As long as inflation stays low, nominal interest rates will also stay low. But in recent years, real interest rates have also been ultra-low. The root causes of this lie beyond the policy-makers’ world. Real interest rates will return to normal, and thereby push up nominal rates even if inflation stays very low, when the forces that have recently depressed aggregate demand have run their course.

Let me briefly rehearse the leading factors: a) the huge surpluses built up because of high oil prices; b) the rapid growth of the super-saving countries, led by China (pictured); c) the retrenchment of the banks after the trauma of 2008/9; d) the extreme weakness of the eurozone; e) the imposition of fiscal austerity; f) the depression of the corporate appetite for risk.

We are certainly not there yet, but several of these factors have already begun to moderate. I can see on the horizon a period when some of them end more or less simultaneously.

That would be enough to raise the growth rate of aggregate demand quite decisively. Central banks would then shift away from nervously trying to boost demand to again seeing their job as restraining it. Once that shift has occurred, interest rates and bond yields will again be a few percentage points above inflation, thus giving a significant positive real interest rate.

Yes, now is too early to act on this idea. But you should be thinking about it. You most certainly should want to avoid being late.

David Fuller's view

I can only conclude from this that savvy Roger Bootle expects global GDP growth to improve in the next few years.  As subscribers know, I have been advocating this view on the basis that with the USA in the pole position among larger developed economies, it would take at least six years and most likely several more, to recover from the severe credit crisis recession.  I believe we are on schedule, in contrast to the much gloomier forecasts from a number of commentators. 

Assuming Roger Bootle’s forecast of “a significant positive real interest rate” in a few years’ time is correct, the big risk will be in bond markets. 

Equities will do far better over the medium to longer term, I maintain. 1) Accelerating technological development is lowering costs and making successful multinational corporate Autonomies vastly more efficient; 2) thanks to technology, energy costs will remain generally lower; 3) globalisation also contributes to lower costs and creates a vastly greater market, as does the triumph of capitalism in the last 30 years; 4) these factors are contributing to the fastest growth in middleclass consumers ever seen.  

Some things never change and equities will remain volatile.  Nevertheless, I believe it would take something drastic, such as a nuclear war - the Middle East has moved ahead of Putin’s Russia in this risk list – to derail seriously the long-term bullish prospects for stock markets in countries where governance is sound.