Irving Fisher’s Theory of Interest does not support the popular “Fisher Theorem which asserts that real rates remain constant, while changes in the inflation rate drive nominal interest rates. In fact, Fisher found that interest rate changes lagged changes in the inflation rate considerably. Furthermore, his examination of world credit markets led him to conclude that real rates were, if anything, more volatile than nominal rates.
Following the lead of several great economists, including Fisher, Malthus and Keynes, the authors hypothesize the existence of a factor that influences both interest rates and inflation rates simultaneously. Their evidence strongly suggests that the age distribution of the population—the relative sizes of age groups that may be termed “consumers” and those that may be termed “savers”—has had a significant effect on both interest and inflation rates.
Given the current and projected age distributions of the U.S. population, investors can expect a significant downturn in rates some time after 1988 and very low yields by the end of the century. Current high-yield bonds maturing beyond 2000 may thus provide investors with significant capital gain opportunities by the mid-1990s.
