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Visualizing the 200 Year History of the U.S. Interest Rates
interest rates us history As the Federal Reserve enacts measures to stimulate the economy, interest rates will remain near zero for at least three years.
Does this represent a historic low-interest rate low? This decline in interest rates has been taking place worldwide since the Middle Ages, according to an interesting report by the Bank of England. Indeed, these downward-sloping rates predate the advent of modern central banks — illustrating a historical trend that is well entrenched.
According to New York Life Investment’s Markets in a Minute chart, there have been 20 centuries of interest rates in the U.S. since the establishment of the first American institution down to the current historic lows.
interest rates us history: Historic Highs and Lows
While the U.S. government pumped billions into the economy during World War II to help finance the war, interest rates fell to 1,7% — rates that were historically low by comparison. Additionally, government debt soared to over 100% of GDP during this period.
The interest rate reached a record high of 15.8% in 1981. During the 1970s and early 1980s, inflation was a major economic issue, and Federal Reserve Chairman Paul Volcker instituted rate controls to restrain demand. Economic growth was low and unemployment rose to 8%.
Yields on 10-Year Treasury Notes, an important factor in determining interest rates
through September 28, 2020
Data source: Macrotrends
In the past year, interest rates have declined from 2.1% to 0.9%, a 65% decrease. The current interest rates are well below 1945 levels – and far below the average from the last 58 years of 6.1%.
Longer Horizons
In the 18th and 19th centuries, interest rates also reveal interesting trends.
At the turn of the century interest rates had fallen for three decades; by 1835 they stood at 4%. As a result, the U.S. national debt was paid off for the first time in history, as Andrew Jackson considered it a “moral failing” or “black magic.”
To finance the federal budget, the government sold large swaths of land, thus avoiding any debt accumulation. However, this did not last long. Real estate speculation led to a real estate bubble, which then led to a collapse of the economy. Over the next several years, rates continued to rise as the government borrowed again.
A long-term, negative slope of interest rates followed the Civil War, which ended in 1945. After the Civil War, interest rates took 100 years to surpass the highs of that era.
Why So Low For So Long?
There is no clear explanation for why interest rates have risen, but broad structural forces may be at play.
A higher accumulation of capital could be one explanation. Another argument suggests that modern welfare states have as well, because of their substantial public spending. Among UK households, average expenditures as a share of GDP rose from 35% in 1981 to 60% in 1960, from 8% in 1700 to 19% in 1750.
Along with this, rates typically have cycles of 22 to 27 years. If rates rise and fall in a short period, a quick reversal can usually be observed. Interest rates fell 25% in one year in 1982, from 14.2% to 10.4%. Rising rates, however, signal a different trend. They usually reverse after 2-14 years.
Market distortions—such as ultra-low yields on income—are likely to become more prevalent as near-zero rates seem more likely in the future. Thus investors might want to rethink their asset allocation among fixed income, equity, and alternative investments.
RESOURCE: The Boo MONEY
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