Visualizing the 700-Year Decline of Interest Rates
How far can interest rates fall?
Currently, many sovereign rates sit in negative territory, and there is an unprecedented $10 trillion in negative-yielding debt. This new interest rate climate has many observers wondering where the bottom truly lies.
Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England (BOE), shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.
The Evidence on Falling Rates
Collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.
Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.
Centennial Averages of Real Long-Term “Safe-Asset”† Rates From 1311-2018
*Real rates take inflation into account, and are calculated as follows: nominal rate – inflation = real rate.
†Safe assets are issued from global financial powers
Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.
The average real rate between 2000-2018 stands at 1.3%.
Why have interest rates been trending downward for so long?
Here are the three prevailing theories as to why they’re dropping:
1. Productivity Growth
Since 1970, productivity growth has slowed. A nation’s productive capacity is determined by a number of factors, including labor force participation and economic output.
If total economic output shrinks, real rates will decline too, theory suggests. Lower productivity growth leads to lower wage growth expectations.
In addition, lower productivity growth means less business investment, therefore a lower demand for capital. This in turn causes the lower interest rates.
Demographics impact interest rates on a number of levels. The aging population—paired with declining fertility levels—result in higher savings rates, longer life expectancies, and lower labor force participation rates.
In the U.S., baby boomers are retiring at a pace of 10,000 people per day, and other advanced economies are also seeing comparable growth in retirees. Theory suggests that this creates downward pressure on real interest rates, as the number of people in the workforce declines.
3. Economic Growth
Dampened economic growth can also have a negative impact on future earnings, pushing down the real interest rate in the process. Since 1961, GDP growth among OECD countries has dropped from 4.3% to 3% in 2018.
Larry Summers referred to this sloping trend since the 1970s as “secular stagnation” during an International Monetary Fund conference in 2013.
Secular stagnation occurs when the economy is faced with persistently lagging economic health. One possible way to address a declining interest rate conundrum, Summers has suggested, is through expansionary government spending.
Bond Yields Declining
According to the report, another trend has coincided with falling interest rates: declining bond yields.
Since the 1300s, global nominal bonds yields have dropped from over 14% to around 2%.
The graph illustrates how real interest rates and bond yields appear to slope across a similar trend line. While it may seem remarkable that interest rates keep falling, this phenomenon shows that a broader trend may be occurring—across centuries, asset classes, and fiscal regimes.
In fact, the historical record would imply that we will see ever new record lows in real rates in future business cycles in the 2020s/30s
Although this may be fortunate for debt-seekers, it can create challenges for fixed income investors—who may seek alternatives strategies with higher yield potential instead.
How Total Spend by U.S. Advertisers Has Changed, Over 20 Years
This graphic visualizes the fluctuations in advertising spend in the U.S., along with its brutal decline of 13% as a result of COVID-19.
Total Spend by U.S. Advertisers, Over 20 Years
With an advertising economy worth $239 billion in 2019, it’s safe to say that the U.S. is home to some of the biggest advertising spenders on the planet.
However, the COVID-19 pandemic has resulted in the major upheaval of advertising spend, and it is unlikely to recover for some time.
The graphic above uses data from Ad Age’s Leading National Advertisers 2020 which measures U.S. advertising spend each year, and ranks 100 national advertisers by their total spend in 2019.
Let’s take a look at the brands with the biggest budgets.
2019’s Biggest Advertising Spenders
Much of the top 10 biggest advertising spenders are in the telecommunications industry, but it is retail giant Amazon that tops the list with an advertising spend of almost $7 billion.
In fact, Amazon spent an eye-watering $21,000 per minute on advertising and promotion in 2019, making them undeniably the largest advertising spender in America.
Explore the 100 biggest advertisers in 2019 below:
|Rank||Company||Total U.S. Ad Spend 2019||Industry|
|#4||Procter & Gamble||$4.3B||Consumer Goods|
|#9||American Express||$3.0B||Financial Services|
|#11||JPMorgan Chase||$2.8B||Financial Services|
|#16||Nestlé||$2.3B||Food & Beverages|
|#18||Expedia Group||$2.2B||Travel & Hospitality|
|#19||Capital One Financial||$2.2B||Financial Services|
|#20||Fiat Chrysler Automobiles||$2.0B||Automotive|
|#24||PepsiCo||$1.7B||Food & Beverages|
|#25||Bank of America||$1.7B||Financial Services|
|#28||McDonald’s||$1.6B||Food & Beverages|
|#29||Booking Holdings||$1.6B||Travel & Hospitality|
|#31||Johnson & Johnson||$1.5B||Pharmaceuticals|
|#32||Anheuser-Busch InBev||$1.5B||Food & Beverages|
|#34||Merck & Co.||$1.5B||Logistics|
|#44||Wells Fargo||$1.1B||Financial Services|
|#45||Yum Brands||$1.1B||Food & Beverages|
|#51||Diageo||$918M||Food & Beverages|
|#53||Discover Financial Services||$883M||Financial Services|
|#54||Mars||$880M||Food & Beverages|
|#58||Molson Coors||$822M||Food & Beverages|
|#61||Coca-Cola||$816M||Food & Beverages|
|#64||Kraft Heinz||$782M||Food & Beverages|
|#70||Constellation Brands||$749M||Food & Beverages|
|#80||Marriott International||$667M||Travel & Hospitality|
|#89||Reckitt Benckiser||$593M||Consumer Goods|
|#90||Keurig Dr Pepper||$593M||Food & Beverages|
|#91||Restaurant Brands International||$589M||Food & Beverages|
|#92||Inspire Brands||$589M||Food & Beverages|
The report offers several ways of looking at this data—for example, when looking at highest spend by medium, Procter & Gamble comes out on top for traditional media spend like broadcast and cable TV.
