Long-run trend in long-term interest rates: Down 1.6% every century

[SeattleCPA]

I'm been away from forum for few weeks, so sorry if this has already been discussed. But I thought the paper from Kenneth Rogoff and his co-authors on the long-run trend in long-term sovereign debt really interesting. And actionable.

Here's link: https://www.nber.org/papers/w30475

The TLDR summary: Long-term real interest rates should continue to trend down steadily at rate of 1.6% per century? At least per the last few centuries?

P.S. I think the current long-term real interest rate looks to be on the trendline?

[MustacheAndaHalf]

The research paper covers 700 years of data, but I can't find where the paper gets that data, or where it makes comments on the quality of that data.

[SeattleCPA]

The research paper covers 700 years of data, but I can't find where the paper gets that data, or where it makes comments on the quality of that data.

The data they use comes from earlier research Schmelzing did, as noted in the Rogoff, Rossi and Schmelzing paper. And in a footnote on page 10 of the paper, the authors point you to the Bank of England working paper Schmelzing wrote which covers the same ground and which supplies an Excel workbook of the data.

You can get maybe get additional useful info from the PDFs that appear at link below related to data quality. And you can get the actual data, I think, by grabbing the Excel spreadsheet that appears link below.

https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018

[SeattleCPA]

I did a longer post at my little blog about this, but if one buys their research as I do, I think it puts some of the planning we all do with FireCalc, cFIREsim, PortfolioCharts, etc in a different light.

For example, the interest rate data embedded in FireCalc, cFIREsim, PortfolioCharts, and PortfolioVisualizer is too high for thinking about the future. That's maybe especially case for FireCalc and cFIREsim which use long-term real interest rates over 150-years-ish maybe 1-2% above where rates are today... and then long-term trend is for ever lower long-term real rates in future.

Note: When I did my blog post, I think the long-term real interest rate on sovereign debt was pretty close to the 700-year trendline.

Then the other thing their data suggests is the reason people didn't spot this very steady trend earlier is because the datasets weren't large enough to include all the tail events. I.e., datasets with 150 years of data weren't long enough. Which to me begs the awkward question of how safe is it, really, to estimate tail events (like for safe withdrawal rates) using 50 years of data (like PortfolioCharts and Portfolio Visualizer do) or even 150 years of data (like FireCalc and cFIREsim do).

BTW I love the above referenced tools. And as Tyler has often said about PortfolioCharts, he'd love to have more data he can use. So absolutely not throwing rocks here at the fine work the planning tool creators have done. But I think the research from Rogoff, Rossi and Schmelzing suggest the approach of using a half century or century of data isn't enough?

[BicycleB]

I did a longer post at my little blog about this, but if one buys their research as I do, I think it puts some of the planning we all do with FireCalc, cFIREsim, PortfolioCharts, etc in a different light.

For example, the interest rate data embedded in FireCalc, cFIREsim, PortfolioCharts, and PortfolioVisualizer is too high for thinking about the future. That's maybe especially case for FireCalc and cFIREsim which use long-term real interest rates over 150-years-ish maybe 1-2% above where rates are today... and then long-term trend is for ever lower long-term real rates in future.

Note: When I did my blog post, I think the long-term real interest rate on sovereign debt was pretty close to the 700-year trendline.

Then the other thing their data suggests is the reason people didn't spot this very steady trend earlier is because the datasets weren't large enough to include all the tail events. I.e., datasets with 150 years of data weren't long enough. Which to me begs the awkward question of how safe is it, really, to estimate tail events (like for safe withdrawal rates) using 50 years of data (like PortfolioCharts and Portfolio Visualizer do) or even 150 years of data (like FireCalc and cFIREsim do).

BTW I love the above referenced tools. And as Tyler has often said about PortfolioCharts, he'd love to have more data he can use. So absolutely not throwing rocks here at the fine work the planning tool creators have done. But I think the research from Rogoff, Rossi and Schmelzing suggest the approach of using a half century or century of data isn't enough?

Interesting thoughts, @SeattleCPA! This is awesome stuff, I hope not to mess it up.

Trying to replicate your reasoning from data in the article after also reading your blog post, I tentatively agree/ disagree as follows.

i. with the first in-thread post's statement that current interest rates are on trendline, agree/disagree depending on whether "current" means a couple of years ago (yes!) or right now (no, we have negative real rates now, trend is for slight positive real rate in my analysis on first iteration; discussing below, Arabic numbers).

ii.Re blog post's idea that rates today are lower than cFIREsim data and recent century, strongly agree - recent century was near zero in real terms, we're now several percent negative.

iii. Re note in post above in thread that at the time of the blog post, long term real interest rate on sovereign debt was close to trend, I estimate below that trend is to have a real rate about .34% real terms, so nominal rates would be very close to the inflation rate. Was that true at the time of the blog post?

Could you share more on the steps you took, and the interest rates that you used when calculating?

I based my analysis attempt on table 6 in the article (page 29; appears on page 30 of my pdf), "Macro Variables: Averages by Period." Steps:

1. Table shows average real interest rate for the period 1311-2021 as 6.02 percent per annum.
2. Article suggests long term decline in rates is about 1.6%/century.
3. 1.6%/century x 7.1 centuries in period = 11.36% change expected from start point to endpoint.
4. Difference expected between average and endpoint = 11.36 / 2 = 5.68%.
5. Expected rate at endpoint = 6.02 - 5.68 = 0.34% for 2021. There's obviously variance around this, just calculating the model.
6. 150 years expected change during cFIREsim data period* compared to 2021 = 1.5 centuries x 1.6%/century = 2.4%.
7. Average during 150 year change = 2.4%/2 = 1.2%.
8. Expected rate during cFIREsim era = l.34+1.2  = 1.54%.
9. Expected change during next 50 years = 1.6%/century  x .5 centuries = 0.8%. I am using this as a proxy for the remaining investment period of a young investor, viewing that as the foreseeable future in our lifetimes(though my lifetime will likely be shorter).
10. Expected rate during next 50 years = .34 - (.8/2) = .34-.40 = -.06%.
11. Expected difference between cFIREsim data and foreseeable future = 1.54%-(-.06%)= 1.60%.
12. Obviously if we just look at cFIREsim vs 2021 (aka "now", close enough), difference would be 1.54 - .34 = 1.2% difference between expected rate then and expected rate now.

