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What 700 years of interest rates reveal about the global economy – Quartz

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Interest rates sure are weird these days. Five central banks currently hold policy rates negative; several are dabbling with unconventional bond-buying. The one bank that tried to raise them, the Federal Reserve, found itself back cutting rates within a year. Meanwhile, some $11 trillion worth of bonds have negative rates—guaranteeing losses for buyers that hold those to maturity.

But however weird this moment might be, it’s also entirely predictable—with the benefit of 700 years of hindsight, that is.

That insight comes courtesy of a fascinating working paper by economist Paul Schmelzing, which reconstructs real interest rates in advanced economies dating back to 1311. The study—what the author says is the first construction of a dataset of high-frequency GDP-weighted real rates (i.e. the difference between the nominal yield and inflation)—features a staggeringly rich collection of records culled from diaries, account books, local archives, and municipal registers and includes everything from Medici bank loans to France’s “Revolutionary loans” to the US government.

While the data available from past eras isn’t comprehensive, what it suggests is a steady fall in the average real rate since the late 1400s—a decline that spans centuries, asset classes, political systems, and monetary regimes. The slope of that trend puts long-term real rates on track to hit near-zero levels at some point in the past 20 or so years.

“Current real rate levels should have surprised nobody who had comprehensively charted long-run trends,” writes the author.

Of course, we commonly blame the current state of affairs on the 2007 global financial crisis—and central bankers’ subsequent response. But those critiques don’t square with the historical trend. “The 2007-2008 at best plays a minor cyclical role in explanation of low interest rate levels,” writes Schmelzing. “And the historical record does not imply that any presently-discussed fiscal or monetary policy action can generate any lasting trend break.”

It also turns out that, in the longer sweep of history, this eerie “new normal,” is not very new at all.

Apparently negative-yielding debt—often touted as a sort of late-cycle perversion, a sign of “just how crazy things have gotten”—is plenty frequent if you know where to look (i.e. way, way backward).

Between 1313 and 2018, around a fifth of advanced economies were experiencing negative long-term yields, on average. In keeping with Schmelzing’s larger finding, that share has risen over time. However, the frequency of these episodes seems to be rising. For example, the average share from 1313 to 1750 was 18.6%, compared to 20.8% from 1880 to 2018. Since 2009, that share stands at 25.9% (after an unusual spate of 0% between 1984 and 2001).

What’s behind the long trend in slumping rates isn’t clear. Economists looking to the recent past for culprits tend to identify changes in the pace of growth, productivity, and population size as chief drivers. Testing real GDP growth and demographic change against his dataset, the author finds no clear link.

One clue comes from the inflection point that gave way to the current trend in declining real interest rates. From the 1300s into the mid-1400s, capital costs began climbing. Then, all of a sudden in the late 1400s, credit conditions eased, as capital suddenly began pooling in great quantities, and savings rates seemed to jump.

Why might this have happened? There’s no sign of profit abruptly booming. Instead, it might have something to do with the Black Death.

In 1348, the bubonic plague arrived in Europe. Over the next few decades, it killed around a third of the continent’s population. By wiping out much of the workforce, the plague spread wealth more evenly. The trauma also left people inclined to spend like there was no tomorrow, according to chroniclers of the era. A consumer spending boom on everything from high fashion and booze to fancy eats and art followed.

Then came the moral backlash. Starting in the early 1400s, states around Europe instituted a rash of “sumptuary laws” banning myriad forms of conspicuous consumption. Schmelzing hypothesizes that the luxury retail boom sucked funds away from debt markets. After sumptuary laws finally succeeded in suppressing consumer spending, that trend reversed. Though there’s no micro-level evidence on savings rates to check this against, cautions Schmelzing, this surmise is consistent with narrative accounts and research on longer-term wealth evolution. As savings rates began climbing in the late 1400s, money flowed back into bonds, pushing down rates—and setting off the centuries-long decline that continues still today.

And, naturally, tomorrow. Later this decade, short-term real rates around the world will have dipped into permanent negative territory, according to the economist’s historical extrapolation. As for long-term rates, Schmelzing pinpoints 2038 as the year those go under.

