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"Lisbon turning Airbnb-style rentals into homes for key workers." The headline above is from The Independent July 6, 2020 report. European cities are thinking about what their urban centers should look like in a post Covid 19 environment in terms of affordable accommodation and access to services for their front line workers who have been pushed into the suburbs and long commutes by the expansion of Airbnb into the core tourist areas where prior to the global suppression of interest rates, affordable housing used to exist.

​Affordability is the ability for any urban household to be able to rent a dwelling for less than a 25% of its monthly income, or to buy one for less than about three time its yearly income. ​​​The mobility and affordability objectives are tightly related. ​A residential location that only allows access to only a small segment of the job market in less than an hour commuting time has not much value to households, even if it is theoretically affordable.​

​> More than a third of properties in the centre of the city (Lisbon) are currently taken up by holiday lettings.

> Tourist rentals had pushed up (Lisbon) property prices in recent years and driven out essential workers and their families.

> (Lisbon) authorities will offer to pay landlords in return for renting "safe homes" as affordable housing for workers including hospital staff and teachers.

> We want to bring the people who are Lisbon’s lifeblood back to the centre of the city as we make it greener, more sustainable and ultimately, a better place to both live and visit.

> With many more people likely to be permanently working from home, it makes sense for more Lisboetas to swap the suburbs for the city where they can easily access public transport, services and take advantage of festivals and concerts.

> From Melbourne to Paris, the tide is turning against urban sprawl and back to revitalised city centres where residents can reach key services, like doctors, schools and shops all within a 20-minute walk.

> As Lisbon rapidly transformed into a tourist destination over the last decade, the number of Airbnb units skyrocketed — driving up the cost of housing, and pushing longtime residents out of the city center. When 2020 started, many neighborhoods were more than one third short-term housing; in the worst-affected part of town, around 55 percent of residential units had been converted to makeshift hostels and hotels. Then the virus came, and all the rentals dried up. Now Lisbon is taking advantage of that situation, in order to push some of these units back into the long-term housing market. The city government is renting empty apartments directly from property owners, and then turning around to rent them to Portuguese workers and students at subsidized rates.

​> Now Lisbon is taking advantage of that situation, in order to push some of these units back into the long-term housing market. The city government is renting empty apartments directly from property owners, and then turning around to rent them to Portuguese workers and students at subsidized rates.

> Lisbon may take up to 2,000 homes off the short-term market, but could expand further... the new contracts are for at least five years, and no one will be asked to pay more than 30 percent of their monthly income on rent.

> Last year, the Irish government passed legislation strictly regulating Airbnb-style rentals... this year properties entering the long-term rental market increased as much as 64 percent in some neighborhoods in the capital. 

> In Paris, Mayor Anne Hidalgo has promised a referendum on the future of short-term rental properties in the French capital. “There are about 30,000 Airbnb-type rentals in Paris, the task is to get them back.” 

> Since 2016, it has been legal for cities in Spain’s Catalonia region to take over properties that have not had tenants for over two years... in July, the city of Barcelona (the capital of Catalonia) informed the owners of 194 apartments that they better find tenants soon; if not, the government could take them over and turn them into affordable housing.
 
> Per square mile, Barcelona has the most Airbnb properties in Europe and Lisbon is No. 2.

> In Rome, a group of activists and researchers at the LUISS Guido Carlo University is looking to promote the “Barcelona model,” as part of a multi-pronged approach to make Italian cities more democratic and inclusive. The city center feels desolate at the moment, because all the properties dedicated to Airbnb rentals as well as many of the urban homes of the wealthy, who have houses elsewhere, are empty... Airbnb has disrupted the housing supply in Italy; there are almost a half a million units dedicated to this kind of short-term rental and COVID-19 has exposed the problem of urban inequalities even more starkly.

> ​Over the past decade, the app that connects fly-by-night tourists and short-term renters to “cozy” lofts and five-star “experiences” morphed into a gig-economy nightmare for cities like Paris, Amsterdam and Barcelona. 

> (Now) global tourist traps are being slammed shut, and the ecosystem that sprang up around them is falling apart — including Airbnb. Apartments once reserved for well-heeled tourists have seen bookings slump anywhere from 41% to 96%.

> Paris has 100,000 empty homes and 100,000 second homes, according to the mayor’s office, fueling a sense of social injustice. 

> "Short-term rentals have had a disastrous impact on cities’ rental markets,” McGill University’s David Wachsmuth told The Intelligencer last month. Will a post-Covid-19 society really want that back?

> Already, in China, the slow return of tourism is — understandably — skewed towards domestic, not international, trips. If France loses a chunk of its 2 million annual Chinese visitors and their 4 billion euros ($4.4 billion) in associated spending, that’s a rough prospect for rentals.

> How we work, and travel for work, could also change long-term. Lockdowns in Italy and France have already seen irresponsible city-dwelling Northerners descend on family homes and rural towns in the south. They might stay there if working from home turns out to be a durable, safe option as countries ramp up tests and vaccine research.
 
