April 13, 2024

VERY Long Term Interest Rate Trends

Timothy Birdnow

Here is an essay about long-term interest rates - very long term; going back to the 14th century.

The upshot of the argument is that interest rates have been slowly declining over the past eight hundred years and so we shouldn't be alarmed about the current interest rate rise under Joe Biden.

I think this is largely worthless, a case of comparing apples and oranges.

It should come as no surprise that interest rates have declined; Christianity forbade usury prior to the Renaissance and so much less money was available to buy. Jews and Muslims were the only lenders back then.

And also the explosion of the Europeans onto the world scene and colonization meant an explosion of debt, making interest rates cheaper based on high demand (banks became big deals and multiple banks opened to meet said demand.)

This is just another attempt to lull the public into the lethargy that has kept us mired in the same mindset for decades now. Everything is fine, nothing to see here!


As the economist Maurice Obstfeld has pointed out, the result is that they look like mere "blips” from a long-term historical point of view.

To put it another way, modernity triggered an inexorable decline in the long-term price of money, and was doing this well before we started to fret about ultra-low rates in the 21st century.

Why? Previously economists have blamed this on issues such as productivity, demographics and capital flows. Ben Bernanke, former Fed governor, famously pointed to a savings glut in China and elsewhere, while Summers worries about an era of secular stagnation.

However, even more interesting (and counter-intuitive) is Rogoff et al’s failure to find a statistical correlation between real rates and fundamental economic trends. That might reflect the limitations of their data, but the trio offer another explanation. The real reason, they say, for falling borrowing costs is not economic shifts, but an issue economists often ignore — the nature of finance. A combination of modern capital markets, risk analysis and innovation around using collateral to back loans has made money more efficient.

Proving this is hard, but the idea rings true to me. Call this the "against the gods” effect, to cite Peter Bernstein’s seminal book of the same name. A key distinction between modern and premodern societies is that innovations ranging from double-entry book keeping to computers have left us believing that we can predict, manage and price future risks, without relying on gods, as our ancestors did.

In reality, this confidence is all too often misplaced. But justified or not, the cultural shift that accompanied it has made money more abundant and fluid, thus cutting its cost. This is good news.

Posted by: Timothy Birdnow at 09:41 AM | No Comments | Add Comment
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