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.”
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
