A History of Interest Rates

"This is one of my favourite type of books, which are just about data. You can argue all kinds of things about the past, but then you have to go back and look at the actual numbers. The interesting thing about interest rates is that you have these decade-long swings. It’s important to try to situate today in that historical context. We are in the fourth decade of a very long bull market in bonds – meaning rates have gone down and bond prices have gone up – and at some point that will switch. We need to be aware of that. It’s a very simple observation. I don’t know when rates are going to turn against us, but Homer and Sylla’s history shows us that interest rates can go down – and they can go down for a very long time – and then they go the other way, they go up. This means that you can’t build your public finances on the view that, “Oh yes, today’s rates are going to be the rates in two decades.” You can’t bet on the US being able to borrow indefinitely, an infinite amount, at 2% interest. Exactly. The cool thing about Homer and Sylla is it’s such a great book – it costs nearly $50 on Kindle. I take that as an indication of the market realising the intrinsic value of a ridiculous amount of data about interest rates. You have to go to it with a question. You have to say, “I want to know how much it costs to borrow, in this or that time period, for this or that government or the private sector.” If you just read it, it’s a bit overwhelming, I agree. But then facts have a tendency to overwhelm people. You should try and be aware of the facts as much as possible. The US national debt right now is nowhere near what it was at the end of World War II. This is the sixth debt surge in American history. Five of them were all about war. This one was partly wars – it was also the Bush tax cuts, Medicare Part D [prescription drug coverage] and the financial crisis. What’s different about this surge is that it coincides with a rather difficult demographic transition – the baby boomers are retiring. Also, we don’t have healthcare costs under control. The demographics were much more favourable, and healthcare was not this kind of an issue, after any of the previous surges. So there is an unfortunate convergence – this combination of issues is not something we’ve dealt with before. Yes, in the modern era, that is since we moved away from the gold standard. There were certainly episodes under gold, first in the UK and then for the US, when interest rates were very low. But interest rates have come down and they’ve kept coming down. I’ve refinanced my mortgage five times since 1997. Each time I thought, “Wow, that’s a great deal, I guess I’m done now.” We’ll see how long they stay low. If you read this history, you’ll see you have to take a pretty agnostic view of the short term, at the same time as not taking a long-term bet, from a public finance point of view, that interest rates stay low."

"Investors should realise that interest rates move in long cycles and this is fairly well documented in Homer’s history of interest rates. I think that in general — because I go to lots of seminars and so forth — investors and professional fund managers may have a CFA, but they have no clue about history. Get the weekly Five Books newsletter I think it’s a very good book, a historical document about how interest rates have moved over thousands of years. It has some interesting observations. Sidney Homer was an academic and a very intelligent and knowledgeable man. I think that everybody who is in investment should read this book."