Initial readings and questions:
A. Broadly, my analysis suggests real rates of roughly zero for the forseeable future, starting at a few tenths of a percent and trending slowly to below zero for long-lived investors.
B. Analysis does suggest rates will be lower than what was expected during cFIREsim data.
C. Ah, but what was the actual rate during cFIREsim?

According to the table, average real rate 1914-2021 was 0.19% already! In which case, why should we expect that the next few decades would be different from cFIREsim's data at all?

Is cFIREsim data really 150 years, and the extra years' higher rate from the 1800s really relevant to now? 

Another aspect worth considering might be the effect of variance from trend, versus the effect of the trend line itself. Reading the graphs in Figure 2 and Figure 3 (pages 26 and 28 of article, 27 and 29 of pdf), the variance around trend is often several percent per year, as I guess we are experiencing now and have experienced intermittently depending on age and nation of residence (I assume this data pertains most directly to USA as the provider of most stable loans). So the variance is far larger than the trend.

From skimming the article and looking at the graphs without year by year data, it seemed like some eras have a subtrend that varies from the trend for up to decades at a time, with additional year to year variances around the subtrend so to speak. It seems to me on first consideration that this leaves room for almost any interest rate outcome during the next few decades, such as:

D. Negative real rates of several percent, similar to 1970s and this year, perhaps through the same mechanism of having inflation
E. positive real rates of several percent, perhaps through issuance of high interest bonds designed to fight inflation
F. dramatic swings between D and E, causing large gains and losses for investors in bonds depending on investor choices
G. F might produce interest rates broadly right on trend despite dramatic short term variances
H. Something completely different that I can't think of right now

Fwiw, it appears to me that rates from 1800-1914 shown in table 6 were on average above trend (4.61% vs about trend expectation of 3.64%) while rates from 1914-2021 were below trend (.19% vs trend expectation of about 1.19%). Yet because the trend is down, being "on trend" would produce about the same average real rates of .19% that we're used to during the past century.

In the short term, should we expect change - or instead similarity, in that we're already used to what the trend would suggest? Or after all, should we recognize that variances from trend are having bigger effects than the trend itself, implying that preparation for the variance contingencies is what investors need to do?



*Was the cFIREsim data period really 150 years? I don't know that part, just using the 150 years mentioned upthread.

[vand]

I think it makes sense that discount rates have eked downwards and valuations on assets eke upwards due increasing  life expectancy over the very long term.  People have longer to compound their wealth, they can afford to pay a little more and expect to compound a little slower.  But I think its probably more of an logarithmic function rather than a linear one. Interest rates won't and indeed can't fall by the same nominal amount over time when the effective lower boundary is 0%.

[BicycleB]

I think it makes sense that discount rates have eked downwards and valuations on assets eke upwards due increasing  life expectancy over the very long term.  People have longer to compound their wealth, they can afford to pay a little more and expect to compound a little slower.  But I think its probably more of an logarithmic function rather than a linear one. Interest rates won't and indeed can't fall by the same nominal amount over time when the effective lower boundary is 0%.

Very true.

The article was discussing real rates though. Those can obviously be negative, as they are this year - roughly 4% nominal rates in USA vs inflation of 8%, this is a negative real rate of roughly 4%. Are negative real rates possible for extended periods?

Hasn't euro zone been having negative real rates for a while?

Negative rates feel weird and scary to me. How long can they last?

The article strongly contended that very few historical events broke the pattern, which outlasted numerous nations and monetary regimes. Weirdly but very explicitly, they also wrote that they considered the possibility the trend is toward an asymptote (stable endpoint), which might or might not be zero - and that they found no evidence of an asymptotic endpoint, only of evidence of the downward trend.

[Financial.Velociraptor]

This is consistent with the VERY long term trend interest rates.  Academically robust records are hard to come by from the Sumerian civilization period but there are cueniform tablets.  Most of them were legal documents that declared who owed what to whom and for what consideration.  Typical interest rate in Ancient Sumeria was 100%pa.  That is, if I loan you a sack of grain for harvest, you owe me two sacks of grain at harvest...  In pretty much any thousand year period you look at (and I'm sourcing this from "Against the Gods: The Remarkable Story of Risk", interest rates have forever been trending down as technology makes things more certain and the quasi science of "underwriting" risk improves.  The asymptote logically approaches zero.

[MustacheAndaHalf]

The research paper covers 700 years of data, but I can't find where the paper gets that data, or where it makes comments on the quality of that data.

The data they use comes from earlier research Schmelzing did, as noted in the Rogoff, Rossi and Schmelzing paper. And in a footnote on page 10 of the paper, the authors point you to the Bank of England working paper Schmelzing wrote which covers the same ground and which supplies an Excel workbook of the data.

You can get maybe get additional useful info from the PDFs that appear at link below related to data quality. And you can get the actual data, I think, by grabbing the Excel spreadsheet that appears link below.

https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018

An example they cite is someone borrowing one bag of grain now, and they must pay back two bags of grain later: 100% interest.  I'm confused by the following quote from that link, which seems to imply much faster deflation:

"I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed"

(1.0001588 ^ 100) = 1.6005%, so call it 0.01588% per year.  If someone spends 30 years in retirement, after 20 years bond yields of 3.00% would have fallen to 2.99% (.0318% x 3.00 = 0.0095 rounded to 0.01).  If bond yields are falling this slowly, I don't see how they impact retirement plans.

[MustacheAndaHalf]

2. Article suggests long term decline in rates is about 1.6%/century.
3. 1.6%/century x 7.1 centuries in period = 11.36% change expected from start point to endpoint.

I believe you forgot to use compounding, as each century builds off the prior one:
1.016 ^ 7.1 = 1.1193 or 11.93%

[Weathering]

Is this a western-centric view? Or possibly a developed country view vs. developing/emerging?
Eastern regions and developing regions seem to have higher interest rates than Western and developed regions.
Recently (past 30 years), Eastern and developing regions have had a larger impact on world-wide GDP and financial activity than they did before.

TL;DR: If China has 6+% interest rates, then the world may trend toward 6+% interest rates.

[BicycleB]

2. Article suggests long term decline in rates is about 1.6%/century.
3. 1.6%/century x 7.1 centuries in period = 11.36% change expected from start point to endpoint.

I believe you forgot to use compounding, as each century builds off the prior one:
1.016 ^ 7.1 = 1.1193 or 11.93%

If I read correctly, the data are simply the measuring the interest rates available for new bond issuance in various years (more precisely, the average rate actually obtained in documented issuances). Each century is not shown as building off the prior one.

