Paul Schmelzing Five Lessons From Seven Centuries Of The International Financial System

TITLE: Paul Schmelzing Shares Five lessons From Seven Centuries of the International Financial System CHANNEL: Boston College Carroll School of Management DATE: 2026-06-02 ---TRANSCRIPT--- All right, thank you everybody. We’re going to start our uh final presentation for the day and it’s entitled Five Lessons from Seven Centuries of the International Financial System. I wasn’t aware we had a international financial system for for seven centuries, but I’m really looking forward to hearing about it. Um Paul Schmemellzing is an assistant professor of finance in the Seidener department concentrating on long run asset pricing and global macro. So a continuation of the themes we’ve been talking about. He’s a research fellow at the Hoover Institute at Stanford. He’s worked at Goldman Sachs. He’s worked at a Goldman uh global macro hedge fund and the German Bundesags finance committee. He’s held visiting positions at the Bank of England and the International Monetary Fund. He spent the past seven years writing a book, A New History of the International Financial System, which is coming out with Yale University Press. When’s it coming out, Paul?

December. December. So, we can look forward to that. He’s a member of the German Council on Foreign Relations. So, with that, I’d like you to join me in welcoming Paul Schmemellzing. Thanks so much. Thanks so much Dan and thanks so much Andy and the whole team that is uh involved in the organization today. Um and everybody had something great to say about Andy. But let me add to that uh this whole book project which has been going on for seven years now. uh it could not have been written uh without the support of the whole department and uh Andy and Ronnie and uh all the patience that you need to to finish something like that. Since my first day at BC, uh every time I bump into Andy, he’s asking uh when’s the book coming out? When’s the book coming out? And uh if the book was out, everybody would have one on their table. Right. Right. You got to buy your own now. No, I I heard there’s a big budget uh position in the in the BC Carol School to to buy. Right. Great. So, uh this uh talk uh an alternative title would be welcome to the morbid part part of finance. Um 93% of investors that ever lived well they are dead, right? And so the whole approach of financial history, you could say, is really to ask what can the 7% alive today, what can they learn from the other 93%. And so my daily job is to look at sources like this one. And I’d like to think that that my job is is still relatively AI approved because if you give that contract to chat GPT or so and ask it to decipher that it’s it is having a lot of troubles. So we are looking at a debt contract from the year 1546 uh between the Fuger Bank uh and the English crown and they are transacting in uh short maturity debt um in Flemish currency um at a particular interest rate at a 12% annualized interest rate if you want to be precise and the whole contract is secured by assets by the corporation of London as well as crown land. And these two things will be important for the rest of the the talk as well as the year the fact that it’s 1546. Uh I’m going to argue that uh this contract uh was finalized was written at the cusp of perhaps the most important moment in the international financial system over the last 700 years. And most people, you know, haven’t heard about that time in finance for sure, but it’s more important than the 1980s. It’s more important than the ‘08 crisis or 1914 World War I. Uh so let’s unpack that perhaps a little more. Uh so what is this 7% of of all investors look like today? It’s an incredibly peculiar bunch, I would say, because the typical investor of today uh is 54 years of age. Um the average real rate over his or her lifetime of investing has been 1%. Average inflation rate 1.9%. Central banks held something like 5% of government bonds and and assets. So very very low levels of financial repression you could say. Um, and the world has gotten, you know, working hours have declined, you know, just a couple of minutes every every other year, but it adds up into almost 80 hours less per year, uh, compared to the start of his investing life. There have been zero wars or invasions between rich economies against each other. Basically, we heard something about geopolitics uh earlier today. Uh, and we’ll look at the very long run horizon in a second. And then one of the big stories is is really the rise of China also we heard about that adding 0.5% or so of of global GDP every single year over the span of and so it’s it’s an incredibly important theme as as also we’ve heard now how does that compare to the median the typical investor over history. So actually one-third of the time he’s trying to make sense of deflation in in the world. you know, it’s an incredibly volatile price environment out there, but deflation is is a thing all the time basically, and that obviously conditions you in a very particular way when it comes to debt and and these kind of transactions. Uh 91% of his time, there’s one or another war going on between rich economies one way or another. Not necessarily his own country, but you know, neighboring countries and all that. 91% of the time, let that sink in. And there’s a 37%, if you want to be precise, 37% chance of dying a violent death over a 20-year horizon. Okay? Um, and I’m not talking about life expectancy at birth, but just a random event hitting you within a 20-year horizon, being stabbed on the street or being in a feud, being killed by your neighbor in in a battle. these types of events that conditions you in a pretty fundamental way when it comes to investing. Uh and then um China has continuously been for the typical investor over history uh since the start of the international finance system the biggest aggregate economy in the world. But as we’ll see there’s perhaps a difference between just size and really economic influence and power. U there’s more than just size. Okay, good. Now that contrast between, you know, the 7% and the 93% might be more topical uh than ever as we sit here in 2026 because we have all of these narratives out there of uh not just academics but uh really decision makers talking about this new regime that we are supposedly into, right? The ECB head Christine Lagard calls it we are in this new era of shifts and breaks. uh Adam Tu’s famous historian calls it the the age of the poly crisis. Okay, we we don’t know what what’s hitting us every other day. And then uh in in the White House uh they call it the the reversal of the end of history. So the reversal of Francis Fukuyama essentially. But I will argue that that statements like these uh that you see all the time these days are uh are rather meaningless if they don’t come with uh better long run context. Okay, of this supposed new age of shifts and breaks because uh without long run context it’s