(Very) Long-term Real Interest Rates (over centuries)

[rufuspollock]

Status: we have a good source (Schmelzing) which we could use ...

Research

Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018

This is a 2020 BoE staff working paper and looks pretty spot on. I've attached the xlsx data file.

Staff Working Paper No. 845 By Paul Schmelzing

With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed. A gradual increase in real negative‑yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of ‘non‑human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

• eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018.pdf
  • eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018-appendix.pdf
• Data: eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018-data.xlsx

p.13 Figure III: 454 personal/non-marketable loans to sovereigns, 1310-1946, and U.S. savings bonds – plus resulting real rate trend.1

p.14 Figure IV: Headline global real rate, GDP-weighted, and trend declines, 1317-2018.

Figure V: Nominal bond yields, GDP- and arithmetically-weighted, 1314-2018

Figure VIII: Private R, and R-G trends, “Carolingian Europe”, 1250-2019.39

[Ed: Evidence that "private R[eal] rate" is similar to "public R[eal] rate"]

Aside

When I read Piketty (Capital In 21st Century), I immediately felt one of the weakest parts of his argument was the claim about the stability of real interest rates. Usually, one would imagine that as capital accumulates (as it did in his model) the "price" of it i.e. the interest rate should fall. Much of Piketty's simple model and argument about the domination of capital(ists) rested on the fact that this was not happening. This seemed dubious IMO. My cursory historical knowledge threw up memories that real interest rates a century or a couple of centuries ago definitely seemed higher than today (e.g. British Government consols in the 18th century yielding a real 5 or 6%. Keynes talking about 6.5% yields back in Economic Prospects for our Grandchildren etc).

Interesting that the above BoE paper a) lends substantial data for this claim of declining real interest rates b) specifically mentions that this undermines Piketty's claims:

the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

Some damning critical asides from Schmelzing in the footnotes e.g. this one in fn 46 on p. 32 implying in academic language that Piketty has not been entirely straight with some sources:

In a footnote, Piketty (2014, 354) refers to Homer and Sylla (1996), contending that the reference would show that
“for interest on loans, we often find rates above 5% in earlier periods, typically on the order of 6-8 percent, even for
loans with real estate collateral”. I have been unable to find such a statement in the History of Interest Rates. Even
ignoring this, it still remains unexplained why Piketty then opts for 4.5%, rather than at least choosing a figure
between 6-8%.