by UnHerd
Thursday, 14
January 2021

The most important economic trend in the world today

The collapse of interest rates isn't a weird anomaly — it's here to stay
by UnHerd

Every saver knows that interest rates are freakishly low. In fact, they’ve been on the floor for more than a decade now. But is this just a weird anomaly?

A chart tweeted out today by the economist Philipp Heimberger would suggest not. It shows the long-term trend in German interest rates (on government debt) over the last 150 years:

The most important trend is the remarkably steady fall over the last 30 years. Much the same has happened in all the G7 economies — as the following chart shows:

It’s tempting to blame this phenomenon on the series of unfortunate events that began with the banking crisis of 2008. But it’s now plain to see that the long collapse of interest rates started well before any of that.

The global disruption caused by the pandemic is the final test. If there’s no return to inflation (plus interest rate rises) then we’ll need to accept that we’ve entered a new era — one with permanently low rates.

This will have profound consequences. In fact, we’re already seeing signs of a shockingly new economic order. For instance, in Denmark, borrowers can now get a zero per cent mortgage. Just to be clear, this doesn’t mean a no deposit mortgage, it means that the borrower pays zero per cent interest. Furthermore, that’s fixed for 20 years — which demonstrates a sincere belief on the part of the lender that the new normal is here to stay.

A few years ago, Danish government was one of the first to get away with borrowing from the markets at zero per cent interest — now ordinary Danes can do the same. Of course, Denmark is one the very most stable and prosperous countries in the world and thus an extreme case – nevertheless it indicates the direction of travel for other advanced economies.

For the Left this is wonderful news: the old constraints on borrow-and-spend policies look a whole lot weaker than they used to be. But those with more conservative economic instincts have their work cut out. They will need to persuade voters that the new normal does not mean a magic money tree for every garden. The example of Greece shows it is still possible to stretch the patience of one’s creditors too far.

Beyond that, there’s a perilous balancing act to pull off. On the one hand, to use our enhanced borrowing capacity to build our way out of the post-Covid slump; but on the other, to not allow cheap credit to fuel bad habits. The last thing we need now is public sector profligacy or private sector speculation.

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  • This is an incredibly superficial blog post that basically amount to saying ‘graph goes down for 30 years WOW!’ and little else.

    There doesn’t seem to be any actual analysis of why they have fallen the last 30 years except ‘2008 can’t explain it’.

    Seems to ignore actually analyzing factors like:
    – persistent low inflation
    – Quantitative Easing since 2008 – it’s interesting that UNTIL 2008 the interest rate was hovering around where the average for interest rates before the great economic crises of the 20’s and 70’s
    – huge pool of new savings from high-propensity to save countries in the Far East
    – Slower growth and demand for capital investment
    – More capital investment taking place outside traditional banking in venture capital, hedge funds or dark pool capital sources
    – Non-physical industries with less capital requirements
    – Less competitive economy as slow monopolisation has occurred in many industries raising barriers to entry thus demand for capital

    Maybe the authors should actually try to produce something useful, but I guess the clickbait model of news that now obtains militates against that.

  • The trouble with the nil inflation / nil rates combination is that unlike in the past your debt’s real cost is not inflated away over time. So your mortgage will no longer be crippling for the first few years and then gradually ease as it’s eroded by inflation. It will be crippling for the whole term as every £ has to be paid back at its full value.

    In the long term this has to be bearish for house prices.

  • Any PG Wodehouse quote deserves an up vote, more so if it includes Bertie. PG can be used to explain all human existence if you dig deep enough into his wisdom. Just Blandings Castle can cover 90% of all human questions.

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