> ​This crisis may be a chance for a more balanced recovery than simply a return to the norms of over-valued, over-crowded and over-polluted cities.

Santa Monica has effectively wiped out 80% of its Airbnb listings​...
Source: Investopedia, March 8, 2020 

Santa Monica has effectively wiped out 80% of its Airbnb listings by instituting the toughest regulations on short-term rentals in the U.S. The southern California city said it was spurred by overall increases in housing prices and dwindling housing supply. The new regulations, which have been effective since June 2015, require anyone putting a listing on Airbnb in Santa Monica to live on the property during the renter’s stay, register for a business license, and collect a 14% occupancy tax from users that will be payable to the city. In 2019, the City of Santa Monica reached an agreement with Airbnb in which the company agreed to remove illegal short-term listings from its website. As of 2019, the city has only 351 short-term rental properties, most of which are listed on Airbnb.

Airbnb's Coronavirus Collapse
TWiT Tech Podcast Network, April 23, 2020

Click to go to the ArchDaily.com list of the 25 tallest buildings

ITEM: 'Promiscuous treatment of nature' will lead to more pandemics. Habitat destruction forces wildlife into human environments, where new diseases flourish. Source: Jonathan Watts, The Guardian Global Environment Editor. May 7, 2020. Now that we are in the expanding first wave of the novel coronavirus Covid 19 we can see how unprepared we are for a major global viral epidemic and how it has affected societies across the world in terms of: Sovereignty Civil Rights Politics Economics Finance Employment Production Supply Chains Transportation Education Entertainment Group Gatherings Health Care Elder Care Child care Psychological Stress Risk Aversion ie: the status quo societal norms are being remade.

See my table of the historical timelines of pandemics since the 2nd century CE; all this practice and we are still unprepared. ​​As noted on my ongoing Canadian Housing Starts chart since 1956, housing production has been lagging the census since the 1970s.  Housing and employment structures are a commodity that depreciates over time requiring maintenance and renovation. In this pandemic with it's myriad ongoing social adjustments, there is a call for repurposing offices especially in older buildings that suffer from inefficiencies. ​The June 8, 2020 research from McKinsey & Company indicates that office-space decision makers expect the percentage of time worked in main and satellite offices to decline by 12% and 9% respectively, and work from home will increase from 20% to 27% of work time. They suggest that some organizations could reduce their real-estate costs by 30% or almost eliminate them if they shifted to a fully virtual model. These changes could also increase their organizational resilience and reduce their level of risk by having employees work in many different locations.

CLICK CHART TO ENLARGE ​ ​Angus Reid reported that at the end of March 2020, 17% of their respondents said they are doubtful that their own jobs will return or are convinced that those positions are gone for good. Three months later at the end of June, the response jumped to 38%.

​"Google will keep its employees home until at least next July 2021, making the search-engine giant the first major U.S. corporation to formalize such an extended timetable in the face of the coronavirus pandemic. The move will affect nearly all of the roughly 200,000 full-time and contract employees across Google parent Alphabet Inc., and is sure to pressure other technology giants that have slated staff to return as soon as January. The Wall Street Journal, July 27, 2020

​What It Would Take To Reach Herd Immunity For The Coronavirus
"Scientists are working at breakneck speed to develop an effective vaccine for the coronavirus. Their ultimate goal: to immunize enough of the world’s population to reach herd immunity."
The Wall Street Journal, July 27, 2020

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Thanks to Greg The Analyst's April 22, 2020 blog entry "Why I view this cycle as deflationary, not inflationary." for his unsourced reproduction chart of the "Income Share of Top 1% Relative to Bottom 90%" since 1920 (chart left). I added to the chart mashup the closest comparison I could find to reflect Canada's wealth gap. The two countries track the same trend in income disparity rising from the early 1980's when state mandated interest rate inflation peaked, to now the end of 2Q 2020 when our new Bank of Canada Governor, Tiff Macklem said on June 22nd, "Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work." "avoid a persistent drop in inflation" oh oh... apparently the members of the The Canadian Club of Montreal who are mainly from the business and professional communities addressed by the Governor are not to be exposed to the apparently scary noun... "deflation" I will highlight below the main points of Greg's argument. ​We are indeed beginning to see the elements unfold for another great cycle of deflation, not official yet, but the evidence mounts.

Money Velocity

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Deflation Probability

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​Reopening Canada: 3 stages of recovery

DEPRESSION DEFINITION 
​(✓) = now occurring in various global economic centers.