Each year's average is simply a data point, each century a series of data points. I mean, the number for each year is a result based on underlying research, but that result is the focus of their study. The authors' finding is that the rates displayed in this manner have declined at the measured pace. The authors specify that their best summary of the trend is essentially linear - the rates decline at a steady pace on average despite variance around the line. This is shown in the graphs and described in the supporting text about the authors' data and calculations (again, if I read correctly; if not, please point out the location in the article of the correct info).

Compounding is an appropriate technique to calculate returns of a portfolio assuming that conditions permit reinvestment, but that's not what the article was measuring. It's measuring rates committed by lenders to borrowers in documented debt issuances as a class within a given year, not compounded returns of portfolios.

PS. Note also that 1.6%/century or .016%/year is not the interest rate that would compound in calculating a portfolio's return. The actual interest rates were much higher, such as 11.xx%/year plus inflation back in the 1300s, or 6.xx%year plus inflation in the 1600s. The .016% is only how much lower the rate for a new bond would be in one year compared to the prior year.

[vand]

I think it makes sense that discount rates have eked downwards and valuations on assets eke upwards due increasing  life expectancy over the very long term.  People have longer to compound their wealth, they can afford to pay a little more and expect to compound a little slower.  But I think its probably more of an logarithmic function rather than a linear one. Interest rates won't and indeed can't fall by the same nominal amount over time when the effective lower boundary is 0%.

Very true.

The article was discussing real rates though. Those can obviously be negative, as they are this year - roughly 4% nominal rates in USA vs inflation of 8%, this is a negative real rate of roughly 4%. Are negative real rates possible for extended periods?

Hasn't euro zone been having negative real rates for a while?

Negative rates feel weird and scary to me. How long can they last?

The article strongly contended that very few historical events broke the pattern, which outlasted numerous nations and monetary regimes. Weirdly but very explicitly, they also wrote that they considered the possibility the trend is toward an asymptote (stable endpoint), which might or might not be zero - and that they found no evidence of an asymptotic endpoint, only of evidence of the downward trend.

Maybe real rates can be negative for a while in practice, but in theory it’s impossible for them to be negative permanently, because it violates time preference theory - that all other things being equal, you would rather have an apple in your hand today than the same apple in a year’s time because of the uncertainty between now and then. To give up the apple today you have to expect an to receive more than just an apple next year.

As Buffett neatly summarises,investing distils down into a few basic questions:

what am I giving up today?
what am I getting back?
when am I getting it?
how sure am I?

[MustacheAndaHalf]

2. Article suggests long term decline in rates is about 1.6%/century.
3. 1.6%/century x 7.1 centuries in period = 11.36% change expected from start point to endpoint.

I believe you forgot to use compounding, as each century builds off the prior one:
1.016 ^ 7.1 = 1.1193 or 11.93%

If I read correctly, the data are simply the measuring the interest rates available for new bond issuance in various years (more precisely, the average rate actually obtained in documented issuances). Each century is not shown as building off the prior one.

Each year's average is simply a data point, each century a series of data points. I mean, the number for each year is a result based on underlying research, but that result is the focus of their study. The authors' finding is that the rates displayed in this manner have declined at the measured pace. The authors specify that their best summary of the trend is essentially linear - the rates decline at a steady pace on average despite variance around the line. This is shown in the graphs and described in the supporting text about the authors' data and calculations (again, if I read correctly; if not, please point out the location in the article of the correct info).

Compounding is an appropriate technique to calculate returns of a portfolio assuming that conditions permit reinvestment, but that's not what the article was measuring. It's measuring rates committed by lenders to borrowers in documented debt issuances as a class within a given year, not compounded returns of portfolios.

PS. Note also that 1.6%/century or .016%/year is not the interest rate that would compound in calculating a portfolio's return. The actual interest rates were much higher, such as 11.xx%/year plus inflation back in the 1300s, or 6.xx%year plus inflation in the 1600s. The .016% is only how much lower the rate for a new bond would be in one year compared to the prior year.

Thanks for the explanation - I think you're interpreting their work correctly, but it's way too wishy washy for me.  Two centuries after 6.xx% rates they expect 3.xx% rates or lower.  It's subtracting the magical number "1.6%" every century, regardless of the starting level.

[SeattleCPA]

i. with the first in-thread post's statement that current interest rates are on trendline, agree/disagree depending on whether "current" means a couple of years ago (yes!) or right now (no, we have negative real rates now, trend is for slight positive real rate in my analysis on first iteration; discussing below, Arabic numbers).

So I was looking at the chart in the Rogoff, Rossi and Schmelzing (RRS) paper on page 14 of the PDF (link provided earlier). And this is rough, because the data stop at the end of 2021, but if you extrapolate the trend line, it looks to be around or maybe even below a 2%-ish long-term real rate for 2022. The RRS paper shows the actual long-term real rate at end of 2021 was below that. And so the question was/is, has that changed in 2022. I didn't attempt to calculate (as per footnote) a "seven-year progressively-lagged inflation"... but looked at the ten-year US Treasury TIPS rate when I was writing the blog post. And it looked to be pretty close to the trend line. In my blog post, I said "right on the trendline." That was probably a poor wording choice. At the very least, I should not have used "right."

iii. Re note in post above in thread that at the time of the blog post, long term real interest rate on sovereign debt was close to trend, I estimate below that trend is to have a real rate about .34% real terms, so nominal rates would be very close to the inflation rate. Was that true at the time of the blog post?

As noted, that chart on page 14 referenced above shows that using that "seven-year progressively-lagged inflation" the actual long-term real rate at end of 2021 was considerably lower than trend line. Also that the trendline, just eyeballing it, is about 2%-ish. Maybe a little lower. But when I saw that, what I wondered was, well, what about what's happened to real interest rates over 2022. I didn't try to calculate their inflation rate. So this isn't apples to apples. But I looked up the Fed's 10-year treasury rate for TIPS and it suggested to me that the 10-year real Treasury rates right now actually are not very different from the trendline. The link: https://fred.stlouisfed.org/series/DFII10

Could you share more on the steps you took, and the interest rates that you used when calculating?

I think I've probably done this above. But your approach (quoted below) produces a different result than the RRS paper shows in its charts. Let's think about why that may be. (The first thought that jumps out to me is maybe the two breaks in the trend slow down the decline?)

