December 16, 2015


Why Very Low Interest Rates May Stick Around (Neil Irwin, DEC. 14, 2015, ny tIMES)

For years, financial commentators have been predicting an imminent rise in rates. After all, goes the theory, the Fed has been engaged in extraordinary interventions to artificially depress the cost of borrowing money. Surely those rates will snap back to their pre-2008 levels, if not rise higher. If that happens, get ready for double-digit mortgage rates and a substantially higher cost to maintain the government debt.

But if you look at the longer arc of history, a much different possibility emerges. Investors have often talked about the global economy since the crisis as reflecting a "new normal" of slow growth and low inflation. But, just maybe, we have really returned to the old normal.

Very low rates have often persisted for decades upon decades, pretty much whenever inflation is quiescent, as it is now. The interest rate on a 10-year Treasury note was below 4 percent every year from 1876 to 1919, then again from 1924 to 1958. The record is even clearer in Britain, where long-term rates were under 4 percent for nearly a century straight, from 1820 until the onset of World War I.

The real aberration looks like the 7.3 percent average experienced in the United States from 1970 to 2007.

"We're returning to normal, and it's just taken time for people to realize that," said Bryan Taylor, chief economist of Global Financial Data, which scours old records to calculate historical financial data, including the figures cited here. "I think interest rates are going to stay low for several decades."

Posted by at December 16, 2015 5:30 PM