Financial Sense recently spoke with Richard Sylla, professor emeritus of economics at New York University and the co-author of A History of Interest Rates, about the unique times we are living in and why, historically speaking, we may be looking at a momentous turning point in human civilization.
History of Interest Rates
“As long as you have some commerce...people are going to demand credit,” Sylla said.
Silver and gold have always been prized, but coin-based currency didn’t come in until the fifth or sixth century. This ushered in a new era, Sylla noted.
This was one of the most impactful economic innovations in history, basically beginning in Asia Minor or what is today Turkey.
This state of affairs changed over the years, but we basically had a monetary system based on precious metals until the classical gold standard in the late 19th and early 20th centuries, Sylla noted.
Then, in the 1930s, due to the effects of the Great Depression, President Franklin Roosevelt took the US off the gold standard and we’ve been on a unbacked fiat system ever since.
“We are living in an age of fiat money now,” he said. “The governments don’t have to exchange the paper money they produce for gold or silver anymore. I think that led to high inflation in the US from the late 1960s until that high-interest rate period of 1980 to 1981. Since that time, the central banks have been a little more responsible, not inflating the US currency supply so much.”
Credit Patterns and Peak Civilizations
In A History of Interest Rates, Sylla identified an interesting pattern corresponding to the rise and fall of major empires.
When we look at interest rate trends, “it seems like there is a U-shaped cycle for each civilization,” he told listeners.
At some point they reach a peak and then slowly trend down overtime. Then, after getting as low as they can possibly get, they start to trend higher again, but usually with much, much higher debt levels. This was a pattern seen with Babylon, Greece, and even Rome.
Applying this analysis to the present, we see that we had a run up of very high interest rates peaking in 1981, with a dramatic fall to near-zero or even negative, Sylla stated. But now, we’re beginning to see rates creep up, and this could be the beginning of the final stage of the cycle, Sylla said.
“We might say that our current low interest rates indicate that we’re at one of the high points of our civilization,” he said. “Maybe things will get worse from now on.”
Today’s Markets Unprecedented
Since the last edition of the book in 2005, we’ve seen a totally unprecedented series of events. We’ve experienced the lowest interest rates on a very wide, global scale for the first time in millennia, Sylla noted.
For 5,000 years, interest rates remained in a narrow range. The last peak of around 20 percent occurred under Hammurabi in Babylon, Sylla added. We didn’t hit that level again until 1980 and 1981. Since then, we’ve seen the long decline to our present state.
“Someone alive today who remembers the last 40 or 50 years can feel they’ve been a part of a special period of interest rate history, from the extreme highs to the extreme lows in US history,” he said.
This is occurring over a period where the United States’ government debt has been seen as a benchmark and safe haven around the world.
“That’s been very valuable to the United States,” Sylla said. “I sometimes think we’re abusing the privilege a little bit. The national debt was trillion in 1980. … Just 10 or 12 years ago, it was trillion. Now it’s trillion.”
As interest rates go up, the government is going to have to pay more money to finance its debt, which has implications for the budgets. On top of that, we have to consider unfunded liabilities including the Social Security system and Medicare system, both of which face serious financial shortfalls in the future.
“We need to face these issues,” Sylla said. “We do have to face up to some of these debt problems, and we’ve been lucky with these low interest rates. … Maybe the outlook isn’t so bad if we normalize interest rates and the economy keeps growing. I think that we would get back to more normal times instead of the interesting times we had for the last 40 years or so.”
Listen to this full interview with Richard Sylla by clicking here.