I based my analysis attempt on table 6 in the article (page 29; appears on page 30 of my pdf), "Macro Variables: Averages by Period." Steps:

1. Table shows average real interest rate for the period 1311-2021 as 6.02 percent per annum.
2. Article suggests long term decline in rates is about 1.6%/century.
3. 1.6%/century x 7.1 centuries in period = 11.36% change expected from start point to endpoint.
4. Difference expected between average and endpoint = 11.36 / 2 = 5.68%.
5. Expected rate at endpoint = 6.02 - 5.68 = 0.34% for 2021. There's obviously variance around this, just calculating the model.
6. 150 years expected change during cFIREsim data period* compared to 2021 = 1.5 centuries x 1.6%/century = 2.4%.
7. Average during 150 year change = 2.4%/2 = 1.2%.
8. Expected rate during cFIREsim era = l.34+1.2  = 1.54%.
9. Expected change during next 50 years = 1.6%/century  x .5 centuries = 0.8%. I am using this as a proxy for the remaining investment period of a young investor, viewing that as the foreseeable future in our lifetimes(though my lifetime will likely be shorter).
10. Expected rate during next 50 years = .34 - (.8/2) = .34-.40 = -.06%.
11. Expected difference between cFIREsim data and foreseeable future = 1.54%-(-.06%)= 1.60%.
12. Obviously if we just look at cFIREsim vs 2021 (aka "now", close enough), difference would be 1.54 - .34 = 1.2% difference between expected rate then and expected rate now.

I basically adjusted the cFIREsim numbers the way you did. For what that's worth.

Initial readings and questions:
A. Broadly, my analysis suggests real rates of roughly zero for the forseeable future, starting at a few tenths of a percent and trending slowly to below zero for long-lived investors.
B. Analysis does suggest rates will be lower than what was expected during cFIREsim data.
C. Ah, but what was the actual rate during cFIREsim?

Agree that's what the analysis suggests.

BTW the economist.com covered this paper (predictably). And their story from a couple of weeks ago suggests sovereign borrower real rates drop to zero about 2065.

In their paper, RRS say the trendline does go into negative territory but that they think there could be an asymptote.

According to the table, average real rate 1914-2021 was 0.19% already! In which case, why should we expect that the next few decades would be different from cFIREsim's data at all?

Again, you're getting calculation results that differ from the RRS paper's charts.

Is cFIREsim data really 150 years, and the extra years' higher rate from the 1800s really relevant to now?

I'm taking cFIREsim at its "word" regarding then their data starts. The website shows data starts in 1871.

Regarding the extra years, I think what the seven centuries shows is something really is happening thats systemic and continues through centuries of history.

BTW you probably saw this but the trend doesn't show up if you shorten the timeframe covered by the dataset. 

Another aspect worth considering might be the effect of variance from trend, versus the effect of the trend line itself. Reading the graphs in Figure 2 and Figure 3 (pages 26 and 28 of article, 27 and 29 of pdf), the variance around trend is often several percent per year, as I guess we are experiencing now and have experienced intermittently depending on age and nation of residence (I assume this data pertains most directly to USA as the provider of most stable loans). So the variance is far larger than the trend.

My reading led me to understand that they really look at the sovereign debt of what was/were the world's safest borrowers. And that that's changing over time. E.g., US right now. But before that UK. In the earliest centuries, I think some of the Italian borrowers?

From skimming the article and looking at the graphs without year by year data, it seemed like some eras have a subtrend that varies from the trend for up to decades at a time, with additional year to year variances around the subtrend so to speak. It seems to me on first consideration that this leaves room for almost any interest rate outcome during the next few decades, such as:<snip>

I agree. But then this noisiness would appear in the 150-year and 50-year histories people use to plan too.

*Was the cFIREsim data period really 150 years? I don't know that part, just using the 150 years mentioned upthread.

If you generate a cFIREsim simulation and look at the chart of account balances, you can see that the earlier scenario starts in 1871.

[SeattleCPA]

I think it makes sense that discount rates have eked downwards and valuations on assets eke upwards due increasing  life expectancy over the very long term.  People have longer to compound their wealth, they can afford to pay a little more and expect to compound a little slower.  But I think its probably more of an logarithmic function rather than a linear one. Interest rates won't and indeed can't fall by the same nominal amount over time when the effective lower boundary is 0%.

Very true.

The article was discussing real rates though. Those can obviously be negative, as they are this year - roughly 4% nominal rates in USA vs inflation of 8%, this is a negative real rate of roughly 4%. Are negative real rates possible for extended periods?

Hasn't euro zone been having negative real rates for a while?

Negative rates feel weird and scary to me. How long can they last?

The article strongly contended that very few historical events broke the pattern, which outlasted numerous nations and monetary regimes. Weirdly but very explicitly, they also wrote that they considered the possibility the trend is toward an asymptote (stable endpoint), which might or might not be zero - and that they found no evidence of an asymptotic endpoint, only of evidence of the downward trend.

I agree with @BicycleB 's comments above with one minor tweak. I don't think you take the nominal rate on a 10-year treasury and deduct the current year's inflation rate. That's not how they're adjusting the nominal rates to get real rates. The RRS paper, as noted in other comments, uses "progressively-lagged seven-year realized inflation."

BTW, today we can look at 10-year TIPS to get real rates. And in ten years with the actual inflation data for the next decade, we can see what the real returns of 10-year treasuries today paying 4% equal.

[SeattleCPA]

This is consistent with the VERY long term trend interest rates.  Academically robust records are hard to come by from the Sumerian civilization period but there are cueniform tablets.  Most of them were legal documents that declared who owed what to whom and for what consideration.  Typical interest rate in Ancient Sumeria was 100%pa.  That is, if I loan you a sack of grain for harvest, you owe me two sacks of grain at harvest...  In pretty much any thousand year period you look at (and I'm sourcing this from "Against the Gods: The Remarkable Story of Risk", interest rates have forever been trending down as technology makes things more certain and the quasi science of "underwriting" risk improves.  The asymptote logically approaches zero.

Agreed. And I'd say the trend discussed in the RRS paper is also consistent with other sort of weird stuff we observe.

E.g., is this long-run downward trend in basically "riskless" assets also part of expanding PE ratios?

[SeattleCPA]

Is this a western-centric view? Or possibly a developed country view vs. developing/emerging?
Eastern regions and developing regions seem to have higher interest rates than Western and developed regions.
Recently (past 30 years), Eastern and developing regions have had a larger impact on world-wide GDP and financial activity than they did before.

TL;DR: If China has 6+% interest rates, then the world may trend toward 6+% interest rates.

Good question.

I would observe though that historically almost nothing causes the long-term trendline to break.