Depressions are characterized by their length, by abnormally large increases in unemployment (✓), falls in the availability of credit (✓) (often due to some form of banking or financial crisis (✓)), shrinking output (✓) as buyers dry up (✓) and suppliers cut back on production and investment (✓), more bankruptcies (✓) including sovereign debt defaults (✓), significantly reduced amounts of trade and commerce (✓) (especially international trade (✓)), as well as highly volatile relative currency value fluctuations (✓) (often due to currency devaluations (✓)). Price deflation (✓), financial crises (✓), stock market crash (✓), and bank failures (✓) are also common elements of a depression that do not normally occur during a recession. (Wikipedia)

CLICK CHART TO ENLARGE US leveraged loan downgrade ratio hits staggering 43:1 as COVID-19 stalls market S&P Global Market Intelligence JUN 4, 2020

"In their optimistic scenario — where restrictions lift in May and life gets back to normal by June — 9% of leveraged loans would default within a year. If lockdowns are in effect until June and normalcy returns at the end of August, defaults would hit 14% of loans, they said. In the worst case — the virus keeps returning in waves until the middle of next year — UBS sees the rate at 22%." Quote from UBS Investment Bank via Bloomberg/FinancialPost May 2020

​Weak Hands

• "Collateralized loan obligations, the largest investor segment in the $1.2 trillion U.S. leveraged loan asset class, are exceeding their structural limits for lower-rated debt at eye-watering numbers."
• "As a leading indicator, rising downgrades also typically precede a period of increased defaults."
• "The downgrades that have come at breakneck speed are also predominantly at the lower end of the ratings spectrum, changing the composition of the B- cohort significantly."
• "At the lower rung, Morgan Stanley strategist Srikanth Sankaran expects that nearly a fifth of the loan market could transition to CCC as a result."

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​The Looming Bank Collapse - The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.
by Frank Partnoy The Atlantic JUL-AUG 2020 Issue

TEXT SNIPPET:
 
Like a CDO, a CLO has multiple layers, which are sold separately. The bottom layer is the riskiest, the top the safest. If just a few of the loans in a CLO default, the bottom layer will suffer a loss and the other layers will remain safe. If the defaults increase, the bottom layer will lose even more, and the pain will start to work its way up the layers. The top layer, however, remains protected: It loses money only after the lower layers have been wiped out.

Despite their obvious resemblance to the villain of the last crash, CLOs have been praised by Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system. Like former Fed Chair Alan Greenspan, who downplayed the risks posed by subprime mortgages, Powell and Mnuchin have downplayed any trouble CLOs could pose for banks, arguing that the risk is contained within the CLOs themselves.

These sanguine views are hard to square with reality. The Bank for International Settlements estimates that, across the globe, banks held at least $250 billion worth of CLOs at the end of 2018. Last July, one month after Powell declared in a press conference that “the risk isn’t in the banks,” two economists from the Federal Reserve reported that U.S. depository institutions and their holding companies owned more than $110 billion worth of CLOs issued out of the Cayman Islands alone. A more complete picture is hard to come by, in part because banks have been inconsistent about reporting their CLO holdings. The Financial Stability Board, which monitors the global financial system, warned in December that 14 percent of CLOs—more than $100 billion worth—are unaccounted for.

​Read the hole story by Frank Partnoy  at The Atlantic

​Currencies May See Wild Swings if Slow Growth Breaks CLO Market

HOW CAN A GLOBAL SLOWDOWN TRIGGER A CLO COLLAPSE?
As global demand wanes, consumers begin to spend less, business revenue streams dry up and investors pivot away from chasing yields and more toward preserving capital. Corporations that took out these covenant-lite loans – that were then securitized into a CLO – then face mounting pressure as their ability to service their debt is compromised. The probability of an onslaught of defaults then becomes considerably higher.

Furthermore, companies that are on the hook for these loans may attempt to cut corners or lay off employees as a way to trim losses and stave off insolvency. However, in the process, they may end up breaching their covenant(s), consequently giving the lender the right to declare a default on the loan. This in turn could make many of the income-generating tranches in the CLO worthless and bring down the overall value of the security

The CLOs would then shift their position on the balance sheet from assets to liabilities, potentially putting financial institutions outside the regulatory parameters of capital requirements. This may then force them to start selling other assets to compensate for the losses they incurred on the CLOs. Consequently, a selloff iterated across multiple institutions could trigger broad-based panic and hurried liquidation across global financial markets.

HOW WOULD FX MARKETS RESPOND TO A CLO UNRAVELING?
In the event of a downturn, which is further exacerbated by a CLO collapse, anti-risk assets like the US Dollar, Japanese Yen and US Treasuries would likely gain at the expense of cycle-sensitive currencies like the Australian and New Zealand Dollars. Cycle-sensitive commodities like oil – and currencies that frequently track its movement like the Canadian Dollar, Russian Ruble and Norwegian Krone – may also suffer.

While many central banks could lower rates to combat the downturn, the exact simulative effect of further cuts may not be sufficiently conducive in restoring liquidity and confidence. Other central banks with rates at or below zero like the ECB and Riksbank may have to resort to unconventional monetary measures, though even those are sometimes not effective enough to raise inflation and stave off a slowdown.

