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Since the 1990s central banks have been given the target of keeping inflation low. 2% has been the goal. But in practice as this diagram shows, the trend was already strongly downward before central banks were given this goal. Achieving it was not a problem as a result.

It’s also important to note interest rate trends. These have been steadily downward over hundreds of years. There’s no reason to think that central bank control of interest rates has had anything to do with this over the last couple of decades.

He uses real interest rates in the second paragraph, not nominal.


There are good reasons to think inflation and interest rates move in line with each other. If inflation is high interest rates need to be higher to pay real rates of return. The fact that the two move together is then unsurprising. But also reassuring, because they do.

4 thoughts on “Cretin”

  1. Herr Kartoffelkopf is correct that real interest rates have declined over time. The Spanish crown could borrow only at rates above 10% and frequently at up to 20%, despite the riches of the Indies and the theoretical power to tax. That under the gold standard.
    Two of the reasons for the decline – growing trust that your borrower os not going to go bust, and an efficient bond market – are however under threat from recent government shenanigans and MMTMurphy’s greenery yallery bond schemes.

  2. The Meissen Bison

    philip – I think you’ll find that from now on it’s Kartoffelkopf and that the ‘Herr’ ist verboten!

  3. Interest rates have not been steadily moving downwards

    During the 18th century, interest rates in the UK were stable, remaining at 4-5% regardless of the issue. The instability came about in the 19th century, where there was more volatility in the interest rates that saw it moving anywhere between 4 and 10%. The start of the 20th century was no different, with the same instability and constant flux between 5 and 10% instead.

  4. @philip/diogenes

    You’re both just cherrypicking a few pieces of data. Last year I enjoyed reading a bigger collection of data by the economic historian Paul Schmelzing (which I believe is going to be the basis for a book) who was pretty convinced of a very long term “suprasecular” trend. You may at least enjoy the little dig at Piketty!

    Bank of England Staff Working Paper No. 845
    Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018

    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.

    As far as the late 20th century onwards, are concerned, you may also be interested in this short summary of trends in the last few decades from NIESR:

    Secular decline in global interest rates
    It is a stylised fact that real interest rates have been declining globally since the 1980s (figure 1). Meanwhile, growth in both prices and demand has been moderate over this period, and more recently notably weak. When taken together, these two facts suggest that the real natural rate of interest has also fallen.

    And here’s a description of a 2019 NBER paper by Larry Summers and Lukasz Rachel (which I’m quoting because it summarises this aspect of the paper better than the paper’s own abstract):

    The long decline of real interest rates in developed nations is one of the central macroeconomic trends of the last half-century. Łukasz Rachel and Lawrence H. Summers present new evidence on the causes of this decline in On Secular Stagnation in the Industrialized World (NBER Working Paper 26198).

    The researchers focus on “the advanced economy interest rate,” an aggregate constructed from the prevailing interest rates in the OECD nations. They find that the neutral real global interest rate — the rate which balances desired saving and investment and thus leads to full employment and stable inflation — has fallen about 3 percentage points since the 1970s. Today, they conclude, the average neutral real rate is around zero in industrialized nations. Crucially, absent growing government debt and deficits and increasingly generous social insurance programs, the neutral rate would have fallen nearly 7 percentage points and would now be significantly negative.

    On Secular Stagnation in the Industrialized World
    Łukasz Rachel and Lawrence H. Summers
    NBER Working Paper No. 26198
    August 2019

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