This is back-of-the-envelope math, but in my blog post I pointed out that the Black Death (the "Plague") in Europe? The trend did break then but that that was roughly 100 to 200 times worse that the COVID-19 pandemic.

[SeattleCPA]

Maybe real rates can be negative for a while in practice, but in theory it’s impossible for them to be negative permanently, because it violates time preference theory.

I'm not sure that this is true or practically true.

Certainly a world with zero or near-zero interest rates for sovereign borrowers looks different. But is it really that far fetched to think that for riskless assets, a sovereign borrower might only give you your money back (in real terms)?

This wouldn't be the same thing as saying capital has no return. Because investors could get a return for bearing some risk.

Also at a practical level, getting 1% is not that much different than getting 0%.

[SeattleCPA]

2. Article suggests long term decline in rates is about 1.6%/century.
3. 1.6%/century x 7.1 centuries in period = 11.36% change expected from start point to endpoint.

I believe you forgot to use compounding, as each century builds off the prior one:
1.016 ^ 7.1 = 1.1193 or 11.93%

If I read correctly, the data are simply the measuring the interest rates available for new bond issuance in various years (more precisely, the average rate actually obtained in documented issuances). Each century is not shown as building off the prior one.

Each year's average is simply a data point, each century a series of data points. I mean, the number for each year is a result based on underlying research, but that result is the focus of their study. The authors' finding is that the rates displayed in this manner have declined at the measured pace. The authors specify that their best summary of the trend is essentially linear - the rates decline at a steady pace on average despite variance around the line. This is shown in the graphs and described in the supporting text about the authors' data and calculations (again, if I read correctly; if not, please point out the location in the article of the correct info).

Compounding is an appropriate technique to calculate returns of a portfolio assuming that conditions permit reinvestment, but that's not what the article was measuring. It's measuring rates committed by lenders to borrowers in documented debt issuances as a class within a given year, not compounded returns of portfolios.

PS. Note also that 1.6%/century or .016%/year is not the interest rate that would compound in calculating a portfolio's return. The actual interest rates were much higher, such as 11.xx%/year plus inflation back in the 1300s, or 6.xx%year plus inflation in the 1600s. The .016% is only how much lower the rate for a new bond would be in one year compared to the prior year.

Thanks for the explanation - I think you're interpreting their work correctly, but it's way too wishy washy for me.  Two centuries after 6.xx% rates they expect 3.xx% rates or lower.  It's subtracting the magical number "1.6%" every century, regardless of the starting level.

I'm not sure I understand @MustacheAndaHalf 's comment above. But I don't think we should think a century from now, rates should be 1.6% lower than today. (That would seem way too deterministic.)

I just read the RRS paper to be saying that even though on a shorter-term perspective rates bounce around a lot, there's been a steady, slow long-run downward trend. And almost nothing to date breaks the trend.

[vand]

Maybe real rates can be negative for a while in practice, but in theory it’s impossible for them to be negative permanently, because it violates time preference theory.

I'm not sure that this is true or practically true.

Certainly a world with zero or near-zero interest rates for sovereign borrowers looks different. But is it really that far fetched to think that for riskless assets, a sovereign borrower might only give you your money back (in real terms)?

This wouldn't be the same thing as saying capital has no return. But investors would get return for bearing some risk.

Also at a practical level, getting 1% is not that much different than getting 0%.

Yes, it's a theoretical impossibility. You are saying that you prefer to have one (or less than one) apple in the future as opposed to the same apple today. But then when the future comes that will still be the case, and so the consumption never happens and you have a world where everything is forever deferred into the hithero future.

Left to its own devices in a free market (reflecting peoples' true time preference) we would never see negative real interest rates.

Central banking can obfuscate and override free market forces for a time and con people into believing that they should be grateful to be able to lending money to the government while paying for the privilege, but the Emperor has no clothes on this one (imo).

In fact, I would say that if really think negative real yields should be possible then you have by all accounts brought into the bubble and not realised it

https://moneyweek.com/513058/navigating-the-weird-world-of-negative-interest-rates

Finally, as was the case in the tech bubble, people are dreaming up all sorts of "new normal" explanations to justify negative yields. Some ask why savers should be compensated for taking no risks, and argue that it makes sense for bond holders to effectively be charged to park their money with governments.

[ChpBstrd]

Maybe the rise of fiat currencies has something to do with the lowering of rates.

If I loan my gold to a nation, and the nation collapses, I have lost something that would have value even if the nation collapsed.

If I loan my US dollars to the United States, and the nation collapses, I have lost something that would have no value in that scenario anyway.

Thus, a decision to loan USD has less risk than the decision to loan precious metals, because the risk of national collapse is already included in the decision to own a fiat currency. Seen in that light, the decision of major world powers to drop their gold standards in the 20th century probably resulted in lower interest rates and more economic activity, part of the reason for the unprecedented economic boom of those times.

[BicycleB]

I think it makes sense that discount rates have eked downwards and valuations on assets eke upwards due increasing  life expectancy over the very long term.  People have longer to compound their wealth, they can afford to pay a little more and expect to compound a little slower.  But I think its probably more of an logarithmic function rather than a linear one. Interest rates won't and indeed can't fall by the same nominal amount over time when the effective lower boundary is 0%.

Very true.

The article was discussing real rates though. Those can obviously be negative, as they are this year - roughly 4% nominal rates in USA vs inflation of 8%, this is a negative real rate of roughly 4%. Are negative real rates possible for extended periods?

Hasn't euro zone been having negative real rates for a while?

Negative rates feel weird and scary to me. How long can they last?

The article strongly contended that very few historical events broke the pattern, which outlasted numerous nations and monetary regimes. Weirdly but very explicitly, they also wrote that they considered the possibility the trend is toward an asymptote (stable endpoint), which might or might not be zero - and that they found no evidence of an asymptotic endpoint, only of evidence of the downward trend.

I agree with @BicycleB 's comments above with one minor tweak. I don't think you take the nominal rate on a 10-year treasury and deduct the current year's inflation rate. That's not how they're adjusting the nominal rates to get real rates. The RRS paper, as noted in other comments, uses "progressively-lagged seven-year realized inflation."

BTW, today we can look at 10-year TIPS to get real rates. And in ten years with the actual inflation data for the next decade, we can see what the real returns of 10-year treasuries today paying 4% equal.

Thanks for the tweak. I had forgetten that part. You are absolutely correct!

PS. Thanks for your other explanations in separate part regarding my calculations. I don't have time until tomorrow (at best) to re-read the paper and catch up with you, but am grateful for the clarifications to follow. In any case, I clearly missed the data on page 14 during my skimming and then approximated, apparently incorrectly, so thanks for setting me straight.