On the digital front, Expedia Group is the biggest spender on desktop search, while Amazon tops the list for internet display ads.
The Rise and Fall of Advertising Spend
Interestingly, changes in advertising spend tend to fall closely in step with broader economic growth. In fact, for every 1% increase in U.S. GDP, there is a 4.4% rise of advertising that occurs in tandem.
The same phenomenon can be seen among the biggest advertising spenders in the country. Since 2000, spend has seen both promising growth, and drastic declines. Unsurprisingly, the Great Recession resulted in the largest drop in spend ever recorded, and now it looks as though history may be repeating itself.
Total advertising spend in the U.S. is estimated this year to see a brutal decline of almost 13% and is unlikely to return to previous levels for a number of years.
The COVID-19 Gut Punch
To say that the global COVID-19 pandemic has impacted consumer behavior would be an understatement, and perhaps the most notable change is how they now consume content.
With more people staying safe indoors, there is less need for traditional media formats such as out-of-home advertising. As a result, online media is taking its place, as an increase in spend for this format shows.
But despite marketers trying to optimize their media strategy or stripping back their budget entirely, many governments across the world are ramping up their spend on advertising to promote public health messages—or in the case of the U.S., to canvass.
The Saving Grace?
Even though advertising spend is expected to nosedive by almost 13% in 2020, this figure excludes political advertising. When taking that into account, the decline becomes a slightly more manageable 7.6%
Moreover, according to industry research firm Kantar, advertising spend for the 2020 U.S. election is estimated to reach $7 billion—the same as Amazon’s 2019 spend—making it the most expensive election of all time.
Can political advertising be the key to the advertising industry bouncing back again?
Visualized: A Breakdown of Amazon’s Revenue Model
Here’s a look at the different parts of Amazon’s revenue model, and how much money each business segment makes.
Visualized: A Breakdown of Amazon’s Revenue Model
Amazon has evolved into more than just an online store. While ecommerce makes up a significant portion of the company’s overall sales, its diverse revenue model generates billions through various business segments.
This visualization provides an overview of the different parts that make up Amazon, showing each business unit’s net sales from June 2019 to 2020.
A Diverse Revenue Model
With a market cap of $1.7 trillion, Amazon is currently the most valuable retailer in the world. The company is expected to account for 4.6% of total U.S. retail sales by the end of 2020—but the tech giant is more than just a one-trick pony.
A key factor in the company’s success is its diversification into other areas. Here’s a breakdown of Amazon’s revenue mix:
|Business Segment||Net Sales (June 2019 - 2020)|
|Online stores||$163 B|
|Third-party selling services||$63 B|
|Amazon Web Services||$40 B|
|Subscription services||$22 B|
|Physical stores||$17 B|
|Total Revenue||$322 billion|
While Amazon is truly more than an online store, it’s worth noting that online sales account for a significant amount of the company’s overall revenue mix. Over the period of June 2019 to 2020, product sales from Amazon’s website generated $163 billion, which is more than the company’s other business units combined.
A significant day for online sales is Prime Day, which has grown into a major shopping event comparable to Black Friday and Cyber Monday. In 2020, Prime Day is projected to generate almost $10 billion in global revenue.
While ecommerce makes up a large portion of Amazon’s overall sales, there are many other segments that each generate billions in revenue to create immense value for the tech giant. For instance, enabling third-party sellers on the platform is the company’s second-largest unit in terms of net sales, racking up $63 billion over the course of a year.
This segment has shown tremendous growth over the last two decades. In 2018, it accounted for 58% of gross merchandise sales on Amazon, compared to just 3% in 2000. While third-party sellers technically outsold Amazon itself, the company still makes money through commission and shipping fees.
Amazon is Not Alone: Diversification is Common
Amazon isn’t the only major tech company to benefit from diverse revenue streams.
Other tech giants generate revenue through a range of products, services, and applications—for instance, while a healthy portion of Apple’s revenue comes from iPhone sales, the company captures 17% of revenue from a mix of services, ranging from Apple Pay to Apple Music. Microsoft is another example of this, considering it owns a wide range of hardware, cloud services, and platforms.
While there are several reasons to build a diverse business portfolio, a key benefit that comes from diversification is having a buffer against market crashes. This has proven to be particularly important in 2020, given the economic devastation caused by the global pandemic.
The Sum of its Parts
Despite varying levels of sales, each business unit brings unique value to Amazon.
For instance, while Amazon Web Services (AWS) falls behind online sales and third-party sellers in net sales, it’s one of the most profitable segments of the company. In the fourth quarter of 2019, more than half of Amazon’s operating income came from AWS.
In short, when looking at the many segments of Amazon, one thing is clear—the company is truly the sum of its parts.
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