CLOs may not be the next trigger for a recession, but they could exacerbate an economic downturn. Furthermore, the average recovery rates for defaulted loans have fallen to 69 percent from the pre-crisis levels of 82 percent. Indirectly-connected players like banks that lend to firms that are holding these instruments or have exposure to them could be at risk.

The exact extent of the CLO web remains unknown. However, what the 2008 financial crisis taught the world is that highly integrated markets are efficient but also incredibly vulnerable. This then risks an element of contagion whereby a system-wide disruption could occur. A web of interconnectedness is often welcome by all – that is, until along comes a spider.

Read the Full Report with Charts Here by Dimitri Zabelin Analyst, MAR 2019

The junk debt that tanked the economy? It’s back in a big way.
The Washington Post JUL 2018

Earlier this year (2018), after complaints from banks and dealmakers reached sympathetic ears in the Trump administration, the newly installed chairman of the Federal Reserve and the Comptroller of the Currency Office declared that previous “guidance” against lending to companies whose debt exceeded six times their annual cash flow should not be taken as a hard and fast rule.

The CLO market got an even bigger boost this year when an appeals court in Washington struck down a regulation issued under the Dodd-Frank financial regulation law that required all securitizers — the firms that bundle loans of any kind and sell pieces of the packages to investors — to retain 5 percent of a deal.

Michael Barr, a professor of law and public policy at the University of Michigan who served as point man on the financial reform effort for the Treasury in the Obama administration said, “we have now re-created the condition that led to the last crisis by making it easier to aggregate loans that are not good for investors.”

The three judges who signed on to that opinion were all appointed by Republican presidents, all have a long track record of skepticism toward regulation and regulators, and all have a long association with the conservative Federalist Society. 

THE BUYOUT OF AMERICA by Josh Kosman

Marquee private equity firms such as Blackstone Group, Carlyle Group, and Kohlberg Kravis Roberts, have grown bigger and more powerful than ever. They have also become the nation’s largest employers through the businesses they own. Journalist Josh Kosman explores private equity’s explosive growth and shows how its barons wring profits at the expense of the long-term health of their companies.

He also explores the links between the private equity elite and Washington power players, who have helped them escape government scrutiny. The result is a timely book with an important warning for us all, which unfortunately in 2020 is starting to play out. JoshKosman.com

​And in Canada

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​First up, here's an abbreviated list of some of the main arguments that "This time REALLY is different" by Carmen Reinhart and Kenneth Rogoff in their new  Bloomberg Markets interview of May 24, 2020 via Moneyweb. ​ This is an interview update of their 2009 history of financial crises "This Time Is Different: Eight Centuries of Financial Folly".

​CR: So pandemics are not new. But the policy response to pandemics that we’re seeing is definitely new. If you look at the year 1918, when deaths in the US during the Spanish influenza pandemic peaked at 675,000, real GDP that year grew 9%. So the dominant economic model at the time was war production. You really can’t use that experience as any template for this. That’s one difference.

It’s certainly different from prior pandemics in terms of the economy, the policy response, the shutdown... The reversal in capital flows in the four weeks ending in March matched the decline during the [2008-09] global financial crisis, which took a year. So the abruptness and the widespread shutdowns we had not seen before.

KR: Certainly the global nature of it is different and this highlights the speed. We have the first global recession crisis really since the Great Depression. 

The economic policy response has been massive and absolutely necessary... But certainly the aggressive crisis response reflects lessons learned in 2008.

CR: Let’s take monetary policy before the pandemic. US unemployment was at its lowest level since the 1960s. By most metrics the US was at or near full employment. It’s very possible that the path was toward rising interest rates. Clearly that has been completely replaced by a view that rates are zero now and that they’re going to stay low for a very long, long, indeterminate period of time, with a lot of liquidity support from the Federal Reserve. So that’s a big game changer, discounting futures.

What this does mean is that the market is really counting on a lot of rescues. The blanket coverage by the Fed is broad, and that is driving the market. And expectations are that we’re going to have this nice V-shaped recovery and life is going to return to normal as we knew it before the pandemic. And my own view is that neither of those are likely to be true. The recovery is unlikely to be V-shaped, and we’re unlikely to return to the pre-pandemic world. 

KR: It’s not just the people not working. What’s the efficiency of the people who are working? The monetary response has been done hand in hand with the Treasury. The market is banking on this V-shaped recovery. But a lot of the firms aren’t coming back. I think we’re going to see a lot of work for bankruptcy lawyers going across a lot of industries.

CR: There is talk on whether it’s going to be a W-shape if there’s a second wave and so on. That’s a very real possibility given past pandemics and if there’s no vaccine.

The shock has disrupted supply chains globally and trade big-time. The World Trade Organisation tells you trade can decline anywhere between 13% and 32%. I don’t think you just break and re-create supply chains at the drop of a hat. 

Another reason I think the V-shape story is dubious is that we’re all living in economies that have a hugely important service component. How do we know which retailers are going to come back? Which restaurants are going to come back? Cinemas? When this crisis began to morph from a medical problem into a financial crisis, then it was clear we were going to have more hysteresis, longer-lived effects.

