Global Real Interest Rates – Charts Updated for 27/7/11
An update of the global real interest rate charts for 27/7/11. The important markets of the world continue to display negative real interest rates, however we’re starting to see improvements in various pockets of 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:
The US tends to go through long-term generational cycles where the real fed funds rate fluctuates from being consistently positive, to only intermittently positive (if that). During the long periods where the real fed funds rate remains positive, the banking systems tend to draw in large amounts of central bank notes for long periods of time. During these periods, banks have the platform to expand their activities (i.e. engage in increasingly aggressive fractional-reserve banking). As this process gains momentum, debt tends to accumulate and the supply of ‘claims upon central bank notes‘ (i.e. deposits: — what most people call ‘money’) increases rapidly.
However, eventually the economy reaches a maximum capacity for leverage, and the house of cards tends towards collapse. Thus, central banks engage in easy monetary policy in order to stave off a significant collapse in the stock of ‘IOU claims upon central bank notes’. During these periods, the real fed funds rate tends to be only intermittently positive (if that!) and the money creation process goes into reverse (as deposits become decreasingly appetising).
As can be seen from the long-term chart of the real fed funds rate (above), we are in the latter portion of the generational cycle. The real fed funds rate has been only intermittently positive for the past 10 years. Moreover, zooming in to the shorter-term timeframe (see chart below), we can see that we are currently in one of the most onerous periods of this long-term cycle in the real fed funds rate.
With the exception of Norway (and, to some extent, Switzerland), real interest rates in the developed world remain negative and pointing downwards. We interpret this as bearish because of the huge legacy of debt in these countries.
Asian real interest rates look similarly bearish. Asian currencies are reknown for the high degree to which they are ‘backed’ by dollars. We intend to write something about the implications of this soon… (so please subscribe!)
Real interest rates in Eastern Europe remain generally negative. However, as can be seen from the charts below, they are nearing their inflection points. In recent months we have noted the weakness of this sector, and we believe that this weakness will continue over the coming months. However, it is starting to become clear that the end to this trend is somewhere along the horizon.
Real interest rates in Latin America continue to buck the global trend.
Middle East & Africa:
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