The Lowest Interest Rates In The Last 5000 Years?
Most everyone is probably aware that interest rates today in the U.S. are at historical lows. To a large extent this is due to the quantitative easing strategy that the fed has been following since the depression of 2008. Their goal was to suppress interest rates to make borrowing easier in order to stimulate the economy after its biggest collapse since the Great Depression of the 1930s. Central banks in many other countries followed suit, and today the phenomenon is pretty widespread across much of the developed world. But U.S. interest rates can only be traced back to 1864, when the country’s first national bank was created. Just how low are current rates from a longer historical perspective?
WealthVest, a Bozeman, MT financial services firm specializing in annuities, researched this question and came up with an estimate of rates going back to the Sumerian era of the Mesopotamian city-states, around 3000 B.C. They determined that annual interest rates at that time for barley were as high as 33%. By the time Greece became a world powerhouse about 2700 years later, its well established financial system, coupled with the much broader use of credit, had driven rates down to as low as 6%. Moving forward about 600 years, the decline of the Roman empire caused rates to soar to as high as 13% until Emperor Justinian established his Code, which (among other things) lowered the maximum legal rate to 8%. During the subsequent dark ages, recordkeeping was so poor that it’s been virtually impossible to determine lending rates with any degree of accuracy.
The founding of the Bank of England in 1694 could be considered the start of the modern age of banking. Of interest is the fact that from its inception all the way through the 1970s, BofE’s interest rates never exceeded 8% nor fell below 2%. In the U.S., beginning in 1864, rates also fluctuated between those two extremes through the 1970s, although with much less volatility. In Japan, from the 1880s through the 1970s, rates ranged between 3% and 9%, and in Germany between 3% and 8% starting after World War II.
The 1980s saw a huge jump in interest rates in the U.S. and in the U.K., peaking at over 14% and 16% respectively. This of course was followed by one of the most protracted declines in history, culminating in the crash of 2008. From all this data, assuming it is valid, we could assert that interest rates today are actually lower than they’ve ever been over the last 5000 years.
Although this has been just an intellectual exercise designed to highlight the significance of the extremely low rates we are experiencing today, this situation is impacting the future investment returns we can expect to get. The low interest rate environment (which results in high bond prices), coupled with the historically high valuations in stock prices, is unprecedented. There has never been a time when prices of both bonds and stocks have been high at the same time. This makes it difficult to construct diversified portfolios that can generate historical returns while still effectively managing volatility and downside risk. As a professional investment manager, I find it much more challenging these days to select and allocate fixed-income investments than stock investments.
Practically speaking, we don’t have the option of pulling all our money out of bond funds and waiting until the Fed allows rates to rise to a more market-based level. We have to make the best of the situation, which means carefully selecting investments from among the many fixed-income asset classes. But if you’ve been used to getting 8% – 10% returns from a well-diversified portfolio in the past, you might want to temper those expectations for the foreseeable future.