500 Years of Interest Rates: The Lesson

It May Surprise You Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] 500 Years of Interest Rates: The Lesson - Real interest rates have trended lower for five centuries, independent of monetary or fiscal policies… - The warning of the “real rate depression cycle”… - A frightful arithmetic… Recommended Link [Do NOT Invest in anything until you see this]( [Read more here...]( While mainstream media headlines are focused on the pandemic and the election, shocking details about this rare occurrence happening right now are being ignored. Something is happening right now that could result in profits even HIGHER than investing just in gold bullion itself. And this gold expert with decades of experience has recorded a brand new briefing on how you can take advantage of this unique opportunity. He’s urging Americans to watch this before they invest in ANYTHING. [Click Here Before This Opportunity Comes Offline]( Annapolis, Maryland March 18, 2021 [Brian Maher] Dear Reader, Yesterday we hauled forth [evidence]( that long-term interest rates have trended persistently downward 500 years running. And the Himalayan rates of the mid-to-late 20th century? These may be history’s great exception, a brief but violent spasm… like a fleeting burst of blood pressure… or a volley of cannons. Here again, the graphic evidence: [IMG 1] Harvard economics professor Paul Schmelzing, in summary: Despite temporary stabilizations such as the periods 1550–1640, 1820–1850 or in fact 1950–1980 -- global real rates have shown a persistent downward trend over the past five centuries… since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed… Against their long-term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’... Furthermore: Rates have held this downward course “irrespective of particular monetary and fiscal responses.” That is, despite the monkeyings of governments and their central banks. Can you therefore expect the downward journey of interest rates to maintain present headings? We have further ransacked the historical data… rooted around for clues… and plucked out worrisome findings. Worrisome, that is, if you track your time in years and decades — not centuries. Details to follow. Let us first examine another historical oddity, worrisome in its own way — the present stock market... Tech Trounced The Dow Jones surrendered 153 points today; the S&P 58. But the Nasdaq seized the headlines… The index absorbed a savage trouncing — down 409 blood-stained points. Once again, rising Treasury yields wield the bludgeon. Markets are sensing inflationary pressures, and the Federal Reserve’s willingness to let them build. The 10-year yield jumped over 5% today, to 1.73%. 30-year Treasury yields scaled 2.5%... their loftiest since August 2019. CNBC, by way of explanation: Technology shares led the U.S. stock market lower on Thursday as a spike in bond yields fueled concern about equity valuations and prompted investors to sell growth-focused high flyers. But let us resume our study of time… and money. For light, we once again resort to the good Professor Schmelzing. The arc of interest rates bends lower with time, he has established. But as he has also established: No line bends true across five centuries. Even the long downturning arc has its squiggles and twists, its crooks and its kinks, each bent by the great forges of history. To these, we now turn… Recommended Link [The Future of Investing? Real Estate, Stocks, Crypto and more]( [Read more here...]( Interested in real estate? Stock? Precious Metals? Bitcoin and Crypto? Don’t miss this all-new event. You’ll even get our new Special Report: What You Need to Know About Cryptocurrency for free. [Click Here To Learn More]( “Real Rate Depression Cycles” Across seven centuries, Schmelzing identifies nine “real rate depression cycles.” These cycles feature a secular decline of real interest rates, followed by reversals — often sudden and violent reversals. The first eight rate depression cycles tell scintillating and often murderous tales… These cycles rotated upon such high dramas as the Black Death of the mid-14th century… the Thirty Years’ War of the 17th century… and the Second World War of the 20th century. The world is presently ensnared within history’s ninth real rate depression cycle. This cycle began in the mid-1980s. Schmelzing’s researches reveal the real rate for the entire 700-year span runs to an average 4.78%. The real rate for the past 200 years — meantime — averages 2.6%. It is here where our tale gathers pace… and acquires point… A Thing of Historic Grandeur Schmelzing’s research shovels up this revelation: This present cycle is a thing of historical grandeur — in endurance — and intensity. Of the 700 years, only one cycle experienced a greater endurance. That cycle was in the 15th century. And only one previous cycle — also in that age — exceeded the current cycle’s intensity. By almost any measure… today’s rate depression cycle is stupendous, a thing for the ages. The sharp plunge to the right gives the flavor of it: [IMG 2] Beware “Reversion to Mean” “Relative to both historical benchmarks,” concludes this fellow, “the current market environment thus remains severely depressed.” That is, real rates remain severely depressed relative to historical benchmarks. If the term “reversion to mean” has anything in it — we believe it does — the world is in for a hard jolt when the mean reverts. When rates do regain their bounce… history shows... they bounce high. Schmelzing: The evidence from eight previous “real rate depressions” is that turnarounds from such environments, when they occur, have typically been both quick and sizeable… Most reversals... have been rapid, nonlinear and took place on average after 26 years… Within 24 months after hitting their troughs in the rate depression cycle, rates gained on average 315 basis points [3.15%], with two reversals showing real rate appreciations of more than 600 basis points [6%] within two years. If the magnitude of the bounceback approximates the magnitude of the cycle it ends… we can expect a fantastic trampolining of rates. We must consider that rate appreciations of 6% are within reason. The present rate depression cycle runs nigh on 40 years. We must conclude — therefore — that the present rate cycle depression goes on loaned time. What happens once the loan is called in? 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The nation has taken on $7 trillion of fresh debt within the past year alone. How would America service a $28 trillion debt — a $28 trillion debt jumping by second, by minute, by hour, by day, by week, by month, by year? Indeed… by decade? Debt service already represents the fastest-growing government outlay. The Committee for a Responsible Federal Budget (no laughter!) estimates interest payments on this debt will total $300 billion this year. Horrifying Arithmetic But as the Committee further informs us, at present debt levels: Each 1% rate increase inflates debt service by roughly $225 billion. Should rates rise 1%… interest payments would balloon to $525 billion… exceeding all Medicaid costs. What if rates jump 2% or — heaven forfend — higher? The Committee: If rates were 2% higher, interest costs would total $750 billion, which is more than the federal governments spends on defense or Medicare. And at 3% higher, interest costs would total $975 billion — almost as much as is spent on Social Security benefits. We do not expect such a violent lurch in rates within the year. But assume the present rate depression cycle reverses spin next year or the year following. Assume further that real rates leap to 6% within two years of the reversal. Recall, rates streaked to 6% or higher after two previous rate reversals. Debt levels — meantime — could well exceed $30 trillion within the next two years. What is the cost to service a $30 trillion debt… at 6% the year? We haven’t the stomach to run the arithmetic. But we hazard the figure is plenty handsome. Debt service would nearly swamp the entire budget. But what might bring down the curtain on the current cycle? The Mischievous Gods Most previous rate depression cycles swung with death, destruction, howls, shrieks and sobs. Examples, again, include the Black Plague, the Thirty Years War and World War II. Perhaps a similar calamity will reverse the present cycle. Or some other unforeseen blow. The mischievous gods hold many tricks up their shirtsleeves. Of course, we can find no reason in law or equity why the second-longest, second-most intense rate depression cycle in history… cannot become the longest, most intense real rate depression cycle in history. The cycle could run years yet, we must allow. It could also reverse Sunday morning. The Lord only knows — and He is silent. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning Editor’s note: $2,000,000… That’s how much money is connected to [Jim Rickards’ latest prediction…]( If you haven’t seen it yet, we highly advise you take the time too. Simply put… Those who take advantage of what Jim believes will happen in the years ahead... could experience life changing returns in [a market that 99% of Americans have no idea even exists…]( That’s why you should [click here]( to see Jim’s latest video. 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Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. 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