incredibly hard to distinguish the noise from the really the true breaks. Okay. And so part of this this whole exercise today is trying to distinguish the the permanent factors in the long run context from the more transitory ones and trying to to see which of these statements really has has legs in in the long run context. But this entire book project it it originally it started uh during my PhD when when everybody when the buzz was all about secular stagnation and this weird you know this is the 10-year uh real Treasury yield. uh when we were below zero, right? And everybody was trying to figure out uh how on earth we got to negative interest rates in the world. And um that was the first sort of narrative out there that claimed we were in this this new unusual inexplicable regime in financial markets that we just couldn’t make sense of. And and for the first time in a millennium or so, uh we we saw something never seen before. Uh negative interest rates. And then we shifted gears over the past couple of years and then now we’re in this higher for longer narrative uh that uh supposedly you know we’ll be in this extended period of of high interest rates, high inflation and and geopolitical risk and so again this is what got me started on this entire uh project in many ways because I always felt as a financial historian extremely uncomfortable just uh looking at a chart like this and making these grandio statements that we are in this new secular environment. uh what is true for interest rates is is true for many many variables in in finance that for the longest time we just didn’t have a very good idea about the data itself in the first place you know we didn’t have the actual empirics the reconstruction uh to back up any of these statements and so the book u goes to great length uh some rather nerdy chapters in there really trying to reconstruct uh term structures trying to reconstruct short material rates, long maturity rates and all that associated uh financial activity because the situation with with interest rates was was more like this for the for the longest period of time. Uh we we were splicing together uh time series commercial paper rates with with tea bills and and from different sources and and in a an extremely chaotic way. Okay. And this is one of the better time series out there that that um uh was the longest we had for the longest period of time. Okay. And on this basis uh it is incredibly hard to distinguish if you want to call call it random walks just chaotic behavior in these in these old these fundamental financial variables from true structural trends that are going on. Okay. Uh and um this is what I ended up with doing for interest rates for long maturity interest rates. uh suddenly this random walk type of chaotic uh world in in rates uh I would argue suddenly we see a lot more structure perhaps and it it makes it way way more convincing to distinguish the noise the random walks from from really trends. Okay. And then you can for the first time you can do the fancier statistical exercises and econometrics and really distinguish okay when are the real uh shifts and breaks occurring over this very long run period of time. when do we have real moments where the end of history is reversed if you will uh we need the data first and so the the book spent a lot of time actually providing you the data for the first time right and then you can argue about uh from various different ways but at least we have a basis to argue with okay so that’s the idea now as you can see it’s it should be visible to the eye without any any fancy tests but this is a downward trending uh series by and large okay there’s a lot of noise around the trend line perhaps but interest rates for one uh they have been on a downward trend essentially. So, so if you look closely, this chart starts in when in the 14th century, right? So, interest rates I I argued in my dissertation, they have been actually uh on a multi-entury, an incredible 700y year downward trend. Okay? So this whole secular stagnation narrative that something unusual happened during the 1980s that that you know we no longer innovate or its demographics or whatever it is but something big happened in the 1980s that explains this great moderation phase and and the whole negative interest world. Uh I found that on on this new basis I try to argue well that’s just not convincing. Okay. uh if interest rates have been downward trending for more like 700 years rather than 40 years maybe something other different is going on after all. Uh but um what is true for for interest rates is is is really true for for other financial variables and this is how it looks like for for real interest rates if you’re inflation adjusted. So the book reconstructs inflation trends across the world for for seven centuries as well. uh inflation is is upward sloping while normal rates are downward sloping but uh nominal rates over time they don’t compensate you very well for this upward slope and so we end up with a pretty strong downward trend in global real rates across countries across different maturities issuers it’s always the same story basically um uh and so in that sense uh you could say uh if if you want to if you want to think about a punchline you could basically say that um uh an investor in say the year 1700 or so right when the Bank of England uh came into existence when when the Brits executed their kings uh and this kind of stuff uh an investor at that point in time having access to the past 250 years of data say okay he could have predicted in that year the arrival of negative interest rates in the early 21st century Okay, this is uh perhaps simplistic but not too simplistic. Okay, so this is the kind of stuff you you can in principle uh do you you you never arrive at a good point estimate for sure and and there’s a lot to argue with for sure but um um the structure is there the trend is there and sooner or later you can see there’s a lot of noise around the blue line but you know we always come back to the blue line after all after some period of time um if that period of time is more like 50 years until we’re back to the blue then it doesn’t matter for anybody in this room, right? If that adjustment speed is is incredibly slow, then this is more of a nice anecdote to have maybe. But uh the point is the adjustment speed you can measure that is more between five and 10 years on average. So the so-called halflife, the time it takes to go back to the line. Um, so that’s the first pretty striking uh result I would say and that makes that exact line. It makes it pretty relevant, I would argue, for pretty much anybody in the room. Uh, whether you’re in equities or or fixed income, this will influence your your returns at the end of the day. Uh, this type of adjustment speed. Um, and then but then let me tell you at least a little bit about these these fancy exercises. You can do so-called structural braid tests. I mean, when are the real regime