Forget secular stagnation. One historian says the world is actually in its ninth “real rate depression” and 700 years of data show that – when it comes – the turnaround could be sudden.
In research published on the Bank of England’s staff blog, Harvard University’s Paul Schmelzing says most work pointing to a period of permanently lower equilibrium real interest rates is too short term. Instead, he tracked the risk-free rate since 1311 by identifying the dominant asset of each period – starting with sovereign rates in the Italian city states in the 14th and 15th centuries and moving to long-term rates in Spain, then the Province of Holland, the U.K., Germany, and finally the U.S.
Real rates, or the benchmark interest rates minus inflation, have averaged 4.78 percent while the 200-year real-rate average is 2.6 percent. That makes the current market environment “severely depressed,” Schmelzing wrote. However, it’s simply following a five-century downward trend, in which there have been nine periods of secular decline followed by reversals.
The current period – since the 1980s – is the second-longest recorded and its closest historical analogy is the global “Long Depression” of the 1880s and 1890s which saw low productivity growth, deflationary price dynamics, and the rise of global populism and protectionism.
This spell seems to have ended without a push from policy makers. That could be good news for those struggling to find a fix for the current low-rate environment.
“There is strong evidence suggesting that the last ‘secular stagnation cycle’ started fading relatively autonomously after just over two decades following the key financial shock, not requiring the aid of decisive fiscal or monetary stimulus.”
Be prepared though. The data show most reversals of real-rate stagnation periods have been rapid and non-linear. Within 24-months after hitting their troughs in the cycle, rates gained on average 315 basis points, with two occasions showing appreciations of more than 600 basis points, Schmelzing says.
“Looking at past cyclical patterns, the evidence suggests that when rate cycles turn, real rates can relatively swiftly accelerate.”