5 Things to Know about 707 Years of Interest Rate Data

The Annuity Man

This fantastic article and resource by Allison Bell from ThinkAdvisor efficiently covers over 7 centuries of interest rate data and also includes a link to a ridiculously good paper written by Paul Schmelzing, a Harvard University economic history graduate student.  He actually wrote that paper in response to the common belief that today's rates are very low and will definitely rise in the near future.  Not so fast my factual friends, according to Schmelzing.

It seems like everyone is stuck dreaming about "Jimmy Carter Interest Rate" levels, and hoping to see those double digit interest rates once again.  Schmelzing actually makes the argument that I've been pounding the table on for years when people say, "Interest rates are really low."  My answer is always, compared to what.?...today's rates in Japan or Germany?

We all need to come to the realization that current interest rate levels might be the new normal.  Schmelzing used historical facts over 700 years to prove just that.  He actually thinks that "the global neutral rate" may settle in the 1% range for a long time to come.  Hello!  Reality anyone?

Schmelzing writes that "with regards to policy, very low real rates can be expected to become a permanent and protracted monetary policy problem."  He also adds that "my evidence still does not support those that see an eventual return to 'normalized' levels however defined. 

That translation in working man's terms, these perceived low interest rate levels are going to be here for a while...and maybe longer than most expect and are predicting.