and the other from bonds and loans? Or the amount of risk associated with it? I don't think there is a difference for an investor who just picks whatever instrument yielding higher ROI, whether it is risky tech startups or risk free government bonds. Tech startups have higher return on capital with higher risk, government bonds have low yield but small risk. Risk adjusted those terms seem interchangeable to me.
  - bildung 6y ago
    Capital returns is the superset (in the way it is used by Piketty). Capital returns include "profits, dividends, interest, rents and other income from capital" https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century#Contents https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...
smabie 6y ago
interest rates are not low, we just measure them wrong. The dollar is being devalued at an astounding pace, and yet some people will split hairs and say "well, technically.." look at stocks, housing, land, education, health care and food.
- deleted 6y ago
  [deleted]
- tomjakubowski 6y ago
  > interest rates are not low, we just measure them wrong. The dollar is being devalued I don't follow. Could you explain? If the dollar is losing value, then wouldn't interest rates "really" be lower than they'd appear to be without accounting for the devaluation? Here's my reasoning: Imagine the dollar loses 50% of its value in the next year. You park $100 in a 1% APY 12 month CD today. After a year, you've earned $1 in interest. But your CD has actually lost value in that time, even accounting for the interest money the bank gave you. In real terms, the interest rate was less than 1%; in fact, it was negative! So the 1% interest rate appeared higher than it "really" was.
lasagnaphil 6y ago
For those who don't want to download the entire PDF, here's the one graph you want to see: https://ibb.co/Q8fqdrH https://ibb.co/Q8fqdrH
johbjo 6y ago
Seems disingenuous. Looking at the their data (p. 13), it does not look like a linear trend. There are two obvious change points; 1450 where rates dropped around 5%, and then 1680 it dropped 5%. Without the extreme outliers in 1905 and 1930, the trend would be constant at 5% from 1680 onwards.

134 points by panax 6y ago

"since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed" " Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory. " "if historical trends are extrapolated, R-G will soon reach permanently negative territory –a first since at least medieval times." "Whatever the precise dominant driver – simply extrapolating such long-term historical trends suggests that negative real rates will not just soon constitute a “new normal” – they will continue to fall constantly. By the late 2020s, global short-term real rates will have reached permanently negative territory. By the second half of this century, global long-term real rates will have followed."

AndrewBissell 6y ago
Extrapolating a trend (even a 700 year long one) into the indefinite future is a fraught exercise, as is attempting to read it as benign just because it has perhaps been so in the past. Remind me, who was it that wrote about the tendency of the rate of the profit to fall over the long term, until the point it provokes a crisis?
- hardlianotion 6y ago
  Yes, you’d greatly prefer to understand why.
- Context_free 6y ago
  You can find the answer here https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit... This is the first thing that came to my mind as well...the current data on falling rentier rates, crises of political economy etc. makes sense in light of that old model.
- casualrandomcom 6y ago
  That one actually predicted the First World War. I am actually with you on the first sentence but your counterexample is weak at best
AnimalMuppet 6y ago
"To (negative) infinity, and beyond!"

Jkvngt 6y ago

Monetization of debt means hyperinflation these days. Free, easy money.u

voodootrucker 6y ago

It took me a while to get it, but this all works in the opposite direction as well. The time value of money can be negative: A dollar today can be worth more than a dollar tomorrow. It's not pretty. When the pie is shrinking the incentives get ugly rapidly. Let's hope this can be a "good" deleveraging, we fix metrics that don't positively correlate with non-zero-sum productivity growth, and on top of that pull the next rabbit out of the hat where we can keep exponential growth happening for another cycle (spacex, EVs, etc). Otherwise, we'll be fighting over a shrinking pie, which is nature's way of adjusting the population to the modified carrying capacity.

bananaboi 6y ago
I think you meant to say "A dollar tomorrow can be worth more than a dollar today".
- sudosysgen 6y ago
  That would be positive time value.
  - ahepp 6y ago
    I believe it would be negative time value? It is generally assumed that in an inflationary economy, a dollar today is worth more than a dollar tomorrow The post above seems to talk about deflation. It's possible we're just using a different sign convention (or perhaps I've missed something more fundamental)
    - sudosysgen 6y ago
      Yeah, I do think we're just using different sign conventions here, because of inflation and opportunity cost a dollar today should be worth more than a dollar tomorrow.
      - chordalkeyboard 6y ago

monadic3 6y ago

Debt forgiveness also used to be a thing.

hardlianotion 6y ago

“ suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.” Them’s fighting words.

VinLucero 6y ago
I thought the same thing. I need to go deeper and understand how this contrasts with Piketty. Anyone have a TL;DR for this thread?