KR: So we use a much more modest version of recovery. And still, with postwar financial crises before 2008-09, the average was four years, and for the Great Depression, 10 years. And there are many ways this feels more like the Great Depression.

And you want to talk about a negative productivity shock, too... There’s a lot of uncertainty, and it’s probably not in the pro-growth direction.

So there are going to be phenomenal frictions coming out of this wave of bankruptcies, defaults. It’s probably going to be, at best, a U-shaped recovery. And I don’t know how long it’s going to take us to get back to the 2019 per capita GDP. I would say, looking at it now, five years would seem like a good outcome out of this.

“If it drags on, the forces that are pulling the euro zone apart are going to grow stronger and stronger.”

CR: The problem in emerging markets goes beyond the poorest countries. For many emerging markets, we’ve also had a massive, massive oil shock. Nigeria, Ecuador, Colombia, Mexico—they’ve all been downgraded. So the hit to emerging markets is just very broad. Nigeria is in terrible shape. South Africa is in terrible shape. Turkey is in terrible shape. Ecuador already is in default status, as well as Argentina. These are big emerging markets. It’s going to be enormously costly.

For the G-20 initiative, I indeed hope it is the G-20 and not just the G-19. China needs to be on board with debt relief. That’s a big issue. The largest official creditor by far is China. If China is not fully on board on granting debt relief, then the initiative is going to offer little or no relief. If the savings are just going to be used to repay debts to China, well, that would be a tragedy.

KR: The IMF at this point is all-in on trying to find a debt moratorium, recognizing there’s going to be restructuring in a lot of places. But I don’t think the US is by any means all-in, and a lot of the contracts of the private sector are governed under US law. And if the US government is not in, if China’s not in, it’s not really enough. 

KR: The financial markets think there’s no chance interest rates will go up. There is no chance inflation will go up. If they’re right, and if another shoe doesn’t drop, it’ll be fine. But we could have costs from this. We’re talking about economies shrinking by 25% to 30%. And those [declines] are just staggering compared to the debt burden costs, whatever they are. So certainly we would strongly endorse doing what governments are doing. But selling it as a free lunch, that’s stupefyingly naive.

CR: If you look back to 2008-09, nearly everybody had a banking crisis. But a couple of years later, the focus had moved from the banking problem to the debt problem... And if there’s a shakeout that involves concerns about Italy’s growth, then we could have a transition again from the focus on the Covid-19 crisis this time to a debt crisis. But Italy, as I said, is on a different scale than the peripheral countries that got into the biggest trouble in the last crisis. It potentially also envelops Spain. So I think that if you were to ask me about an advanced economy debt issue, I think that is where it is most at the forefront.

KR: We argued at the time that the right recipe was to involve write downs of the southern European debts. And I think that would have been cheap money in terms of restoring growth in the euro zone and would have [been] paid back. And we may be at that same juncture in another couple of years where you’re looking at just staggering austerity in Spain and Italy on top of a period of staggering hardship. Advanced countries have done this all the time—finding some sort of debt restructuring or writedown to give them fiscal space again, to support growth again. If the euro zone doesn’t find a way to deal with this, maybe eurobonds might be in the picture to try to indirectly provide support. Again, we’re going to see huge forces pulling apart the euro zone.

CR: It’s hard to say in China what is public and what is private, but corporates in China levered up significantly, expecting that they were going to continue to grow at double digits forever. That hasn’t materialised. There’s overcapacity in a lot of industries.

China came into this with inflation running over 5% because of the huge spike in pork prices. So I think initially that the PBOC [People’s Bank of China] has been somewhat constrained initially in doing their usual big credit stimulus by uncertainty over their inflation. I think that’s changing because of the collapse in oil price. So I do think we are going to see more stimulus from China.

KR: There will be a pretty sustained growth slowdown in China. We were on track for that anyway. But who can they export to? The rest of the world is going to be in recession. I think if they can average 1% growth the next two, three years, then that will look good. That’s not a bad prediction for China. And let’s remember, their population dynamic is completely changing. So 3% growth in that, with that Europeanising of their population dynamics, would not be bad at all. But there’s a big-picture question about their huge centralisation, which is clearly an advantage in dealing with the national crisis but maybe doesn’t provide the flexibility over the long term to get the dynamism that at least you’ve got in the US economy.

KR: So central banks all over the world are using the fiscal side of their balance sheet...  Monetary policy is essentially castrated by the zero bound.

CR: We really can’t look independently at central banks without also looking at the balance sheet, not just of the government, but the balance sheet of the private sector, which has a lot of contingent liabilities.

On the issue of negative interest rates, I do not share Ken’s views on that particular matter. When you have, as we do today, very fragmented markets, markets that became totally illiquid, I think the way I would deal with that would not be through making rates more negative, but by an approach closer to the one taken by the Fed, which is through a variety of facilities that provide directed credit. Sustained negative interest rates in Europe have led to a lot of bank disintermediation. And often bank disintermediation means that you end up with the less regulated, less desirable financial institutions.