shifts here, right? when when are the the the eras of shifts and breaks and and Christine Lagards in in the international financial system essentially right this is the benchmark series for capital markets themselves and so I tested a lot of the usual suspects in 1980s the 19 uh World War II 1914 etc you can you can test a lot of these these big narratives out there the only two points in time that survive these these kind of exercises are the Black Death 1348 or so. You really have to go back a long time. That was an epic era of shifts and breaks for sure. Uh and then it’s 1557, right? So that’s 1557. That second one is pretty close to the debt contract I showed you just a few minutes, right? Something major happened around that time in the international financial system. Um so let’s unpack that uh a little more. uh 1557 was the moment when the current trend line in the cost of capital in that sense was established and we are still as of 2026 we’re on that exact trend line if you want to uh frame it that way. Okay, this is the last time we can identify a big structural break in the cost of capital. Uh good. So we are all indebted to something major happening in the middle of the 16th century still rather than it’s way more powerful than anything happening in 1914 or 1980s or08 say okay um so what is going on I mean there are a couple of things going on you you have to buy the book of course to to get the real punchlines but um a couple of things are are notable I mean I mentioned the the 37% chance of of just dying a violent death Right. So nowadays, uh this is from a great guy in uh uh at LSZ in in London. Um all he does is is reconstruct the homicide rates and and how how likely you are to get stabbed on the street and at different points in time. And this dark black line shows exactly that, right? So the chance for atypical investor, elite investors who who account for most of financial transactions uh to die a violent death. Okay. And um uh the interesting thing is that uh prior to 1557 this uh was extremely elevated. Okay. So uh extremely high chance to to die a random death irrespective of any life expectancy. Okay. Uh but then it it comes down sharply around the early 16th century. Okay. and we are uh almost at modern levels of of uh so this whole pinka story of the the uh better angels of a nature starts kicking in etc. But it correlates interestingly pretty nicely with something big happening in interest rates. Okay. And so the the explanation I I would suggest is that it has a lot to do with um patience levels. Okay. And with safety and your chance of dying on the street on a random day might influence in pretty fundamental ways your decision between consumption and saving, right? And that is what is uh behind the the link between interest rates and uh the risk of dying of violent death. I would suggest our patience levels. We can measure this in in other ways. How much endowments somebody leaves for his for his offspring and and uh that shows a major reversal around that point in time. People feel safe. People feel uh optimistic about the long run future in their lives suddenly. Okay. Uh what happens I mean uh the feud is banned. Okay. at that point in time. And so the feud was the way to to settle conflicts between investors, okay? It was not very diplomatic. Okay? So if if you had some sort of argument with your neighbor, well, you went there with with mercenaries and and set his his castle ablaze and and uh his all his property. And this is showing up in these elevated rates. The the feud is banned at in the early 16th century. This is exactly when we see a sharp first major decline in the cost of capital. patients, people decide to save over consumption because they can be much much sure to to actually be able to draw on that in a couple of years, right? So, this is a major shift. Uh, in that sense, I like the the Rich Bernstein, his his reference to patience. It it has a there’s something major going on playing out when it comes to patience. Uh here we come to the to the other striking thing what that makes the current investors so uh in some ways unprepared for what might come next okay so Nick Nick Burns mentioned it this morning that uh markets have a really tough time digesting this new geopolitical risk okay that is out there uh the median investor since the start of the international finance system like I said 91% of his investment life was uh wars going on all the time and there are these columns in the in the background. This is just rich economies uh fighting it out with each other every single year essentially. Uh but what has happened since 1945 is in that sense incredibly remarkable. Uh you see this chart goes back all the way to

Uh we barely have a three or four year period without these wars. interest rates react pretty sharply uh to any of of these geopolitical escalations time and again. But in a way, you could also say the market is kind of shrugging off geopolitics over the very very long run, right? On in the secular space because this black line, the interest rate keeps coming down, right? Keeps coming down through the 30 years war, keeps coming down through the Napoleonic wars. It always resets at a lower level. So, uh, geopolitical risk is real and it has major patterns in asset markets that we can now measure from the ground up. That’s what I’m trying to to do in the in the book for the first time. Uh, but it always resets at a at a lower level compared to pri pre- crisis, prior to conflict. Uh and so something more fundamental must be going on than just uh if you will geopolitical risk and and uh this era since 1945 uh to give you a good anecdote uh has been the longest period of peace between rich nations uh since the year 1270. Okay. uh in 1270 uh the Italian citystates Genua, Florence, Venice, they fought a pretty nasty war with each other. Uh it left uh them pretty traumatized and they entered a long period of peace. Okay. But this most recent one since 1945 is the longest such period since then. So no wonder that markets are are pretty illprepared to um to this new wave of uh of geopolitical risk. But we can tease it out in in great detail in in the book. And um in terms of the y-axis here, look, it’s um measuring the number of deaths per million population in these rich economies. Okay? Including, you know, the US enters the sample in the in the 1800s and and late late 1700s. In fact, uh your average rate there is something like 290 people per million population are are dying in uh in a typical war. Okay. Uh do the calculation for the US what that would mean in a typical year for for the rich economies right now. Uh you’re arriving at if my math is right 87,000 in a typical year just in terms of the population to scale it up. Right. So this is an immensely volatile, immensely risky environment that we’re talking about and an environment from which we can learn incredibly much going out of arguably this this longest period of peace since 1270.