Zenst 6y ago

Many factors for the decline in interest rates, but past few decades 80's onwards I would factor in: 1) The recessions of the 70's and subsequent bumps showed that high interest rates in such times hurt the populas deeply. 2) Lower interest rates enable economic stimulus 3) QE can be used to keep interest rates down and stimulate the money, so it may stimulate the economy. The future - we are seeing things like negative interest rates come into play. Personal view is the whole shift to silly low interest rates has driven people away from responsible money management and from a save for a rainy day towards have now pay tomorrow. The real downside is that low interest rates discourage savings and those that do save are now not so well off.

kristopolous 6y ago

This isn't surprising. Risk and rates are related and there's been an increase in stability and decrease in risk throughout the centuries. As far as a stable society goes, low interest rates are a good sign Even amidst this terrible pandemic, no country has collapsed, nobody has gone to war, currencies haven't been debased, all protests have more or less been handled, nothing is truly out of control. Mass death and failure, yes, but the banks are still open, the lights are still on, the trash is still going out, your mail is still arriving... Things are more or less still operational

xwdv 6y ago
A plane crashed in Indonesia.
phkahler 6y ago
the US budget deficit is rising, soon out of control IMHO. Raising rates is no longer viable without severe consequences. Nobody has seemed to realize that it's the rate of change in interest rates that has an effect, not the absolute level of them (within reason). The stock market is one giant bubble. People talk occasionally about negative interest rates, and wonder how A) that might work and B) how not to have people realize what a house of cards it all is. But sure, rates are low and everything is great!
- anewaccount2021 6y ago
  Rates can never rise. Americans and American corporations are too indebted with no room to finance increased debt servicing costs. The dilemma is the longer rates stay low, the more debt is piled on. Ultimately there must be a complete reset.
  - phkahler 6y ago
    Yes. The 2008 bubble popped when the fed made an abrupt upward change in rates. Because housing prices vary inversely with rates, that put people under water. Now imagine the same effect with corporate and government finances on a much larger scale.

u678u 6y ago

Not sure why they stopped at 2018. They've gone down a lot more since then.

throw0101a 6y ago
If the paper was published in 2020, that probably means they spend 2019 working on it and doing the research, so the last full year's worth of data they had would have been 2018.

xyzzy4 6y ago

It’s probably due to life expectancy rising. Income has more value when converted to a lump sum if you’re expected to live longer.

lettergram 6y ago

Don’t need interest rates when they print money. If you would like to learn more: http://anuparty.org/on-interest-slavery/ http://anuparty.org/on-interest-slavery/ Effectively, banks can lend on margin. They put 10% down, you pay back 100% of the loan + some little interest. What does that mean? They can loan out 10x the money they have, and people pay it back in full, 10x their return. Each of those have a small bit of interest and fees. Making them a nice cushy income stream. The FES can also just create money with a click. This devalues all the other dollars slightly, but then those funds can be shared. Overall, this isn’t surprising.

beckingz 6y ago
Banks don't just get free money from the government. They have to go almost bankrupt first.
pas 6y ago
At least for the last few decades the limiting factor for money creation was interest rate, not the fractional reserve requirement. Since there's a very active overnight market for lending excess reserves banks just borrow reserves if they need more to meet the requirements. This is the rate that central banks influence. In the UK the fractional reserve requirement is 0% for example. Lending is entirely risk-weighted ROI limited.

perfunctory 6y ago

> suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record. capital returns != interest rates

snidane 6y ago
> capital returns != interest rates What makes the difference? That one comes from stocks and the other from bonds and loans? Or the amount of risk associated with it? I don't think there is a difference for an investor who just picks whatever instrument yielding higher ROI, whether it is risky tech startups or risk free government bonds. Tech startups have higher return on capital with higher risk, government bonds have low yield but small risk. Risk adjusted those terms seem interchangeable to me.
- bildung 6y ago
  Capital returns is the superset (in the way it is used by Piketty). Capital returns include "profits, dividends, interest, rents and other income from capital" https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century#Contents https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...

smabie 6y ago

interest rates are not low, we just measure them wrong. The dollar is being devalued at an astounding pace, and yet some people will split hairs and say "well, technically.." look at stocks, housing, land, education, health care and food.

deleted 6y ago
[deleted]
tomjakubowski 6y ago
> interest rates are not low, we just measure them wrong. The dollar is being devalued I don't follow. Could you explain? If the dollar is losing value, then wouldn't interest rates "really" be lower than they'd appear to be without accounting for the devaluation? Here's my reasoning: Imagine the dollar loses 50% of its value in the next year. You park $100 in a 1% APY 12 month CD today. After a year, you've earned $1 in interest. But your CD has actually lost value in that time, even accounting for the interest money the bank gave you. In real terms, the interest rate was less than 1%; in fact, it was negative! So the 1% interest rate appeared higher than it "really" was.

lasagnaphil 6y ago

For those who don't want to download the entire PDF, here's the one graph you want to see: https://ibb.co/Q8fqdrH https://ibb.co/Q8fqdrH

johbjo 6y ago

Seems disingenuous. Looking at the their data (p. 13), it does not look like a linear trend. There are two obvious change points; 1450 where rates dropped around 5%, and then 1680 it dropped 5%. Without the extreme outliers in 1905 and 1930, the trend would be constant at 5% from 1680 onwards.