KR: So the probability is, for the foreseeable future, we’ll have deflation. But at the end of this, I think we’re going to have experienced an extremely negative productivity shock with deglobalisation. In terms of growth and productivity, they will be lasting negative shocks, and demand may come back. And then you have the many forces that have led to very low inflation maybe going into reverse, either because of deglobalisation or because workers will strengthen their rights. The market sees essentially zero chance of ever having inflation again. And I think that’s very wrong.

CR: Some of the scars are on supply chains. I don’t think we’ll return to their precrisis normal. We’re going to see a lot of risk aversion. We’ll be more inward-looking, self-sufficient in medical supplies, self-sufficient in food. If you look at some of the legacies of the big crises, those have all seen fixed investment ratchet down and often stay down.

​READ THE FULL INTERVIEW TEXT "This time really is different" by Carmen Reinhart and Kenneth Rogoff in their new  Bloomberg Markets interview of May 24, 2020 via ​Moneyweb.

Canada GDP % Growth Annualized

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The Canadian economy advanced an annualized 0.3 percent on quarter in the three months to December 2019, below a downwardly revised 1.1 percent expansion in the previous period and matching market forecasts. It was the weakest growth rate since the second quarter of 2016, when the economy shrank 2 percent. (BEFORE THE FIRST COVID 19 CASE HIT)
Source: TradingEconomics.com

In his final official speech May 25, 2020, the Governor of the Bank of Canada ​Stephen Poloz said:

“Although a minority of observers worry that these extreme policies will create inflation someday, our dominant concern was with the downside risk and the possibility that deflation could emerge... Deflation interacts horribly with existing debt, the two main ingredients of depressions in the past... In effect, then, we were saying that the downside risks were sufficiently dire that there were no relevant trade-offs for monetary policy-makers to consider. Picture the pandemic creating a giant deflationary crater in the middle of the economy; it takes what looks like inflationary policies to offset it.” 

A panel of experts assembled by the C.D. Howe Institute and led by David Dodge, a former Bank of Canada governor, on May 25 said the central bank and government should “reinforce their commitment” to the two-per-cent target.

Poloz said the economy will “need significant monetary stimulus in the rebuilding stage,” but that “it is well understood that the bank’s ability to lend without limit must be backed up by the inflation target to anchor inflation expectations.”

Canadian 5 Year Fixed Rate Mortgage Rates 1951 = 05.46%​ +30yrs 1981 = 18.15% +30yrs 2011 = 05.19% April  2015 = 04.64%, a new low for 27 months MAY 13 2020 = 05.04% MAY 20 2020 = 04.94%

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"Eight centuries of global real interest rates, R-G [real wealth returns (R) and broader real growth (G)], and the ‘suprasecular’ decline, 1311–2018" Source Material
by Paul Schmelzing, January 2020. Bank of England Staff working Paper No. 845 (all 110 pages here)

The Introduction, in full:

The evolution of long-term real interest rates has in recent years attracted significant academic interest. Partly in the context of the “secular stagnation” debate and related contributions, which in different variants have advanced theories on the drivers behind a low rate environment, supposedly originating in the second half of the 20th century. Partly in the context of “inequality” and “wealth” debates, particularly stimulated by the contribution of Piketty (2014), and its peculiar view of long-term asset and wealth returns in their relation to broader income growth. Despite regular recourse to “history” from the proponents of such theories, it will be posited in this essay that both debates advance a misrepresentative view of long-run interest rate and wealth return trends – and only partly because they overwhelmingly omit archival and other historical factual evidence.

The discussion of longer-term trends in real rates is often confined to the second half of the 20th century, identifying the high inflation period of the 1970s and early 1980s as an inflection point triggering a multi-decade fall in real rates. And indeed, in most economists’ eyes, considering interest rate dynamics over the 20th century horizon – or even over the last 150 years – the reversal during the last quarter of the 1900s at first appears decisive.

Equally, the historical relation between real wealth returns (R) and broader real growth (G) has assumed a central role in the current debates on long-term inequality trends, culminating in the widely discussed contribution of Piketty (ibid.). The latter contended – on the basis of positing a “virtual stability of the pure return of capital over the very long-run” – that excess real capital returns over real growth rates would soon perpetuate an “endless inegalitarian spiral” (ibid, 206, 572).

From what are, at their core, return and capital cost debates, have sprung various related policy and academic contributions. For instance, more recently the spread between “Safe R” (the real capital cost for the “safe” sovereign debt issuer) and “G” (its respective real income growth rate) since 1950 has been documented, and highlighted as a key variable to assess public debt sustainability (Blanchard 2019).