Can I ask a question? Yeah. Go back to that last. I just want to understand this. I I’m looking at 79 from like so 1940. I guess that’s what’s that the columns in the back. I don’t see it now. That’s your war intensity, your war severity, if you will, in terms of battle deaths, right? Okay. Yeah, but the deaths were like 1979 on that chart. I’m looking at it says 79. I’m reading it wrong. Yeah. Yeah. Yeah. The black line is interest rates, right? That’s your interest rate. Okay. What’s happening in 79? Well, the oil shocks are happening, I guess. Right. Okay. That’s what I was trying to Okay. Right. Right. Exactly. Um, so we also talk about commodities, but uh again, so this peace dividend that we kind of uh received in 1945, this incredible peace dividend. Uh how did we use that peace dividend? Um uh so Europe gets a lot of uh is is being trashed on quite a bit these days for just uh relying on the US and its and its whole peace dividend. But it’s been happening across all advanced economies. This is for the US and Europe. Uh it’s the welfare spending relative to GDP since uh the early 20th century, right? Since that new era of of of peace, arguably we went on this incredible almost exponential trend of spending more and more and more money uh in in welfare and uh redistribution uh activities, right? Uh that has been completely absent from uh the long run international finance system where this was close to zero for for 600 years. And this is one of the elements that I’m arguing uh is likely not to be one of these permanent factors. It’s likely one of these transitory factors. It’s finally coming to an end because everything points to the fact that it is governments themselves that have become overstretched uh as of the early 21st century. It’s not just the US. It’s more broadly governments themselves have overextended themselves in in a unique way over the 600 year 700 year context. Okay? And that part is reversing as we speak. Since 1557, you could say, governments have been on an incredible bull run. Okay? The decline in rates, uh the ability to wage war, um the ability to finance both war and and other expenses. Uh but as we enter the the 21st century, we are seeing the first signs of really a more fundamental reversal from that 500y year bull run in governments themselves. cracks are appearing everywhere essentially um because we haven’t really done a good job dividing spending that peace dividend in in pretty smart ways and just this whole redistribution welfare exercise is is one example but not the only one. So uh the other remarkable thing is that we have used a lot of this peace dividend to just uh cut back on on work essentially right and on just the intensity of work. So, this is a great chart by the Bank of England um just showing you annual average working hours adjusted for part-time uh work and sick and holiday and and leave etc. Uh we are here in the 21st century 2026. Uh we just hit a 575 year low in average working hours. Now, I know it’s not representative for for the room, per se. Uh you you’re still working like it’s the 17th century, right? Uh but when it comes to these great power competition rivalries, okay, what we can see in the data is that that is not a causal explanation, but it’s the the successful rivals, the successful challenges to the reserve currency, to the incumbent. They not just work smart in some areas but they work incredibly intensely. Okay. So their working hours are just on a different level compared to the incumbent uh you know rich economies that that might be becoming incredibly comp complacent over time. And the US worked far far more far more intensely when it overtook Britain uh around 1914 as the reserve currency as the hedgeimon. uh this time around you know what you can say is that that when you look at Chinese working hours they are just on a different level to western uh working hours okay and again this is not a causal statement but uh we have been in this secular this trend since since the late 19th century of working ever less ever less and this is also one of these factors that um is feeding into to the growth picture into that sustainability picture uh that seems to be coming to an end it’s it’s uh one of these transitory uh in the big picture of things transitory uh underlying factors here. Can I ask a question? Yeah. Go back. I don’t am I allowed to ask questions. Professor Sure. Uh Dennis in charge of questions. I have a question. I have a question. There’s somebody I can’t remember who it is who writes the book and said it used to take 1800 or you had to work three weeks to feed yourself. It’s working versus calories to buy the law. Brad the law. So you had to work a lot to feed yourself. In the industrial revolution broadly you had to work less to feed yourself. partly related to addictive work, more innovation. So you’re say complacency that argument would be you have to work less to feed yourself and you spend your time doing other things. So it’s about work. You can work less because we’re more productive and we don’t have to feed ourselves. And Brad Deong has this big thing about how long you have to work to eat this many calories. Right. Right. No, I think you said complacency. I’m thinking it’s it’s innovation that has allowed No, no. I my sense is Yeah, you’re you’re on to something. In that sense, I find it interesting that these big technological breakthroughs in that sense I find it interesting that these big technological breakthroughs In that sense I find it interesting that these big technological breakthroughs they in that sense I find it interesting that these big technological breakthroughs they pre In that sense I find it interesting that these big technological breakthroughs they preed that sense I find it interesting that these big technological breakthroughs They are preceded sense. I find it interesting that these big technological breakthroughs they are preceded by I find it interesting that these big technological breakthroughs they are preceded by long I find it interesting that these big technological breakthroughs they are preceded by long periods. Interesting that these big technological breakthroughs they are preceded by long periods. interesting that these big technological breakthroughs, they’re preceded by long periods of just working harder and harder and harder and more focused at certain things. Perhaps that’s what you could say perhaps, right? So the other way uh that we increasingly start uh spend our productivity and and our surplus is uh not just through redistribution but also through uh well interventions okay and and and