Real Interest Rate has been rolling down for 700 years!

The predicted global recession [1] finally comes, and the market has already priced-in the central banks’ rate-cutting responses, which results in the inverted yield curve of the US bond markets one year ago [2]. The predictive power of the Inverted Yield Curve is stunning that it does not only (likely to be able to) correctly predict the emergence of a recession, but it can also (likely to be able to) predict accurately the time frame in 6–18 months' time after the inversion.

With the COVID-19 pandemic developing, a global recession seems to be inevitable. That is why the Fed urgently cuts the rate by 50bps last week and the market still expects another cut in Mar. Cutting rate has become a typical prescription for curing recession, indeed the trend of lowering the interest rates of the US in the past 40 years is vividly depicted in Figure 1.

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Figure 1 The US Fed Fund Rate 1970–2020. Source: Trading Economics

One of the major reasons why the previous peak of the Fed rate is in 1980 is probably the termination of the Bretton Woods System by the US in 1979. After “relaxing” the constraint of money supply, rate-cutting has become one of the most commonly used monetary policies for boosting the economy.

That is why the negative nominal interest rate regime has become common nowadays, IMF (2019) even published a paper titled “Cashing In: How to Make Negative Interest Rates Work” [3]. The US would likely join the negative rate club very soon.

However, in fact, we have emphasized for a decade about the trend of negative REAL interest rates in the world. I have published several papers on the effects of the negative real interest rates on housing prices [4]. The recent situation is just a manifestation of the negative real interest rate regime that even the nominal rate dips into the negative zone. It is almost impossible in the past, but since the development of electronic money and cashless society, it is easier to enforce a negative nominal interest rate [5].

The trend of decreasing real interest rate is not a recent phenomenon but has been evolving for 700 years (from 1317 to 2018), according to Schmelzing (2020) [6]. He found that the global real interest rate (GDP-weighted) fell 1.6 basis points per year on average in the period, as shown in Figure 2. Yet, it is still the first time in the past 700 years that the GDP-weighted real rate has become negative globally since the 1900s.

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Figure 2 700 years’ Downward Trend of Global Real Interest Rate. Source: Guilford (2020) from [6]

Figure 3 further reveals that the negative real rate is commonly encountered in individual economies. The century average since the 1900s is about 25% of the advanced-nation experiencing negative real rates, and some of the peaks can surpass 80%!

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Figure 3 Share of Advanced-Nation GDP Experiencing Negative Real Rates. Source: Guilford (2020) from [6]

When money becomes fiat, the money supply cannot be constrained, interest rates can be expected to be going down much faster. Sometimes, it can result in hyperinflation or asset bubble bursts, if people lose the confidence of the money systems. It explains why the gold price is upsurging very fast and bitcoin would be banned by some governments. Since my article explains the upsurge momentum of gold price on Jun 24, 2019 (when the gold price was $1400), the latest price is $1699 (~20% up in 9 months) [8].


[1] Yiu, C.Y. (2019) Why Global Recession 2020? A Review of IMF’s (2019) World Economic Outlook Report, Medium, Nov 6.

[2] Yiu, C.Y. (2019) Yield Curve is Inverted Today, Medium, Mar 23.

[3] IMF (2019) Cashing In: How to Make Negative Interest Rates Work, IMFBlgo, Feb 5.

[4] Yiu, C.Y. (2019) Real Interest Rate Effect on Housing Price Cycles, Medium, Mar 12.

[5] Yiu, C.Y. (2019) Cashlessness Can Be A Pathway for Negative Interest Rate, Medium, Aug 30.

[6] Schmelzing, P. (2020) Eight Centuries of Global Real Interest Rates, R-G, and the ‘suprasecular’ decline, 1311–2018, Staff Working Paper №845.

[7] Guilford, G. (2020) What interest rates dating back to 1311 tell us about today’s global economy, Quartz, Jan 20.

[8] Yiu, C.Y. (2019) Why Gold Price Suddenly Upsurges Above US$1400 per Ounce? Medium, Jun 24.

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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