Global profitability trends that investors should take account of
The return on real estate is higher than on securities, and accumulating the wealth can eventually lead to an economic crisis. These are conclusions brought by a new fundamental research conducted by experts from the National Bureau of Economic Research.
Where it all comes from
The Rate of Return on Everything was published on the NBER website in December 2017. It involved a group of 5 persons, each and every one of them were economic theory experts. They did an immense job and analysed the return rates of 16 world-leading economies from 1870 to 2015. It is no surprise that this research was recognised as one of the largest both in terms of the period covered and the volume of data collected.
Experts discovered that the real estate has shown better return rate than securities in a span of 145 years. More specifically, both categories of assets gave a 7% return, while securities showed a higher volatility. Houseowners are likely to benefit from this news, but all that glitters is not gold. According to this research, the return on the real estate leased accounts for merely one half of the entire return on real estate. That being said, an investor would have to hold a diversified portfolio to get high profits.
Mystery behind low interest rates
Interest rates fell consistently for the last decade, which puzzled economists. Many saw signs of an upcoming crisis in this situation and the inability of central banks to manage economies effectively. However, the NBER study allowed for a different look at the problem. In particular, the comparative analysis of different economies in various historical periods revealed that the highest rate of return on public debt, which we could observe in the 80s, in fact, was an anomaly. In most cases, the real return on bonds and short-term notes was a low and sometimes even a negative value. This, by the way, was confirmed by studies of other economists (e.g. Carmen Reinhart from the Harvard University and Belén Sbrancia, an expert from the International Monetary Fund). Therefore, the lower profitability that we observed in recent years is not as much as a sign of decline but return to the initial state, i.e. normal conditions.
This also means that the attempts of central banks to normalise the interest rates are not unreasonable. Authors of The Rate of Return on Everything believe that once the return rates are low, the public debt can be managed more efficiently. Moreover, they believe that the regulation policy on public debt needs to be much more aggressive when economies are weak, thus, allowing to compensate the helplessness of central banks.
Inequality in progress
In 2013, a French economist Thomas Piketty formulated his own theory of economic inequality in his book “Capital in the Twenty-First Century” He concluded that the current rate of return on capital exceeds economic growth (he expressed the statement through the formula r > g, where “r” is the return on capital and “g” is the economic growth). It will continue to grow further, which will subsequently lead to an economic instability and even jeopardise the democracy.
The Rate of Return on Everything has actually confirmed the Piketty’s findings. In particular, it revealed that starting 1870, the median return on wealth amounted to 6% per year, while the real GDP growth rate was around 3% per year. The only exception was the periods of world wars. It was the only time when the return on wealth was much lower than the economic growth.
Thus, the authors of The Rate of Return on Everything gave us answers to many intriguing economic questions. This, by the way, stirred things up in the scientific community. As we speak, experts hold heated debates and discussions on this new information. Can this study bring tangible benefits? Only time can show.
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