[SeattleCPA]

Yes, it's a theoretical impossibility. You are saying that you prefer to have one (or less than one) apple in the future as opposed to the same apple today.

I'm not saying that actually. I'm just saying that for absolutely safe, no risk-to-capital savings, I can see how I might accept a zero percent or very close to a zero-percent return if no capital risk.

Also I'm pointing out that earning 1% if riskless isn't that much more than zero.

E.g., what if my choice is riskless zero percent return with no risk to capital or risky 5% arithmetic average but a 12% standard deviation. Or a risky 4% or 3% arithmetic return but wit a 12% standard deviation.

[SeattleCPA]

Maybe the rise of fiat currencies has something to do with the lowering of rates.

If I loan my gold to a nation, and the nation collapses, I have lost something that would have value even if the nation collapsed.

If I loan my US dollars to the United States, and the nation collapses, I have lost something that would have no value in that scenario anyway.

Thus, a decision to loan USD has less risk than the decision to loan precious metals, because the risk of national collapse is already included in the decision to own a fiat currency. Seen in that light, the decision of major world powers to drop their gold standards in the 20th century probably resulted in lower interest rates and more economic activity, part of the reason for the unprecedented economic boom of those times.

The RRS paper discusses precious metals and impact on lending. And I don't think any of those changes break the trend.

You'd think they might. But apparently they don't.

[SeattleCPA]

I think it makes sense that discount rates have eked downwards and valuations on assets eke upwards due increasing  life expectancy over the very long term.  People have longer to compound their wealth, they can afford to pay a little more and expect to compound a little slower.  But I think its probably more of an logarithmic function rather than a linear one. Interest rates won't and indeed can't fall by the same nominal amount over time when the effective lower boundary is 0%.

Very true.

The article was discussing real rates though. Those can obviously be negative, as they are this year - roughly 4% nominal rates in USA vs inflation of 8%, this is a negative real rate of roughly 4%. Are negative real rates possible for extended periods?

Hasn't euro zone been having negative real rates for a while?

Negative rates feel weird and scary to me. How long can they last?

The article strongly contended that very few historical events broke the pattern, which outlasted numerous nations and monetary regimes. Weirdly but very explicitly, they also wrote that they considered the possibility the trend is toward an asymptote (stable endpoint), which might or might not be zero - and that they found no evidence of an asymptotic endpoint, only of evidence of the downward trend.

I agree with @BicycleB 's comments above with one minor tweak. I don't think you take the nominal rate on a 10-year treasury and deduct the current year's inflation rate. That's not how they're adjusting the nominal rates to get real rates. The RRS paper, as noted in other comments, uses "progressively-lagged seven-year realized inflation."

BTW, today we can look at 10-year TIPS to get real rates. And in ten years with the actual inflation data for the next decade, we can see what the real returns of 10-year treasuries today paying 4% equal.

Thanks for the tweak. I had forgetten that part. You are absolutely correct!

PS. Thanks for your other explanations in separate part regarding my calculations. I don't have time until tomorrow (at best) to re-read the paper and catch up with you, but am grateful for the clarifications to follow. In any case, I clearly missed the data on page 14 during my skimming and then approximated, apparently incorrectly, so thanks for setting me straight.

@BicycleB , the scissor blades sharpen each other... :-)

[clifp]

The research paper covers 700 years of data, but I can't find where the paper gets that data, or where it makes comments on the quality of that data.

The data they use comes from earlier research Schmelzing did, as noted in the Rogoff, Rossi and Schmelzing paper. And in a footnote on page 10 of the paper, the authors point you to the Bank of England working paper Schmelzing wrote which covers the same ground and which supplies an Excel workbook of the data.

You can get maybe get additional useful info from the PDFs that appear at link below related to data quality. And you can get the actual data, I think, by grabbing the Excel spreadsheet that appears link below.

https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018

I have posted before about a Fed study I read more than a decade ago that analyzed sovereign debt default rates and average interest rate.  it is sort of my basis for assuming natural government interest rates are in the 5-6%.   I'm guessing he was one of the authors of the original paper.  I have to admit I didn't consider the possibility that rates would be declining over time.

It is still not clear to me why they should. 5% means you double your money in 14 years, 24 years if you have 2% inflation.  I've never heard of a business, organization, or homeowner that would invest in a project that would have a payback period of over 10-12 years.  Of course, all projects have an element of risk, while investing in good sovereign debt is considered risk-free. 

Although, the early paper points out that countries, like the US, Canada, and Switzerland that haven't defaulted on their debt are a real minority.  If the US has a prolonged period of high inflation 8-10%, we will in fact default on our debt, since hyperinflation acts as a default.

[vand]

The research paper covers 700 years of data, but I can't find where the paper gets that data, or where it makes comments on the quality of that data.

The data they use comes from earlier research Schmelzing did, as noted in the Rogoff, Rossi and Schmelzing paper. And in a footnote on page 10 of the paper, the authors point you to the Bank of England working paper Schmelzing wrote which covers the same ground and which supplies an Excel workbook of the data.

You can get maybe get additional useful info from the PDFs that appear at link below related to data quality. And you can get the actual data, I think, by grabbing the Excel spreadsheet that appears link below.

https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018

I have posted before about a Fed study I read more than a decade ago that analyzed sovereign debt default rates and average interest rate.  it is sort of my basis for assuming natural government interest rates are in the 5-6%.   I'm guessing he was one of the authors of the original paper.  I have to admit I didn't consider the possibility that rates would be declining over time.

It is still not clear to me why they should. 5% means you double your money in 14 years, 24 years if you have 2% inflation.  I've never heard of a business, organization, or homeowner that would invest in a project that would have a payback period of over 10-12 years.  Of course, all projects have an element of risk, while investing in good sovereign debt is considered risk-free. 

Although, the early paper points out that countries, like the US, Canada, and Switzerland that haven't defaulted on their debt are a real minority.  If the US has a prolonged period of high inflation 8-10%, we will in fact default on our debt, since hyperinflation acts as a default.

They should eke down as a function of life expectancy. Look, if you knew with cast iron certainty that you had 3 years ahead of you and that's it, would you delay doing what you want today for a 4% return next year? Of course not, you'd demand a MUCH high rate of return. If you knew you likely had 30yrs ahead of you then you can afford to take a longer term view of things and 4% "more" in a year's time might be an acceptable rate of return. 