This essay approaches these subjects from a historical perspective, arguing that the recourse to archives, printed primary sources, published secondary works, and assessed written evidence from the past, raises deeper problems for such recent debates. In what follows, I attempt to document for the first time the particular evolution of both GDP-weighted global and “safe asset provider” long-term sovereign real rates over a span of 707 years, relying on a collection of evidence from 14th century European municipal and imperial registers, over Habsburg, British, Dutch, crown documents, to (often ignored) earlier secondary sources, and to current Federal Reserve data.
 
First, the approach here modifies various of the empirical findings by what is perhaps the most comprehensive existing investigation on interest rate trends, the work of Homer and Sylla (1996, 2005). The latter do not take into account primary sources, and even the secondary source material is limited, once assessed in detail. Neither do they discuss real rate dynamics (bar four pages on the U.S. context), or attempt to build “GDP-weighted”, global series. In consequence, and for all the merits of their work, the timing and evolution of interest rate trends it suggests is partly inappropriate, partly inapplicable for current debates in both the historical and the economics literature.

One key empirical result analyzed here is that there is no evidence of a “virtual stability” of real capital returns, either expressed in R or “R-G” over the very long run: rather, – despite temporary stabilizations such as the period between 1550-1640, 1820-1850, or in fact 1950-1980 – global real rates have shown a persistent downward trend over the past five centuries, declining within a corridor of between -0.9 (safe asset provider basis) and -1.59 basis points (global basis) per annum, with the former displaying a continuous decline since the deep monetary crises of the late medieval “Bullion Famine”. This downward trend has persisted throughout the historical gold, silver, mixed bullion, and fiat monetary regimes, is visible across various asset classes, and long preceded the emergence of modern central banks. It appears not directly related to growth or demographic drivers, though capital accumulation trends may go some way in explaining the phenomenon. But whoever posits particular recent savings-investment dislocations in the context of an alleged “secular stagnation” needs to face the likelihood that such “imbalances” may have been a continuous key driver for five centuries.

Similarly, negative long-term real rates have steadily become more frequent since the 14th century, and I show that they affected around 20% of advanced economy GDP over time, a share that has historically risen by 1.2 basis points every year: once more, this suggests that deeply-entrenched trends are at work – the recent years are a mere “catch-up period” in this and a number of related aspects.

Together, I posit that the private and public assets covered in the following also go some way in enabling the reconstruction of total “nonhuman” wealth returns since the 14th century. Prior to the recording of robust public statistics, wills and tax assessments suggest that around one-third of private wealth is tied to public and private debt assets, with another third in real estate – in an environment where wealth-income ratios may plausibly have reached 150-250% of GDP. Aggregating such evidence, and constructing plausible long-run R-G series over the last 700 years, suggests that real returns on nonhuman wealth are equally downward trending over time. They are by no means “virtually stable”, a cornerstone of Piketty’s (2014) framework. In fact, if historical trends are extrapolated, R-G will soon reach permanently negative territory – a first since at least medieval times.

With regards to “secular stagnation” debates, I argue that in contrast to prevalent theories, global real rates are not mean-reverting within a certain corridor (Hamilton et al. 2016), and history does not suggest that they reach a steady-state value in the medium-term, even if that value is negative (Eggertsson, Mehrotra, and Robbins 2017, esp. 41). The “real safe rate” is not “normally fluctuating around the levels we see today” (Jorda et al. 2017, 4). In this sense, the decline of real returns across a variety of different asset classes since the 1980s in fact represents merely a return to long-term historical trends. All of this suggests that the “secular stagnation” narrative (Summers 2014; 2015; 2016; Rachel and Summers 2019), to the extent that it posits an aberration of longer-term dynamics over recent decades, appears fully misleading.

The data here suggests that the “historically implied” safe asset provider long-term real rate stands at 1.56% for the year 2018, which would imply that against the backdrop of inflation targets at 2%, nominal advanced economy rates may no longer rise sustainably above 3.5%. Whatever the precise dominant driver – simply extrapolating such long-term historical trends suggests that negative real rates will not just soon constitute a “new normal” – they will continue to fall constantly. By the late 2020s, global short term real rates will have reached permanently negative territory. By the second half of this century, global long-term real rates will have followed.

The standard deviation of the real rate – its “volatility” – meanwhile, has shown similar properties over the last 500 years: fluctuations in benchmark real rates are steadily declining, implying that rate levels are set to become both lower, and stickier. But downward-trending absolute levels, and declining volatilities have persisted against a backdrop of a secularly growing importance of public and monetary balance sheets. This would suggest that expansionary monetary and fiscal policy responses designed to raise real interest rates from current levels may at best have a cyclical effect in the longer-term context.

Finally, this paper is not naïve about the remaining limitations of the very long-term historical evidence. The robustness checks below cannot deflect from the fact that late medieval and early modern data can of course never be established with the same granularity as modern high-frequency statistics. One still has to rely on interpolations here, deal with the peculiarities of early modern finance, and acknowledge that the permanency of wars, disasters, and destitution since the times of medieval Condottieri and Landsknechte has irrecoverably destroyed not an insignificant share of the evidence ideally desired. But I suggest that whoever invokes “history” in the present debates needs to advance against the backdrop of these limitations.