backstopping the financial sector in in many ways. So this is from work with Andrew Metric that I have done. It shows you a reconstruction uh it was just published is a reconstruction of financial distress in rich economies going back all the way to the 17th century. Now uh so that that thick line uh measures advanced economies just by the you know taking crisis interventions as a proxy of financial distress. Essentially it’s a new way of measuring in times where we don’t have high frequency equity markets. This is a way of proxying financial distress. But the point is that that this curve is is sloping upwards upwards upwards right and we spend ever more resources and and brain power in trying to intervene in the economy at least in a major sector of the economy and this is uh uh taking up uh incredibly rising resources uh for the rest of the economy. So the most recent years where on this measure the most financially distress ever in history. Okay. And um we may have avoided a systemic crisis with SVB there two three years ago. But this is bound to occupy us for the rest of our investment lives again. So here we are you know perhaps more informed uh more sophisticated than than the median investor over time managing these type of crisis. But it comes at an incredible cost increasingly. Okay. Um so this is this is a thing that will stay permanent. It’s one of these permanent trends. Now this would all be fine. You know spending resources on welfare, spending resources on financial fighting financial crisis if we had the means to do that. But uh if you read the Wall Street Journal I think just yesterday or it went through a lot of other uh uh publications. Um uh apparently we just yesterday we just uh or by the end of March I should say we just crossed uh 100% uh debt to GP in in this country right for the first time in in our lifetime and within this year or over the next 18 months call it we will cross if we extrapolate from here the all-time high in uh debt to GDP in this country that was previously set during World War II. Okay. Uh these two charts are from the CBO. The CBO these days uh likes to put out 30-year projections in terms of debt sustainability in terms of uh the debt to GDP. Uh and it is uh basically saying that uh before long by the year 2055 if we just extrapolate from here no assuming no radical adjustments to revenues expenditure size etc we are ending up at somewhere like 180% debt to GDP. you know, this is almost like twice the World War II type of levels um that were the all-time previous record. So, this is extremely concerning against the backdrop of just not spending the available resources in a in a particularly smart way arguably. Okay. So, on the debt side as well, the book will argue that uh it changes your entire perspective potentially to look at the long run context. Okay. because uh arguably the operational the decisive measure is not just the debt GP level but the s the the relative interest rate relative to the growth rate over time. R minus G is the is the magic formula, right? Uh R minus G the CBO uh uh Olivia Blanchard in his famous uh keynote a couple of years ago. We we only know it for 30 40 years so far. Okay. Uh but there’s so much more going on. it shifts your perspective to look at the very long run in RMG um as we will do in a second. This for for the moment shows you debt to GDP in advanced economies since the year 1490. Okay, this is the first uh approximation of the exact comparable way of accounting. There’s no statistical agency in the 15th century that puts out CBO like projections, but this is the best we can do for the moment. I argue um it’s not just the US, it’s advanced economies as a whole that are by now on a completely unsustainable debt trajectory. Uh in fact, we are as rich economies just about to cross the all-time record in debt to GDP that was set uh when the Spanish Empire, the Spanish Habsburgs were the reserve currency in the international finance system in the 16th century. uh back then we were talking about close to 120% debt GDP that was the history suggests that is the kind of oldtime ceiling that you run into as rich economies as reserve currencies then things really start to crumble and roll okay the habsbooks try to push it to the limit uh over time the the furthest they could reach is 120%. we are on that trajectory and that should be pretty concerning when it comes to uh the just the resource availability as as governments. So this is one way why why I say that it’s governments per se that are increasingly overstretched and are um it’s incredibly overvalued trade you could say for the last uh by now for the last 400 years or so uh because we’re about to cross that now I mentioned R minus G so for years at least in the in the research community there’s been major debate glob in global macro R minus G captures your your debt sustainable it’s not so much about the stock of debt but is about that magic formula, right? We didn’t have these two components for the longest period of time. Uh the book says we we can do that now for way longer periods of time. Look at that. So this is R minus G for rich economies including the US going back all the way to the 1500s. Okay. So again since that contract there, the Fuger contract, uh governments have been on an incredible role in that sense. R minus G that sustainability has been better better better every century essentially in in pretty radical ways. Most recently we even hit negative levels. Um uh and just on the face of it, I mean this thing seems downward trending, right? And this uh I mean if anything this suggests that we have we in this goldilocks dynamic in this scenario where we can afford anything the debt will pay for itself perhaps as as Blard put it, right? But not so fast because again you can do you can distinguish for the first time these these errors of shifts and breaks and you know of the of the permanent factors the trend factors in in all of this data and distinguish it from the from the noise from the random walks and so that’s what I’m doing uh incorporating uh incorporating growth rates uh growth rates have not just trended down since the so-called secular stagnation the the 198 1980s or so. Uh if you do it granularly, growth rates have been trending downwards roundabout since 1914 or so. Uh since World War I, uh we are cheering two two and a half% growth rates. That’s really nothing to cheer about in the long run context. It’s looking pretty bleak actually despite per capita to be clear. Uh we’re getting richer richer richer. But in many ways it’s a function of falling fertility rates and and