Financial History 142 Summer 2022 - Page 41

around that long , at least in the current form that sees them actively intervening in financial markets and economies . The problem with that view is that when the Bank of England comes into existence in the late-17th century , global real rates are already structurally declining for about 200 years . And when the Bank of England comes into existence , we do not see a particular structural break in British interest rates . When the Banque de France comes into existence in 1800 through Napoleon , we do not see a structural break in French interest rates . When the Reichsbank comes into existence in the 1870s , we do not see a structural break in German real interest rates , etc . I ’ m not dismissing the idea that in the very short term , if the Fed announces tomorrow , we are reducing interest rates by , you know , from 0 to – 5 %, of course , that has big ramifications in the short- and maybe even a bit in the medium-term . But the key idea is that it appears actually very unlikely that even radical action by central banks could reverse the trend that we ’ ve been seeing for 500 years . The evidence appears quite sobering for policymakers .
Pak : In the long term , in this kind of big world sense , you may have these interest rates trending down . But as you said , small changes at specific moments in time can have a big impact on people ’ s behavior ,
partly because people don ’ t live in the long term and , in fact , they often act in the very short term . What kind of lessons should ordinary investors be taking from that ?
Schmelzing : Most of the money that is sloshing around financial markets and interest income assets is still managed by big institutional investors , who by their mandate are more long-term oriented as compared to the hedge funds or the short-term traders gathering on Reddit , etc . Long-maturity , heritable fixed income assets are the oldest financial assets in the world . Why ? Because the motivation by investors and by savers from the beginning was to have a long-term , relatively safe store of value , which can be passed on to your kids , to the next generation , potentially , and to preserve the value in real terms . Short-maturity financial instruments are a very recent financial innovation , actually ; in the 14th or 15th century , we do not see consolidated shortterm debt , for instance . Treasury bills , T-bills or tallies in Britain come into existence centuries after governments have issued long-maturity fixed income .
You asked what investors should take away . It ’ s always dangerous just to extrapolate a line like this , because it would imply that , okay , we ’ re seeing -10 % levels in 2100 . There are good reasons to say , well , shouldn ’ t it be an asymptotic kind of trend from here ? And shouldn ’ t we incorporate agency here and think that governments , central banks and investors will massively steer against the trend line now that they are losing money in real terms all the time ? So that ’ s a very fair argument . But , interestingly , we do not see if we just look at the last 200 years or so a more asymptotic trend decline of interest rates as we approach the 21st century .
In other words , the trend line is not flattening out the closer we get to the present . Instead , it is at least keeping that kind of long-run slope that we already saw since the Renaissance , since the early 16th century , when we have the big inflection . This leads me to say that this fundamental downward pressure on real interest rates will likely stay with us for the foreseeable future . And if we just look at the past couple of months or so with inflation rates going up to 5 %, 6 % or 7 %, it is amazing to see that at least in the short and medium term , people have not massively sold out of government bonds or fixed income . Even in the context of getting – 5 , – 6 % in real terms on their bonds . I think in many ways , it ’ s an amazing statement that investors and the market give right now . I mean , I think the basic desire to store a portion of your wealth in a safe place in the economy and in financial markets ,
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