If we had a meteor destroying the earth situation then you wouldn't care about next year, it would be full on hedonism.

As life expectancy lengthens then people can can a longer term view of things within their own lifetime. 5%/ye real return still works just fine for most people who can put in a 35yr career and have a couple of decades of healthy retirement at the end.

[clifp]

Good points, Longer lifespans, and higher levels of stability would tend to make people accept lower risk-free returns. 
Although, I still contend no human would have given me a 15-year loan at 1.875%, less than 2 years ago.,  I think it is almost entirely a function of artificially low rates, caused by the Fed and fiscal stimulus.

[maizefolk]

Yes, it's a theoretical impossibility. You are saying that you prefer to have one (or less than one) apple in the future as opposed to the same apple today. But then when the future comes that will still be the case, and so the consumption never happens and you have a world where everything is forever deferred into the hithero future.

Left to its own devices in a free market (reflecting peoples' true time preference) we would never see negative real interest rates.

If I'm confident I can earn enough to pay for two apples today, but worried I won't be able to earn enough to pay for any apples in ten years, yes I would probably accept a negative real return to defer my apple purchasing power from now until ten years from now (assuming I have no better options like putting cash under my mattress).

Sure I could buy two apples now, but an apple won't keep for ten years and I'd rather have one apple now and one in ten years than two apples now and be hungry ten years from now. Many other things are like apples: fuel, services, medical care, travel.

[Reynold]

Yes, it's a theoretical impossibility. You are saying that you prefer to have one (or less than one) apple in the future as opposed to the same apple today. But then when the future comes that will still be the case, and so the consumption never happens and you have a world where everything is forever deferred into the hithero future.

Left to its own devices in a free market (reflecting peoples' true time preference) we would never see negative real interest rates.

If I'm confident I can earn enough to pay for two apples today, but worried I won't be able to earn enough to pay for any apples in ten years, yes I would probably accept a negative real return to defer my apple purchasing power from now until ten years from now (assuming I have no better options like putting cash under my mattress).

Sure I could buy two apples now, but an apple won't keep for ten years and I'd rather have one apple now and one in ten years than two apples now and be hungry ten years from now. Many other things are like apples: fuel, services, medical care, travel.

I have seen articles by major economists arguing that the biggest reason cash should be removed from the economic system and replaced with all electronic currency is so that when the government and banks want to pay negative interest rates, you can't evade that by withdrawing cash and stuffing it in your mattress.  You will be forced to spend it or lose it.  Where Europe has been playing around with negative rates, that is already somewhat the case, my understanding is that Europeans tend to be a lot more limited in alternative financial vehicles than in the U.S., most savings and lending are tied to banks.   

That pesky free market thing interferes with the wise judgement of the financial authorities, we can't have that. . . 

[vand]

Yes, it's a theoretical impossibility. You are saying that you prefer to have one (or less than one) apple in the future as opposed to the same apple today. But then when the future comes that will still be the case, and so the consumption never happens and you have a world where everything is forever deferred into the hithero future.

Left to its own devices in a free market (reflecting peoples' true time preference) we would never see negative real interest rates.

If I'm confident I can earn enough to pay for two apples today, but worried I won't be able to earn enough to pay for any apples in ten years, yes I would probably accept a negative real return to defer my apple purchasing power from now until ten years from now (assuming I have no better options like putting cash under my mattress).

Sure I could buy two apples now, but an apple won't keep for ten years and I'd rather have one apple now and one in ten years than two apples now and be hungry ten years from now. Many other things are like apples: fuel, services, medical care, travel.

In case its not obvious I'm using an Apple as a proxy for a unit of real wealth.  I know it won't keep for 10 years...

Nah, sorry, still not buying it. This is new age whacky bubble thinking.  The only reason people defer consumption is to consume more in real terms at some point in the future, and the longer they defer it the higher return it demands. I'm just restating the principle of the time value of money, something which basically everyone who understands finance agrees on.

As in case you need it pointed out, government bonds are not safe even with a printing press ready to hand.  Money systems change over time.  Governments can and do hard default when their debts become too much to pay.  You should absolutely expect a positive return for the RISK of holding goverment bonds, however negligible you think it is. 

[maizefolk]

In case its not obvious I'm using an Apple as a proxy for a unit of real wealth.  I know it won't keep for 10 years...

Surely you were using an apple as a proxy for a unit of real consumption? Otherwise your example makes no sense at all.

Nah, sorry, still not buying it. This is new age whacky bubble thinking.  The only reason people defer consumption is to consume more in real terms at some point in the future, and the longer they defer it the higher return it demands. I'm just restating the principle of the time value of money, something which basically everyone who understands finance agrees on.

All I'm doing is restating the well known fact that increases in spending/consumption have non-linear utility for individuals. You don't have to buy it for it is be an accurate and widely know feature of the human condition.

Otherwise, you are arguing that you prefer to spend 100x your current annual budget this year and then live as a vagrant the rest of your years than to space your spending out equally over your lifespan (which, unless you plan to live 100 years would result in less total consumption, and even if you live 100 years would result in less net present value of spending assuming a positive discount rate).

Nice job of the argument from authority fallacy in the last sentence though.

As in case you need it pointed out, government bonds are not safe even with a printing press ready to hand.  Money systems change over time.  Governments can and do hard default when their debts become too much to pay.  You should absolutely expect a positive return for the RISK of holding goverment bonds, however negligible you think it is.

Oh I completely agree holding government bonds has risk. That's why I pointing out that negative interest rates only make sense when we assume there is no other way to defer spending consumption (like putting cash under ones mattress) that doesn't charge for that service.

[BicycleB]

As in case you need it pointed out, government bonds are not safe even with a printing press ready to hand.  Money systems change over time.  Governments can and do hard default when their debts become too much to pay.  You should absolutely expect a positive return for the RISK of holding goverment bonds, however negligible you think it is.

Oh I completely agree holding government bonds has risk. That's why I pointing out that negative interest rates only make sense when we assume there is no other way to defer spending consumption (like putting cash under ones mattress) that doesn't charge for that service.

Not an economist here, but I agree with the idea that under uncertain conditions, the mere ability to store value for the future is very valuable.

If investments with reliable value are unavailable and the best preparation available for the future is something that stores only part of the current value, I'd still want to use the storage option for any excess funds after I'd paid for a decent life this year. If others think as I do, then under sufficiently bad conditions, accepting a negative real interest rate would be logical for a significant class of people.