just poor demographic uh trends. So, but punchline is when you put the pieces together, the R minus G line, it looks more like this than that long run downward trend. This is your R minus G line, right? So, this starts in the 1930s when we have the last big structural break, this big era of shifts and breaks interval period. This is when we should start the trend line. And lo and behold, this no longer slopes downwards. No, unfortunately, it slopes upwards this time, right? And all of this volatility around world wars and the oil shocks and everything has obscured to a big extent the fact that this thing is upward sloping. It just takes big leaps ups and down ups and down. And when it was down for the most recent time, you know, Olivia Blashard and many people said we can just go all in in COVID and fund these major fiscal deficits. But that was a big idea, a bad idea in in that uh bigger picture context. Okay, that sustainability is decreasing, not increasing. And so I would say uh look, the median investor in history was also pretty used to getting expropriated randomly by its government uh through all sorts of means. Governments and monarchs, they were extremely creative when it comes to that. Um forced loans and and throwing you into the tower if you’re too insistent on on repayment. And you have the whole menu really. But what what has also been around for the longest time is uh proto central banks and quasi central banks. Okay, the bank of England is is a very very old institution but they’re even older ones. So what they have been doing time and again during crisis is is buying up assets in in markets including government bonds, debt monetization essentially and this is making a comeback. Uh and uh most recently we we are in the midst of this monetary policy debate what what we should do with these excessive stocks of of debt on on the Fed’s balance sheet and elsewhere. Um my prediction would be that we should better get used to this new normal in terms of financial repression. the days of the 1950s,60s,7s uh of having this this extreme institutional independence and and quality in many ways. Uh this seems to be the outlier, not the fact that we are back into this financial repression mode with uh interventions with with extremely high uh balance sheet and with other forms of financial repression like negative real interest rates for instance, right? uh the post 45 just like in geopolitical terms the post 45 absence of financial repression is a true outlier in the long run context not the uh resurgence the the comeback of financial repression uh so in that sense you better get used to to all sorts of new creative forms of financial repression in the coming years good I close with that fifth theme actually which is to say this is showing you China’s share of of global GDP P uh for 700 years. So we can now there’s a there’s a guy in in um in Hong Kong and Britain. They they’re collaborating to create these great new granular Chinese GDP series, right? And we now see that I mean this most recent uh growth in China again the the 20th century was the outlier, not anything that happened since the 1980s or so. China is reverting back to the historical mean in terms of its aggregate share of global GDP its size on the global stage and so absolutely we should expect based on the long run content we should expect that to uh intensify and if if we extrapolate they will by the year 2039 by the mid 2030s they will be back at their long run 700y year average uh share of global GDP over time okay so the 20th century was the outlier I want emphasize on so many of these long run financial measures. It’s not the ongoing argu arguably the ongoing reversion back to the mean. Okay, that’s not the surprising part. It’s the 20th century that’s the outlier in so many ways. Uh but I also want to close on an optimistic note like Nick Burns and and maybe say that um well here the the other line the red line is your share of global GDP for the reserve currency. So before the US it was Britain before Britain it was Holland before Holland it was uh theal the the Spanish Hubsburgs and then the Italian city states. um they issued the the currency of choice the debt denomination of choice around the world. We can measure that and it kind of suggests that you know for the longest period of time these reserve currencies I mean they were tiny tiny uh on the world stage and just in terms of aggregate size. Okay. So it must have been something else that made them so attractive that made them so credible uh for investors for the international financial system that they wanted to denominate that they wanted to own this asset during crisis time and again. So it’s true that this this current uh for for western for rich economies they are shrinking in terms of aggreate size pretty dramatically. It’s the fastest reversion also here of this 20th century bump that we’ve seen. This is incredible by itself. Uh but it also suggests that we shouldn’t perhaps uh be too gloomy about this this process in the first place because aggregate size you know we’re simply reverting back to the situation where China has always been the biggest aggregate economy but nevertheless it was never a reserve currency. It was always these rel in relative terms these tiny western economies that apparently there’s something else you need whether it’s ideas whether it’s institutional quality whether it’s um uh other factors that I’m going to talk about but uh we shouldn’t we shouldn’t per se um be concerned perhaps about this this uh story of China in in this sense uh I want to close with what does it all mean for for your uh investment environment uh Here I think is one way of just capturing a lot of what I just said. Uh it shows you the this the spread between private yields across a number of asset classes that that I reconstruct relative to the uh government bond yields. Um the the standard benchmark government returns that we can measure over these long periods of time. So when that contract we started with was written around 1546 or so we see the first big inflection. Okay. For the first time, that number turns positive, which means governments are earning a you could say safety premium or or whatever you want to call it. They trade sustainably lower than private assets. Okay? Because somehow people, you know, attach a premium to to the credibility, safety, what what have you. As I said, this has been increasing for about 400 years or so. They have been on a 400y year bull run, these governments, public sector. But if we do formal u statistical econometric tests or so um I mentioned the