Long-run interest rates: past, present and future

Abstract

“It is utterly impossible [...] for the rich to save as much as they have been trying to save, and save anything that is worth saving.” Marriner Eccles, former Chair of the US Federal Reserve This paper provides a structural explanation for the persistent global rise in debt and declining long-run interest rates since the 1980s. Figure 1 shows the long-run evolution of two key financial variables in the post-WWII period for the United States: the total credit-to-GDP ratio and 10-year real interest rate, as published by the Cleveland Federal Reserve.1 Total credit includes both public debt issued by the federal government and private debt taken on by households and the nonfinancial corporate sector. After remaining relatively stable in the post-WWII years, total debt relative to GDP almost doubled since 1980. The situation is remarkably similar across the world as well, with global debt relative to GDP accelerating sharply since 1980.2 The large rise in debt globally after the 1980s was accompanied by a fall in interest rates—that is, the price of debt. The ten-year real safe rate declined steadily from a high of around six percentage points in the early 1980s to zero in the post-2008 era, before rising in recent years.