I'm not sure our current societies are in such bad shape that my type of logic is the relevant one. I wonder if the relevant logic is more that in the context of a financialized and moderately stable modern economy, savers recognize different investment types as more risky than others, and because many people prefer to minimize perceived risk, there will be a market for "safe" govt bonds even with negative rates.

(Or maybe there won't be. I guess we have interesting questions to learn as the future unfolds!)

[SeattleCPA]

As in case you need it pointed out, government bonds are not safe even with a printing press ready to hand.  Money systems change over time.  Governments can and do hard default when their debts become too much to pay.  You should absolutely expect a positive return for the RISK of holding goverment bonds, however negligible you think it is.

Oh I completely agree holding government bonds has risk. That's why I pointing out that negative interest rates only make sense when we assume there is no other way to defer spending consumption (like putting cash under ones mattress) that doesn't charge for that service.

Not an economist here, but I agree with the idea that under uncertain conditions, the mere ability to store value for the future is very valuable.

If investments with reliable value are unavailable and the best preparation available for the future is something that stores only part of the current value, I'd still want to use the storage option for any excess funds after I'd paid for a decent life this year. If others think as I do, then under sufficiently bad conditions, accepting a negative real interest rate would be logical for a significant class of people.

I'm not sure our current societies are in such bad shape that my type of logic is the relevant one. I wonder if the relevant logic is more that in the context of a financialized and moderately stable modern economy, savers recognize different investment types as more risky than others, and because many people prefer to minimize perceived risk, there will be a market for "safe" govt bonds even with negative rates.

(Or maybe there won't be. I guess we have interesting questions to learn as the future unfolds!)

I think you make good points @BicycleB . Also relevant to me is fact that we need to think about portfolios of investments and not just sovereign debt. I.e., earning no return on one's investments is not what we're talking about. E.g., maybe I have 80% of my portfolio in risky assets generating probably positive real returns. But then for my other 20%, maybe I want something that is riskless and guaranteed, or nearly so, to protect principal. Maybe so I can rebalance. (Gold works like this, right? And it provides value to a portfolio or at least has historically.)

@vand I'm not sure if we disagree or not. E.g., I'm not saying that the long-term real riskless interest rates will go to zero. I am thinking the economists make a compelling argument that rates have steadily dropped over last seven to eight centuries. BTW the paper notes that the trend line may become an asymptote. Which I'd think a possibility too. I'd be interested in whether you think the paper is wrong or if you actually just feel confident or strongly the trend line becomes an asymptote. (If you do we actually aren't really disagreeing here.)

[vand]

Maize, I think we're talking from the same side of the page.

The 21st century may well turn out to have lower average real interest rates than the 21st century, but I don't think anyone is claiming that we can come back in 500 years' time and real interest rates will be averaging -7% in the 26th century, which is the logical extrapolation from the headline.

All I'm saying is that there are clearly understandable and intuitive reasons why expected future returns in developed economies has trended downover very time periods, as life expectancy has rising and society has becoming richer they can afford to defer more of our consumption into the future, so discount rates become increasingly flatter.  It's also why interest rates are always higher than poorer countries - because deferring income for these societies bears a higher cost to them, therefore they have to demand a higher expected higher return. 

It's also why I don't think stocks can return their "historic" real 6-7% over the next 100 years - probably more likely to see that nerfed down to 4-5% imo. Demographics will play a big factor at some point too - the world just won't populate as quickly.

[scottish]

All I'm saying is that there are clearly understandable and intuitive reasons why expected future returns in developed economies has trended downover very time periods, as life expectancy has rising and society has becoming richer they can afford to defer more of our consumption into the future, so discount rates become increasingly flatter.  It's also why interest rates are always higher than poorer countries - because deferring income for these societies bears a higher cost to them, therefore they have to demand a higher expected higher return. 

I'm trying to reconcile your statement here with what I know about existing consumer behaviour.   Rather than defer consumption into the future, I see FOMO everywhere:
- use of HELOCs for home renovations
- purchase of gadget rich automobiles far beyond the need of the consumer (4WDs, AWDs, turbo charged engines, leather uphostelry, proximity keys, etc.)
- huge mortgages (especially in Canada) to purchase real estate, although this is changing as interest rates rise
- buying expensive smart phones on monthly plans
and so on.

Can you clarify this for me?

[ChpBstrd]

All I'm saying is that there are clearly understandable and intuitive reasons why expected future returns in developed economies has trended downover very time periods, as life expectancy has rising and society has becoming richer they can afford to defer more of our consumption into the future, so discount rates become increasingly flatter.  It's also why interest rates are always higher than poorer countries - because deferring income for these societies bears a higher cost to them, therefore they have to demand a higher expected higher return. 

I'm trying to reconcile your statement here with what I know about existing consumer behaviour.   Rather than defer consumption into the future, I see FOMO everywhere:
- use of HELOCs for home renovations
- purchase of gadget rich automobiles far beyond the need of the consumer (4WDs, AWDs, turbo charged engines, leather uphostelry, proximity keys, etc.)
- huge mortgages (especially in Canada) to purchase real estate, although this is changing as interest rates rise
- buying expensive smart phones on monthly plans
and so on.

Can you clarify this for me?

@scottish my take is that @vand is describing the inevitable end of the trend embodied in the overconsumption examples you noted. People might be forced by economic circumstances to be more frugal in the future, just not quite yet.

[scottish]

All I'm saying is that there are clearly understandable and intuitive reasons why expected future returns in developed economies has trended downover very time periods, as life expectancy has rising and society has becoming richer they can afford to defer more of our consumption into the future, so discount rates become increasingly flatter.  It's also why interest rates are always higher than poorer countries - because deferring income for these societies bears a higher cost to them, therefore they have to demand a higher expected higher return. 

I'm trying to reconcile your statement here with what I know about existing consumer behaviour.   Rather than defer consumption into the future, I see FOMO everywhere:
- use of HELOCs for home renovations
- purchase of gadget rich automobiles far beyond the need of the consumer (4WDs, AWDs, turbo charged engines, leather uphostelry, proximity keys, etc.)
- huge mortgages (especially in Canada) to purchase real estate, although this is changing as interest rates rise
- buying expensive smart phones on monthly plans
and so on.

Can you clarify this for me?

@scottish my take is that @vand is describing the inevitable end of the trend embodied in the overconsumption examples you noted. People might be forced by economic circumstances to be more frugal in the future, just not quite yet.

I'd agree with that forecast, especially with interest rates at 4-5%.   IMO, the first world has been living beyond it's means for quite a while now...