cracks have been growing over the 20th century already and and actually this kind of standard test at least um suggests that in the 1950s 1960s this whole process started reversing. Okay. obscured perhaps by the oil shocks and by a lot of the volatility of the 20th century but uh in fact we are in this environment of of lower and lower um safety premier for governments. So that process this um this incredible 500 year bull run of governments themselves is coming to an end. So what did people invest in prior to 1557? Well remember the collateral that this contract told you about the actual even the English crown has to provide some collateral. They don’t rely on the just the tax streams or just on the word of the king. No, it’s private assets, right? It’s private assets once more that are the anchor in the international financial system whether in the form of land or whether in the form of private enterprise. It’s the corporation of London that uh is providing the safest the most valued asset in 1546. And this whole process is is suggesting that we might be in one of these environments where you know once every 500 years the science flip perhaps and uh the data at least uh supports that kind of interpretation for the moment that you know private markets may be the the ones that provide the anchor the reserve asset in the in the decades ahead. So, I’m already uh 45 seconds over time, but uh uh this is the final plug for the book, right? Thank you so much. Thank you, DAN. SO, we’ve got a little bit of time for questions for Paul. So, lots of uh you know, hundreds of years to think about in terms of uh what he’s what he’s postured here. But any questions for Paul? That was a lot. Yes, the gentleman here. There’s a microphone coming for you. Maybe just a technical question. Um, when you have very dense data sets and very sparse data sets, usually very funny things happen. And I just wonder how did you deal with that? because I suspect the further you go back the sparse data data sets, right? Yeah. I mean the the idea was really to for all these financial variables that we saw this is a pretty consistent high frequency annual level observation really a reconstruction, right? So there’s no funny stuff going on with just interpolations etc. Now for some of these other series as it was visible to the eye like the China uh uh share of global GDP there other people have have not yet come up with super annual level granular series. So uh the these broadberry and and Lee guys for China they this is the best they provide in terms of interpolations that are going on. Okay. But uh I’m I’m very careful to just compare apples to apples whenever we talk about financial variables etc. and make sure that this is not at least on the financial side this is not polluting the interpretation in any way. though on a broader level I mean of course the book is not suggesting in any way don’t get me wrong that the 21st century is somehow like the the 14th century okay this is a radically different uh environment where all sorts of funny things happen in in financial markets okay um in that sense but but financial history is is always about finding the right precedents and and um and in this sense it’s it’s more of an art than a science in some ways to to you know make that choice of course. Yeah, another question in the in the middle there. Yeah, I my question is about why do we have this fixation as a percentage of our GDP on our debt? If I look at a balance sheet as a finance year, our balance sheet’s strong. We have 280 trillion in assets total, 180 trillion in total debt, including the US debt. That’s a pretty strong balance sheet. I mean if we were to look at that as a finance major be good. Why the focus on GDP? Well, arguably the the GDP side uh provides your your tax base and and your long run sustainability because um this allows you to either roll over your your entire debt stock or just not be able to do that. Um and so the the emphasis is of course on the on the aggregate GDP side. That’s arguably the the more important variable for for that whole exercise rather than per capita uh basis. The per capita picture looks in in in so many of these charts looks way more favorable than than the aggregate one. Okay. But but um I would say yes, I agree. The the debt to GP level itself, it’s it’s not super informative once once we drill into that. The whole R minus G exercise, however, I would say tells us a lot more uh of of the underlying trends. And the one chart I showed you, I rushed through it a little bit, but when we reconstruct this RMSG series over time, actually the ups and downs, the spikes in particular, they are correlated with actual default events, with actual major fiscal crisis in these countries. Okay, so whatever you think about the slope, it is a pretty good decent proxy in general of big financial distress events. Okay, we didn’t have too much time to spend on these 16th century English defaults or so, but um it’s in the book, you know, gentle gentleman here in the middle. Sorry, my issue is that I have so many questions to ask and I can only ask one. Um so I was going to go with a link to our previous discussion um regarding the lack of stability, the we say delobalization. um an overturning of rules-based financial order. And to the extent that you think that maybe the long-term trends that you had seen in a lot of this data might have been related to the gradual consolidation of powers and the generation of you know a rules-based international order that occurred over time. So you know during the 1300s through like the 1700s you had the um the consolidation of small European states into small into larger conglomerates. Germany in particular or Italy for example where larger states subsumed smaller ones so that you ended up with a great power type world um that eventually you know grew more inconnected on trade um bilateral agreements multilateral agreements um until you finally kind of got to the ultimate state which was following you know World War II where you had the United Nations um you know global free trade and then now you’re kind have seen a disconnect where it’s deglobalization is happening um and the breakdown of the rules-based international order um right right so yeah so you you’re asking a little bit about uh wick financial history you could call it right so is it all about these these western institutions and democracy and and that is behind a lot of that um but there are some troubling patterns if you come from that school of thinking I would say also in the in the data I mean as I mentioned the the Spanish Hopsbooks