Hitting Zero: 700 Years of Declining Global Real Interest Rates
Are negative interests here to stay?
A recent study by Yale economist Paul Schmelzing suggests that global real interest rates “could soon enter permanently negative territory.”
In Mesopotamia around the third millennium B.C. there were two types of money circulating: barley and silver. The interest rate on a barley loan was usually 33%, whereas, on silver, it was 20%. At the time of writing, the interest rate where I live (the Netherlands) on my savings account—technically a loan to the bank—is zero percent. And my country is no exception. An enormous difference compared to the earliest economy we have written evidence of—that of the Sumerians living in Mesopotamia 4,500 years ago.
Schmelzing’s study, titled Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311-2018, illustrates the historical decline in not only nominal interest rates, but also real interest rates. According to Schmelzing, there is a seven-hundred-year declining trend in real rates, which is not likely to reverse course.
In one of my previous articles I showed the (current) correlation between long-term real interest rates on sovereign bonds and the price of gold. I wrote:
One of the key drivers … for the US dollar gold price is real interest rates. It is thought that when interest rates on long-term sovereign bonds, minus inflation, are falling, it becomes more attractive to own gold as it is a less risky asset than sovereign bonds (gold has no counterparty risk).
Regarding this correlation, it’s valuable to get a sense of where real rates are heading.
Schmelzing points out real rates have declined (depending on the type of debt) by 0.006-0.016 % per year since 1311. Remarkably, he states, “that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates” have been falling.
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