Still, it might not be a smooth slide down the slope. Throughout the last 700 years, cyclical forces have temporarily bucked that long-term trend—at times causing rates to drop sharply for decades, followed by steep, abrupt reversals. We’ve been in the grip of one such “rate depression” since 1984. Pointing to Schmelzing’s earlier research on how past episodes have ended, Albert Edwards, strategist at Societe Generale, speculated that after a period of “deflationary bust, we may be on the cusp of one of these contra-secular snapbacks.”

So does that mean we shouldn’t be worried about negative rates and the way they warp the financial system? Nope—just that there’s nothing much to do about it.

“With regards to policy, very low real rates can be expected to become a permanent and protracted monetary policy problem,” writes Schmelzing,” but my evidence still does not support those that see an eventual return to ‘normalized’ levels however defined.”

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Nobody seems to know what's going on with the economy – CNN

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A version of this story appeared in CNN’s What Matters newsletter. To get it in your inbox, sign up for free here.

(CNN)If you’re confused by the US economy, which simultaneously shows signs of strength and cause for concern, you’re not alone.

The economy is on the road to recovery from the coronavirus pandemic, reeling from inflation or a source of disappointment on jobs creation, depending on who you’re talking to.
It’s probably all three, and what happens from month to month seems to be something of a surprise. That element of unpredictability might be the most normal possible thing given the shock of the pandemic — the extraordinary government intervention to save the economy is unlike anything anybody alive today has ever seen.
It’s hard to decide how important any single thing is.
Let’s look today at jobs.
Government data released Friday showed the US economy gained 210,000 jobs in November and the unemployment rate fell to 4.2%. A low rate traditionally signals full employment, meaning that nearly everyone who wants a job has one.
And yet!
Most stories about the November jobs report described it as “disappointing” in the first sentence, but also proof that the pandemic recovery is moving along.
Why the disappointment? Tappe wrote: “Economists had expected more than double the number of jobs created in November, forecasting a continuation of the buoyant economic recovery over the past two months. Instead, the November jobs gain was more reminiscent of the pre-pandemic economy, when employers added a smaller but steady number of positions, at least on the face of it.”
At the same time, there’s the good news. The jobs report suggests the pandemic recovery is progressing. The country has created more than 6 million jobs this year, and labor force participation increased to 61.8%, the highest level since the pandemic hit.
Much of the disappointment stems from expectations. The jobs report is based on two surveys — one of businesses with payrolls and one of households about their economic situation — that are conducted by the government mid-month and released by the Bureau of Labor Statistics in tandem on the first Friday of each month.
“Weird jobs numbers,” tweeted Jason Furman, who led the Council of Economic Advisors during the Obama administration.
“Very strong household survey: unemployment down to 4.2% & labor force participation up as employment up 1.1 million,” he tweeted. “But the normally more reliable payroll survey shows only 210K jobs added.”
He’s not sure what’s going on: “Some explanations may emerge but it may just be measurement error.”
Where do expectations come from? Leading up to the monthly release, economists and banks publish their own expectations for what the surveys will find. If the government data doesn’t hit those expectations, disappointment follows.
I talked to Elise Gould, a senior economist at the Economic Policy Institute, about what we do and do not learn from these reports.
She said they need to be viewed as pieces of information, not the full picture, in part because the surveys can overstate things and miss the changing composition of the workforce.
Revisions to jobs reports from recent months have confirmed stronger job growth than what was shown by the surveys.
Still, it’s best to know the latest information, even if we know it’s likely to change, she said.
Also, the pandemic. There is also the pandemic element to confound economic expectations, just like it has confounded people’s lives.
“Everyone in this economy today and the people that are making these predictions have never lived through a pandemic that hit the labor market so strong,” said Gould. “And so their models are not necessarily capturing the ebbs and flows of the pandemic.”
I asked David Goldman, managing editor of CNN Business, for his thoughts on why these reports seem to confound expectations each month. He came back with three points:
  • This is a particularly unusual environment. It is making predictions really difficult for economists. The labor shortage, supply chain crisis, energy crunch, inflation and Covid-19 situations all wrapped into one make for a delicate balancing act. We should cut economists a break.
  • Right in the long run. Economists actually have been proven correct over the past several months when they initially were thought to be wrong. That’s because the reports keep getting revised higher in subsequent months as Labor Department economists get more data. It’s not only hard for economists at Goldman Sachs and JPMorgan to figure out — it’s hard for the government, too.
  • Don’t focus on expectations. The forecasts aren’t the important thing here — it’s the actual data. And one month doesn’t a trend make. We’ve had some shockingly good jobs data in recent months, and November wasn’t all that bad — just not quite as good as we had expected.
There’s uncertainty elsewhere. Leaders at the Federal Reserve, like Chairman Jerome Powell, had been preaching that inflation was temporary — calling it “transitory,” meaning it wouldn’t permanently affect the economy.
But in a signal that inflation may last a little longer than expected, Powell told lawmakers this week the Fed may end some of its pandemic stimulus efforts — they call it “tapering” — earlier than expected.
“At this point the economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner,” Powell said.
One wrench thrown into the economy has been the resilience of the coronavirus. We may not quite understand how the surge of the Delta variant over the summer and fall arrested progress.
CNN’s Tappe and Nathaniel Meyersohn wrote about the Delta effect back in August.
Now that the Omicron variant is emerging, it, too, could send things in a new direction.