This paper will proceed by first discussing empirical aspects across various assets and geographies, and elaborating on the technicalities of aggregating such evidence, before relating it to other economic and (geo-) political variables, and constructing main derivative series including R-G, the real rate standard deviation, and the long-run negative real rate frequency. This is followed by a discussion of robustness aspects, and, finally, by a closer focus on capital accumulation factors during the late 15th century.

The Suprasecular Rate Decline

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The Conclusion, in full:

This concludes the long-term survey. First, this paper has argued that – partly given their methodological shortcomings (such as the sole focus on secondary source, nominal, country-level, “lowest-issuer”, scattered rate evidence) – relying on existing narratives obscures historical interest rate dynamics: for one, there is across a multitude of assets no evidence of a “virtual stability” of real capital returns, and I have argued that with the approach here it is now at least able to approximate quantitatively actual trend falls over (sub-) periods and asset classes. This empirical basis, for one, suggests that it was not the Black Death that stands out as an inflection point (Epstein 2000, 61ff.), or the 13th and late 17th centuries as Homer and Sylla’s (1991, 556f.) semi-centennial sketch suggests. A far more relevant turning point – one that initiated a “slope” in real interest rates to which the post-Napoleonic period has once more returned – occurs in the late 15th century. That episode coincides with a sharp surge in capital accumulation trends, and a jump in plausible savings rates – an inflection which also clearly precedes institutional “revolutions” such as those proposed by North and Weingast (1989).

But the value of constructing the first multi-century, high-frequency GDP-weighted real rate dataset for both the global “safe asset provider”, and advanced economies on aggregate goes beyond purely empirical qualifications. In its applied dimension, I sought to suggest that a long-term reconstruction of real rate developments points towards key revisions concerning at least two major current debates directly based on – or deriving from – the narrative about long-term capital returns. First, my new data showed that long-term real rates – be it in the form of private debt, non-marketable loans, or the global sovereign “safe asset” – should always have been expected to hit “zero bounds” around the time of the late 20th and early 21st century, if put into long-term historical context. In fact, a meaningful – and growing – level of long-term real rates should have been expected to record negative levels. There is little unusual about the current low rate environment which the “secular stagnation” narrative attempts to display as an unusual aberration, linked to equally unusual trend-breaks in savings-investment balances, or productivity measures. To extent that such literature then posits particular policy remedies to address such alleged phenomena, it is found to be fully misleading: the trend fall in real rates has coincided with a steady longrun uptick in public fiscal activity; and it has persisted across a variety of monetary regimes: fiat- and non-fiat, with and without the existence of public monetary institutions.
 
Secondly, sovereign long-term real rates have been placed into context to other key components of “nonhuman wealth returns” over the (very) long run, including private debt, and real land returns, together with a suggestion that fixed income-linked wealth has historically assumed a meaningful share of private wealth. There is a very high probability, therefore, to suggest that “non-human wealth” returns have by no means been “virtually stable”, as posited by recent popular accounts (e.g. Piketty 2014, 206): only if business investments have both shown an extreme increase in real returns, and an extreme increase in their total wealth share, could the framework be saved. If compared to real income growth dynamics over the same timespan, R-G, we equally detect a downward trend across all assets covered in the above discussion.

There is no reason, therefore, to expect rates to “plateau”, to suggest that “the global neutral rate may settle at around 1% over the medium to long run”, or to proclaim that “forecasts that the real rate will remain stuck at or below zero appear unwarranted” as some have suggested (Hamilton et al. 2016, 663; Rachel and Smith 2017, 37). With regards to policy, very low real rates can be expected to become a permanent and protracted monetary policy problem – but my evidence still does not support those that see an eventual return to “normalized” levels however defined (for instance Eggertsson, Mehrotra, and Robbins 2017, 41, who contemplate a “nadir” in global real rates in the 2020s): the long-term historical data suggests that, whatever the ultimate driver, or combination of drivers, the forces responsible have been indifferent to monetary or political regimes; they have kept exercising their pull on interest rate levels irrespective of the existence of central banks, (de jure) usury laws, or permanently higher public expenditures. They persisted in what amounted to early modern patrician plutocracies, as well as in modern democratic environments, in periods of low-level feudal Condottieri battles, and in those of professional, mechanized mass warfare.

In the end, then, it was the contemporaries of Jacques Coeur and Konrad von Weinsberg – not those in the financial centres of the 21st century – who had every reason to sound dire predictions about an “endless inegalitarian spiral”. And it was the Welser in early 16th century Nuremberg, or the Strozzi of Florence in the same period, who could have filled their business diaries with reports on the unprecedented “secular stagnation” environment of their days. That they did not do so serves not necessarily to illustrate their lack of economic-theoretical acumen: it should rather put doubt on the meaningfulness of some of today’s concepts.

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