The above graph is long term interest rates across multiple developed countries (Ben Bernanke via James Hamilton). My initial guess is this is due to globalization - it doesn't make a lot of sense to invest in mature developed countries when a lot of the jobs are being outsourced to the developing world, so desired investment is below desired savings, and therefore real interest rates are dropping to zero throughout the developed world. I'm far from certain, however. Clearly, deleveraging from the debt boom is part of the story too.
Apparently drought is even affecting Hobbiton now. Nothing is sacred to climate change, it seems.
I don't think your first guess is correct. The only 'deleveraging' that's real has been due to foreclosures and defaults, which reflect increased risk, and should rsult in higher rates. Given the increases in G7 debt since 2000, and the impossibility of servicing it if rates were reflective of risk, rates ave been suppressed by privately held central banks to enable deficit spending. If debt continues to grow, rates at zero won't be low enough and the banks will foreclose on the soverign debtors.
There hasn't been much convergence in interest rates. At the start of the period the (eyeballed) spread is about 1.1% over an average rate of 6.1%, or an 18% spread. At the end of the period the spread is about 0.4% over an average rate of 1.9%, roughly a 21% spread.
On synchronous movements, these are perceived to be the safest investments in the world, with not all that much to choose between them. It's not surprising they would move together.
On the trend, my first assumption is that it's in part due to demographics. Baby Boomers are nearing retirement, and they want their pension investments moved away from volatile stocks to safe, steady assets. The supply of these assets hasn't risen fast enough, so the price has risen instead. The GFC accelerated the drift to safety, but there are hints of a return to trend at the end. Perhaps the GFC was caused in part by people trying to find an alternative safe investment, in the form of houses.
If it's about corporations having a dearth of investment opportunities in developed countries, then the question has to be asked, why aren't corporations investing in developing countries? There should be plenty of latent demand there. Fallout from the 1997 Asian Exchange Rate crisis may be part of the explanation: developing countries don't want to be burned again, so they're limiting foreign investment and foreign funding of investment.
Coming back to developed countries, outsourcing has affected some industries, that's true. But 80% of US GDP, for example, is in services, of which the USA is a net exporter. More importantly, nearly all services have to be delivered at the point of demand, so they can't (yet) be outsourced. Even for things which are imported, most of the value addition happens inside the USA (marketing, retail costs, intellectual property royalties, etc.)
A demographically-driven drift to safety works better than outsourcing as an explanation for that chart.
For years now I have been wondering if boomers retiring throughout the developed world at the same time was going to cause economic effects. Imagine 100 people on a desert island who trade with one another in only three goods (coconuts, fish, and thatched huts). Imagine that they use sea shells as currency. Imagine that 90% of them are planning to retire next year ... what will happen?
I would argue that the price of coconuts, fish, and huts is about to sky rocket. The sea shells that they have stockpiled for their retirement are about to be worth a lot less than they expected.
Furthermore, in the time period immediately preceding this mass retirement I would expect the economy to go into a recession or depression as aggregate demand falls well below aggregate supply. In other words, everyone wants to sell fish, coconuts, and huts but nobody wants to buy them. The central bank on this highly fictitious island lowers interest to zero by increasing the money supply (the number of sea shells in circulation), but unlike in the past this does not get the economy out of recession. We can expect hard times ahead as lots of savers figure out that they have less saved (in real not nominal terms) than they thought they did for them to end up working much later into life than they expected to. We can expect record low interest rates to continue for decades.
There is one further thought I have on this - China. I read somewhere that China has increased the labour supply in the mesh of deveoped world economies by 50%. They also have a very strong propensity to save. If the chinese were net borrowers (borrowing in aggregate more than they were saving in aggregate), then they would be buying up all of the goods and services they were able to produce plus importing more from the west. In this case their low wages wouldn't be a drag on employment in the west. But because of cultural factors and the structure of their economy, they are very much net savers ... which I would expect to contribute to a world wide defecit of aggregate demand and to result in years of low interest rates and high unemployment world wide.
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3 comments:
I don't think your first guess is correct. The only 'deleveraging' that's real has been due to foreclosures and defaults, which reflect increased risk, and should rsult in higher rates. Given the increases in G7 debt since 2000, and the impossibility of servicing it if rates were reflective of risk, rates ave been suppressed by privately held central banks to enable deficit spending. If debt continues to grow, rates at zero won't be low enough and the banks will foreclose on the soverign debtors.
There hasn't been much convergence in interest rates. At the start of the period the (eyeballed) spread is about 1.1% over an average rate of 6.1%, or an 18% spread. At the end of the period the spread is about 0.4% over an average rate of 1.9%, roughly a 21% spread.
On synchronous movements, these are perceived to be the safest investments in the world, with not all that much to choose between them. It's not surprising they would move together.
On the trend, my first assumption is that it's in part due to demographics. Baby Boomers are nearing retirement, and they want their pension investments moved away from volatile stocks to safe, steady assets. The supply of these assets hasn't risen fast enough, so the price has risen instead. The GFC accelerated the drift to safety, but there are hints of a return to trend at the end. Perhaps the GFC was caused in part by people trying to find an alternative safe investment, in the form of houses.
If it's about corporations having a dearth of investment opportunities in developed countries, then the question has to be asked, why aren't corporations investing in developing countries? There should be plenty of latent demand there. Fallout from the 1997 Asian Exchange Rate crisis may be part of the explanation: developing countries don't want to be burned again, so they're limiting foreign investment and foreign funding of investment.
Coming back to developed countries, outsourcing has affected some industries, that's true. But 80% of US GDP, for example, is in services, of which the USA is a net exporter. More importantly, nearly all services have to be delivered at the point of demand, so they can't (yet) be outsourced. Even for things which are imported, most of the value addition happens inside the USA (marketing, retail costs, intellectual property royalties, etc.)
A demographically-driven drift to safety works better than outsourcing as an explanation for that chart.
I agree with Greg so much I find it spooky.
For years now I have been wondering if boomers retiring throughout the developed world at the same time was going to cause economic effects. Imagine 100 people on a desert island who trade with one another in only three goods (coconuts, fish, and thatched huts). Imagine that they use sea shells as currency. Imagine that 90% of them are planning to retire next year ... what will happen?
I would argue that the price of coconuts, fish, and huts is about to sky rocket. The sea shells that they have stockpiled for their retirement are about to be worth a lot less than they expected.
Furthermore, in the time period immediately preceding this mass retirement I would expect the economy to go into a recession or depression as aggregate demand falls well below aggregate supply. In other words, everyone wants to sell fish, coconuts, and huts but nobody wants to buy them. The central bank on this highly fictitious island lowers interest to zero by increasing the money supply (the number of sea shells in circulation), but unlike in the past this does not get the economy out of recession. We can expect hard times ahead as lots of savers figure out that they have less saved (in real not nominal terms) than they thought they did for them to end up working much later into life than they expected to. We can expect record low interest rates to continue for decades.
There is one further thought I have on this - China. I read somewhere that China has increased the labour supply in the mesh of deveoped world economies by 50%. They also have a very strong propensity to save. If the chinese were net borrowers (borrowing in aggregate more than they were saving in aggregate), then they would be buying up all of the goods and services they were able to produce plus importing more from the west. In this case their low wages wouldn't be a drag on employment in the west. But because of cultural factors and the structure of their economy, they are very much net savers ... which I would expect to contribute to a world wide defecit of aggregate demand and to result in years of low interest rates and high unemployment world wide.
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