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Omicron Variant May Be Good For Economy – Forbes

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The omicron variant of Covid-19 has sparked great fear. With time, we may find the fear to have been justified, but we may find the opposite: that this is good news for the economy.

It’s still early days for our knowledge of omicron. Waiting to learn more seems to make sense, but consider this: Business decisions are being made every day. Any person who waits for perfect certainty—about the economy, technology or Covid-19—will never make a single decision. In many areas decisions have to be made this week. So it’s worthwhile to consider how omicron may be good for the economy.

Omicron seems to be displacing the delta variant in South Africa. Ted Wenseleers showed that delta’s share of total Covid-19 cases in South Africa has plummeted while omicron has surged. Because the early indications show that omicron was highly transmissible, it could well displace the delta variant around the world.

So far omicron has triggered a surge in infections in South Africa, but not a comparable increase in deaths. There’s good reason for the virus to mutate to be less dangerous. Bugs that kill their hosts don’t replicate as much as bugs that allow their hosts to remain alive. Many viruses in the past have evolved to be milder. We cannot take this idea too far, however.

The omicron virus may have mutated so that it has greater ability to infect those who already had been exposed to earlier variants. That’s no surprise to South African scientists, who have observed a very high past infection rate in their population. The virus could not get ahead by finding people never exposed to any version of Covid-19, so it found a way to infect the previously ill, this theory goes.

BioNTech CEO Ugur Sahin said recently that current vaccines probably help protect against severe illness from the omicron variant, and that new vaccines are under development that would be more targeted against omicron. Given the speed with which our vaccines were developed, we may have new versions being tested in the lab right now. The question will be how long we have to wait for regulatory approval.

From an economic forecasting viewpoint, business leaders should consider the upside potential of omicron. Although it is way too early to be sure, we may find that the disease becomes dominated by a less dangerous mutation. Illness would continue if this happens, but with fewer deaths and hospitalizations. People would come to feel more comfortable dining out, traveling and seeking routine non-Covid healthcare tests and procedures. The rosy view is far from certain, but current evidence is not more pessimistic.

Companies that that are especially sensitive to the Covid pandemic should try to delay big decisions. We’ll have better information in the coming weeks. But decisions that cannot be delayed should probably consider the possibility of a stronger economy rather than greater Covid problems.

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Can the global economy battle through another COVID-19 setback? – Aljazeera.com

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Video Duration 26 minutes 00 seconds

From: Counting the Cost

A new coronavirus variant has forced governments to impose travel bans just as economies were starting to recover.

Last week, after scientists in South Africa identified a new coronavirus variant, borders were suddenly closed off to passenger travel from Southern African countries, oil prices fell more than 10 percent, and stock markets took a hit.

Markets and economies are expected to face weeks of uncertainty as investors closely watch for updates on Omicron. What comes next largely depends on what scientists discover and how quickly they do so.

Also, green hydrogen has been hailed as the energy of the future; can it help decarbonise economies?

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