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I'm kind of curious what it means (and why) for real interest rates to be going down over time like that graph depicted (and assuming it's accurate). Is it a l

I'm kind of curious what it means (and why) for real interest rates to be going down over time like that graph depicted (and assuming it's accurate). Is it a lack of global economic growth because of natural resource depletion? For example, you could probably get away with a loan for 18% real if you can sail to America and (leaving politics/historical atrocities aside for a moment) come back with a ship full of gold. If I had to take a loan with a rate that high I don't think I could possibly pay it back (if it's enough money) without multiple jobs or somehow getting lucky. I don't know that my labor could produce enough.

bobthepanda 4y ago
These are the shockwaves of the Chinese economy slowing down. China has been a large source of new demand for years, particularly for resource extraction economies; zero-covid supply chain shocks were the first wave, China’s property shock was a second, and economics are not quite back to solid yet either. For decades it has been easy to invest in China; it is not really so easy or cheap to develop in other areas, because postwar East Asia really focused on efficient infrastructure rollout, and now private companies have to pick between countries with cheap labor and countries with good infrastructure.
parmenidean 4y ago
Yeah, there are a lot of interesting theories regarding this (which were far more common in the halcyon days of 2021, when it seemed like ZIRP was the new normal). I actually think an underrated piece of this is that investments have become far less capital intensive. Business in previous economic cycles required a huge amount of capital to begin and maintain: railroads, oil, manufacturing all require enormous sums of capital to continue. Conversely, the dominant businesses in this economic cycle are all Internet based. Google, Meta, etc could run for 1,000 years without substantial cash need, it's a far less capital intensive model. You can see this reflected statistically: the FCF yield of the S&P 500 is 2x what it was in 1990. If businesses need far less cash than before yet remain highly productive, it stands to reason real interest rates would drop: the demand for capital by economic drivers has gone down, while the supply of capital has increased through FCF gains.
- ericmay 4y ago
  I wonder if something like space colonization/resource extraction would reverse or change the trend toward lower interest rates? I imagine (perhaps excluding some sort of sci-fi esque replicator robots) such endeavors would be very capital intensive.
thfuran 4y ago
On the other hand, you'd probably need a high interest rate to justify offering that loan in a time when a transatlantic journey was significantly less predictable and more dangerous.
- ericmay 4y ago
  Good point - much more risky.
jjoonathan 4y ago
"Global Savings Glut" is the term to search.
- ericmay 4y ago
  Do you have any particular articles or blog posts or anything you'd care to share? I could search of course but I'm not sure if there's a canonical article.
  - jjoonathan 4y ago
    https://en.wikipedia.org/wiki/Global_saving_glut https://en.wikipedia.org/wiki/Global_saving_glut The key insight is that savings and investment opportunities are two sides of a single market. Demand and supply. Savings grow reliably and opportunities do not, so demand for investment opportunities outstrips supply of investment opportunities. Therefore, the opportunities get more expensive = lower rate of return.
- deltree7 4y ago
  Yep, this is the answer
deltree7 4y ago
real Interest rate is really a function of supply/demand of money. The world in increasingly having more supply of money (savings) than before. It doesn't look like from a median household perspective, but we have a glut of overall money

bobthepanda 4y ago

These are the shockwaves of the Chinese economy slowing down. China has been a large source of new demand for years, particularly for resource extraction economies; zero-covid supply chain shocks were the first wave, China’s property shock was a second, and economics are not quite back to solid yet either. For decades it has been easy to invest in China; it is not really so easy or cheap to develop in other areas, because postwar East Asia really focused on efficient infrastructure rollout, and now private companies have to pick between countries with cheap labor and countries with good infrastructure.

parmenidean 4y ago

Yeah, there are a lot of interesting theories regarding this (which were far more common in the halcyon days of 2021, when it seemed like ZIRP was the new normal). I actually think an underrated piece of this is that investments have become far less capital intensive. Business in previous economic cycles required a huge amount of capital to begin and maintain: railroads, oil, manufacturing all require enormous sums of capital to continue. Conversely, the dominant businesses in this economic cycle are all Internet based. Google, Meta, etc could run for 1,000 years without substantial cash need, it's a far less capital intensive model. You can see this reflected statistically: the FCF yield of the S&P 500 is 2x what it was in 1990. If businesses need far less cash than before yet remain highly productive, it stands to reason real interest rates would drop: the demand for capital by economic drivers has gone down, while the supply of capital has increased through FCF gains.

ericmay 4y ago
I wonder if something like space colonization/resource extraction would reverse or change the trend toward lower interest rates? I imagine (perhaps excluding some sort of sci-fi esque replicator robots) such endeavors would be very capital intensive.

thfuran 4y ago

On the other hand, you'd probably need a high interest rate to justify offering that loan in a time when a transatlantic journey was significantly less predictable and more dangerous.

ericmay 4y ago
Good point - much more risky.

jjoonathan 4y ago

"Global Savings Glut" is the term to search.

ericmay 4y ago
Do you have any particular articles or blog posts or anything you'd care to share? I could search of course but I'm not sure if there's a canonical article.
- jjoonathan 4y ago
  https://en.wikipedia.org/wiki/Global_saving_glut https://en.wikipedia.org/wiki/Global_saving_glut The key insight is that savings and investment opportunities are two sides of a single market. Demand and supply. Savings grow reliably and opportunities do not, so demand for investment opportunities outstrips supply of investment opportunities. Therefore, the opportunities get more expensive = lower rate of return.
deltree7 4y ago
Yep, this is the answer

deltree7 4y ago

real Interest rate is really a function of supply/demand of money. The world in increasingly having more supply of money (savings) than before. It doesn't look like from a median household perspective, but we have a glut of overall money