were the reserve currency of the 16th century. That’s not exactly a a democratic type of system. Neither is is is the the two reserve currencies that follow him. They are uh pretty authoritarian systems we would say today uh with huge militaries and with pretty we saw how conflicts were resolved, right? not through diplomatic means but um um uh so so they often issued the lowest yielding long maturity asset while having by our standards extremely poor extremely troubling type of uh political systems and and measures of openness and and democracy etc. So this is a bit of a paradox that that is not appreciated enough perhaps. Um I wouldn’t draw sweeping conclusions to when it comes to China or nowadays but it is there. What you the other point you mentioned is of course the the whole survivorship bias right that that might be in these kind of series that uh investors in in the 1500s when they invested in uh they had to expect that you know the British Empire the the um Spanish hops books they they might not survive for the next 20 years or so. We know that expost of course who were the winners who were the losers but um this downward trend uh it really holds for all sorts of polities. You know there are more than 100 polities that go into small city states and and all sorts of polities that we don’t even know about anymore. But um they all show these long run downward structural trends. And so that’s what makes me think that something really fundamental must be going on that connects all of these issuers at the same time with a similar slope. Right. And I didn’t even mention it, but it we see it in private markets as well, by the way, in in long maturity private rates and mortgage rates, right? Mortgage rates are even older assets than government bonds, mortgages. And we see a downward trend over time as well. It’s flatter than the government slope. That’s why this gap opens up, but it’s there. So, so it permeates all sorts of different asset classes over time. I I have a question. In the 1500s, you said the seinal event was they banned feuds and that changed, you know, the way that things h how do you ban feuds? It’s like banning war. You know, there has to be an authority to ban the feuds. How did they do that? No, of course. I mean, I was pretty simplistic when I when I just honed in on the whole feud story, but there are other factors going on uh at the same time. So, uh the the Spanish Habsburgers really consolidate global power in a pretty aggressive, pretty sweeping way. uh and they create a uh a a financial uh tributary system you could say around the globe. Uh they dominate trade, they dominate financial flows. Uh they’re waging trade wars all the time and they establish one anchor currency and financial market uh for the entire financial system for the first time. It’s just multi-polarity chaos before they come along. Okay. And they are the first whether you like their institutional quality or not but they centralize everything for the first time. And so for the first time you have this reference market you have this reference asset that is deep and liquid enough that everybody else can take as their benchmark as their uh most important safe asset out there. Um so I think that’s that’s also a super important um factor in all of this. Yeah. Got a one last question. Professor Romer, what can you tell us about the like the uh dispersion in the data? like you’re you’re showing presumably like a mean or a median, maybe smooth somehow, but at any given year where you report a number, do you have like a bunch of sources and do they all tend to uh cluster around that that number that you report or is there is there actually a lot of dispersion? I like you you’d think that as markets become more integrated the dispersion would be going down over time and that might mean that we’re a little bit less certain about the exact kind of location of the the central point but um is that a is would that be a concern or do you think that’s just a minor issue in your data? Yeah, I can’t go back anymore. But actually this this second or third chart showed you in the in the background it showed you the range, right? And the range of observations uh that that I showed. And so yes, that’s coming down sharply over time, right? The dispersion in that sense. And I mean to be clear, you have you have issuers in there like the Holy Roman Empire with like 200 different dupdoms and duchies and and all them issuing their own kind of debt. So it’s it’s a very very messy at times uh investment environment, right? Um it’s a little bit like the EU today with these all these different issuers and no common debt. Uh that that’s that accounts for a lot of the dispersion back then. Um but the trend is clearly uh downwards over the terms of the range. It’s shrinking dramatically over time. Um but for most of even these early observations I I do really have multiple observ each individual year and and there I form either an average or some sort of weighted observations. So um yeah that that is just in terms of the the nerdy methodology what what we can say uh for the moment but thanks for that. Yeah Paul we look forward to reading the book when it comes out and thank you very much. Round of applause for Paul. Thank you. Thank you. Thanks so much Dean Boon. I’ll tell you, you must have had some fun. You must have had some fun collecting that data, Paul. I mean, where did you go? Like to the catacombs and stuff to find some of it. Did you go to Literally I know some people here who study in like the Did you have to do that kind of thing? I went to Did you go to Did you go to Aby’s Did you have to go to places like that? Oh, so you really went to Abby’s and into the the boughels of Europe and to get this data, huh? The Vatican Library. Okay. A lot of digging on that. That was great. Thank you. And uh thank you everybody for spending the day with us. We know you’re busy and you probably look at your schedule and say, “Oh, do I have enough time to go over there and do this. Um, we’re thank you that you chose to be with us and we hope that you feel it was time well invested. You know, we’re at a university and at the end of the day, we hope you all learned a lot as well as have a chance to meet old friends and new friends. So, thank you. Um we hope you join us for a reception after right now uh right out here in the uh area in the Murray foyer which is out here. Feel free to share us for reception networking saying hello and goodbye. But have a great day, have a great spring and um you know thanks again. We’ll see you out here in the foyer. Great day and thank you all.