Economic historian Paul Schmelzing discusses his new paper “Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018.”
• Schmelzing’s wanted to enter the secular stagnation debate, which he felt was misguided in using the 1970s as a starting point to look at trends.
• His key findings are that long-term real rates have been trending down for 500 years and there have been 46 instances of negative rates since 1311.
• The 1960s and 70s is an outlier with rates breaking out. Volker triggered a return to the centuries old trend with his war on inflation.
• Analysis of LT advanced economy real rates includes market imperfections such as defaults. The downward trend is evident irrespective of geography, risk premium or type of financial assets. Average annual decline in real rates stands at 1.6bps over the past 700 years.
• As real rates are at their historical trend he is sceptical about the secular stagnation theory. Although secular stagnation relates to unobservable equilibrium rates this should move in tandem with the ex-post real rate.
• The increased fiscal expansion advocated under theories of secular stagnation may not do much to raise rates given the LT downward trend. Moreover, fiscal spending as a share of GDP has gone up significantly over history yet real rates have trended downwards.
• Schmelzing casts doubt on Piketty’s theory that returns on non-human wealth are stable over time. Public and private debt together accounted for 40% wealth portfolio for the elite during the 14-17th century which implies a significant share of wealth showing a downward trending real yield. It would need capital appreciation on the remaining part to achieve stable returns.
• Downward trending long-run real rates are not directly linked to growth or demographics. One unifying theme on inflection points in rates is capital accumulation.
Why does this matter? Central banks globally continue to view the current low nominal and real interest rates as temporary. A fundamental shift in expectations towards a steady downward trend in real rates into negative territory would have profound implications for bond and equity markets as well as real assets. See our Deep Dive for a full review of the paper and implications.
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