Bond data back to the Black Death shows lower and even negative rates could be here to stay

Key Points
  • Data going back to the Black Death of the 14th century shows low rates have been the norm for ages.
  • A paper from the Bank of England disputes prominent economic theories such as "secular stagnation" that assert the low-rate low-growth environment is new.
  • The paper comes as some $11 trillion in global sovereign debt continues to carry negative yields, down from a high of some $17 trillion.
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More than 700 years of history show that the times as they are now, at least in regard to interest rates, aren't quite so different as we're led to believe, according to research that goes back to the Black Death plague of the 14th century.

In fact, the low interest rate climate has been more rule than exception and indicative that even negative interest rates shouldn't be considered a major aberration, and may stay there — permanently.

The work from Paul Schmelzing at the Bank of England runs counter to a popular economic theory known as "secular stagnation." The idea, put forth most prominently by former White House economist and Treasury Secretary Larry Summers, contends that the recent low-growth low-rate environment is likely to persist and is linked to causes that aren't likely to go away soon.

However, by tracing rates back to 1311, Schmelzing found that the current state of affairs is consistent with the results over time.

"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," Schmelzing wrote.

The paper comes as some $11 trillion in global sovereign debt continues to carry negative yields. In theory, that means that investors buying those bonds actually have to pay for the privilege of doing so. In practice, it has meant below-zero deposit rates through a wide span of Europe, though the total of negative-yielding debt is down from a high around $17 trillion earlier in 2019.

Role in wealth inequality

Secular stagnation is a theory that traces back to the Great Depression, and has been cited both as an explanation for the current global pattern of low rates as well as growing wealth inequality. Economist Thomas Piketty in 2014 released the landmark "Capital in the Twenty-First Century" book that explored the inequality issue further and argued that a global wealth tax should be used to restore balance.

Schmelzing also argues against Piketty's findings that wealth for the upper echelon is greatly outpacing economic growth. The conclusions, Schmelzing wrote, are "equally unsubstantiated by the historical record" and "overwhelmingly omit archival and other historical factual evidence."

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Piketty disputed the characterization of his work.

"If you look at stock market rates of return, or at the rate at which top billionaire wealth rises year after year, it is clear that the relevant rate of return is substantial, and much larger than the growth rate," Piketty said in an email to CNBC.

Summers did not respond to a request for comment.

The new 'norm'

Despite the ongoing debate, central banks are in no hurry to raise rates.

The Federal Reserve tried a succession of increases in an effort to normalize policy, but last year had to cut three times as markets began to rebel against the hikes.

Albert Edwards, longtime bearish strategist at Societe Generale, highlighted Schmelzing's paper and said in a note to clients that "negative real (and even nominal) interest rates are becoming the norm around the world."

"Its key conclusion," he said of the research, "is that so-called secular stagnation and the decline towards negative real rates should not be seen as a temporary event caused by the 2008 global financial crisis. It is in fact an irreversible multi-century secular trend, possibly dating back to another major crisis – the 14C Black Death! And you thought I was bearish?!"

However, Edwards said there may be a change coming soon.

"I'm beginning to feel that after the coming Ice Age deflationary bust, we may be on the cusp of one of these contra-secular snapbacks," he wrote.

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