Interest Rate Decline

It's been such a long time
I think I should be going
And time doesn't wait for me
It keeps on rolling
--Boston

Interesting graph of interest rates over many centuries courtesy of Visual Capitalist. Obviously, the trend over the past eight centuries has been down.

Several theories are proposed to explain long term interest rate decline. Productivity growth should influence interest rates. As productivity increases, scarcity declines. More capital should be available to borrow, thereby lowering borrowing costs.

The article takes a different view, however. Focusing on the continued decline in rates over the past 30-40 yrs, the author proposes that lower productivity leads to less business investment and therefore less demand for capital. The opposite should be true. Lower productivity means that capital will be more scarce. Less supply means higher prices, all things equal.

The author also proposes aging demographics and slowing economic growth as driving rates lower recently. Of course, this does little to explain the longer term down trend, as there were many periods over the past few centuries where populations grew dramatically and economies boomed.

It is also noted that bond yields have been falling coincident with declining rates--as if bond yields are supposed to trend independent of interest rates. Let's clear up the confusion. Interest rates constitute a price--the price associated with borrowing money. Bonds are a vehicle for borrowing money. Bond 'yield' coincides with the borrowing price. The real news would be if interest rates and bond yields were not highly correlated.

What the article completely ignores is the work of central banks over the past 100+ years to interfere with the natural rate of interest. Slowdown in productivity growth should have caused rates to level out or perhaps to rise. However, central bank intervention has continued to force rates lower, thereby keeping the eight century downtrend in place.

If central banks lose control of rates, then they will surely rise and jeopardize the long term downtrend.