Gresham's Law

An update of the global real interest rate charts for 27/6/11. Real interest rates remain mostly negative (and pointing downwards) throughout the world.

[EDIT: For up-to-date real interest rate charts see here.]

[Note: By 'real' interest rates, we mean the short-term inter-bank rate minus the year-on-year growth in the consumer price index.]

Long-term & Short-term Real Fed Funds Rate:

As can be seen from the long-term chart of the real fed funds rate below, the economy goes through long trends of consistently positive real rates followed by (slightly shorter) trends of intermittently negative real rates.

During the periods of consistently positive real rates, the fractional-reserve banking system has the platform expand. That is, the fractional-reserve banking system has a sound and stable deposit base upon which to extend credit (and thus increase the supply of ‘IOU money‘). Indeed, this process of expansion typically has strong momentum behind it. The extension of credit (or the production of ‘IOU money’ / ‘fiduciary media‘) increases the supply of money, and invites further production of ‘IOU money’. As such long-term trends continue, the extension of credit becomes progressively more liberal and the path of the economy becomes ever-more contingent on the maintenance of the stock of ‘IOU money’.

During the periods of intermittently negative real rates, we find that the preceding swelling of the fractional-reserve banking system goes into reverse. The metaphorical ‘rug’ (of a stable deposit base) is pulled out from under the banking system. This inevitably happens at precisely the wrong time; for the maintenance of the banking system (and the entire economy) usually becomes highly dependent on the prevailing supply of bank deposits.

As can be seen on the chart below, we have been in a period of intermittently negative real rates for around 10 years, and — in particular — we seem to be in one of the most onerous periods during this long-term trend.

Click to enlarge. Source: St Louis Fed

A close up on the recent past shows that the ‘real’ fed funds rate is strongly negative and pointing lower.

Click to enlarge. Source: St Louis Fed

Developed Countries:

With the exception of Australia and Norway, real interest rates in developed countries remain negative and pointed downwards. In the same way as described above, the over-levered west may continue to experience financial distress for some time.

US - Click to enlarge. Source: OECD Statistics

Euro Area - Click to enlarge. Source: OECD Statistics

Japan - Click to enlarge. Source: OECD Statistics

UK - Click to enlarge. Source: OECD Statistics

Switzerland - Click to enlarge. Source: OECD Statistics

Canada - Click to enlarge. Source: OECD Statistics

Australia - Click to enlarge. Source: OECD Statistics

New Zealand - Click to enlarge. Source: OECD Statistics

Norway - Click to enlarge. Source: OECD Statistics

Asia:

Likewise, Asia – renown for its dependence on the dollar – is experiencing the same trend of negative real interest rates.

China - Click to enlarge. Source: OECD Statistics

India - Click to enlarge. Source: OECD Statistics

Indonesia - Click to enlarge. Source: OECD Statistics

Korea - Click to enlarge. Source: OECD Statistics

Eastern Europe:

Although in slightly better shape, real interest rates in Eastern Europe remain negative and falling (particularly in the Russian Federation and Poland).

Czech Rep. - Click to enlarge. Source: OECD Statistics

Hungary - Click to enlarge. Source: OECD Statistics

Poland - Click to enlarge. Source: OECD Statistics

Russian Federation - Click to enlarge. Source: OECD Statistics

Latin America:

Real interest rates in Latin America continue to look considerably better than those in the rest of the world.

Brazil - Click to enlarge. Source: OECD Statistics

Chile - Click to enlarge. Source: OECD Statistics

Mexico - Click to enlarge. Source: OECD Statistics

Middle East & Africa:

Real interest rates in Israel, Turkey and South Africa are either negative or pointed downwards. The same unraveling of the fractional-reserve banking system could become prevalent in these countries.

Israel - Click to enlarge. Source: OECD Statistics

Turkey - Click to enlarge. Source: OECD Statistics

South Africa - Click to enlarge. Source: OECD Statistics