That insight comes courtesy of a fascinating working paper by economist Paul Schmelzing, which reconstructs real interest rates in advanced economies dating back to 1311. The study—what the author says is the first construction of a dataset of high-frequency GDP-weighted real rates (i.e. the difference between the nominal yield and inflation)—features a staggeringly rich collection of records culled from diaries, account books, local archives, and municipal registers and includes everything from Medici bank loans to France’s “Revolutionary loans” to the US government.
While the data available from past eras isn’t comprehensive, what it suggests is a steady fall in the average real rate since the late 1400s—a decline that spans centuries, asset classes, political systems, and monetary regimes. The slope of that trend puts long-term real rates on track to hit near-zero levels at some point in the past 20 or so years. [...]
Between 1313 and 2018, around a fifth of advanced economies were experiencing negative long-term yields, on average. In keeping with Schmelzing’s larger finding, that share has risen over time. However, the frequency of these episodes seems to be rising. For example, the average share from 1313 to 1750 was 18.6%, compared to 20.8% from 1880 to 2018. Since 2009, that share stands at 25.9% (after an unusual spate of 0% between 1984 and 2001). [...]
Then came the moral backlash. Starting in the early 1400s, states around Europe instituted a rash of “sumptuary laws” banning myriad forms of conspicuous consumption. Schmelzing hypothesizes that the luxury retail boom sucked funds away from debt markets. After sumptuary laws finally succeeded in suppressing consumer spending, that trend reversed. Though there’s no micro-level evidence on savings rates to check this against, cautions Schmelzing, this surmise is consistent with narrative accounts and research on longer-term wealth evolution. As savings rates began climbing in the late 1400s, money flowed back into bonds, pushing down rates—and setting off the centuries-long decline that continues still today.
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