Business history, of a sort, was made last week by the French pharmaceutical company, Sanofi, its blood thinner Plavix familiar to those with arteriosclerosis, and the German consumer products group Henkel. (if you are as confused as I was, the product for which Henkel is best known, the detergent Persil, is manufactured and sold by Henkel in Germany and the United States; but the company has licensed the trademark to Unilever in Britain and France).
About half of all Eurozone government debt, and most Japanese government debt, now carries a negative interest rate. The holder gets back less than the amount invested. But Henkel and Sanofi are thought to be the first private corporations to charge bondholders for the privilege of lending. The rate on the short-term paper they issued is minus 0.05%.
Economists have worried about the ‘zero lower bound’ for interest rates – the problem posed by the apparent impossibility of nominal – before inflation – interest rates falling below zero. Keynes presaged that possibility in his discussion of the liquidity trap in his General Theory. The question seemed irrelevant in an era of double-digit inflation and only recently has the issue of the zero lower bound again become live. And when it did, the zero bound was quickly breached. Still, not yet by much. Even the lowest-yielding Swiss government paper only erodes your capital by around 1% per year and if you are content to hold a Swiss fifty-year bond to maturity you will – nearly – get your money back.
The implementation of negative rates has been thought to be limited by the alternative of simply holding cash. Households may stuff notes under the mattress – and the value of currency in circulation – more than €3000 per head in the Eurozone – suggest that many have. But while you can sleep fairly comfortably on €3000, storing, say, €1 billion is more difficult. Reinsurance giant Munich Re is reported to have explored the possibility of storing cash in heavily guarded warehouses. That company knows better than anyone the likely cost of insuring such premises. But there are simply not enough notes to go around. The volume of negative-yielding bonds of the German government alone exceeds the value of all the euro notes in circulation.
There is a theory behind the seeming madness. Low interest rates encourage firms to invest and consumers to spend now rather than later. If the economies of Japan and the Eurozone are stagnant, it is because interest rates are not low enough. So long as inflation is under control, it is the duty of central banks to push rates lower still.
This is not a theory which bears much scrutiny. Consumption in the Eurozone is not sluggish because interest rates are so high, but because expectations are so low. Fiscal austerity and the aftermath of the global financial crisis have dimmed the employment prospects of a generation of young Europeans. Low interest rates have pushed up asset prices, putting house purchase beyond the reach of many, and rendering long-term saving more or less hopeless. To provide 70% of gross income for 25 years of retirement when real interest rates are zero requires setting aside 45% of that gross income every year. Should you save more, to try and make up the shortfall; or less, since the goal of comfortable retirement is beyond reach anyway? The primary effect of monetary policy since 2008 has been to transfer wealth to those who already hold long-term assets – real and financial – from those who now never will.
Last week’s news reinforces this transfer from the have-nots to that already-haves. Henkel and Sanofi are not borrowing at negative interest rates to invest in new productive facilities. Both companies have large cash piles, and the cash generated from their operations far exceeds their investment needs. Their recent borrowing uses the strength of their balance sheets to make profits from money management, exemplifying the aphorism that people will lend you money so long as you can prove you don’t need it. Henkel, secure in the knowledge that German consumers will always demand laundry products, benefits from the absurdity that its credit is far stronger than that of Deutsche Bank.
The investment shortfall in Europe is caused by such capital market dysfunctionalities, not excessive interest rates. I have yet to hear a single business person say ‘if only I could borrow at minus 0.05% my company would be able to undertake some great projects’. The corollary of being able to borrow if you don’t need it appears to be that it is very difficult to borrow if you do need it. There are obvious requirements for new investment in the Eurozone economies – to provide power through a new vintage of cleaner energy plants, to improve roads and relieve overcrowding on trains, to build new houses, to accommodate the refugees who have flooded into Europe, and above all to fund the new businesses which will promote European innovation. But aversion to public debt and the additional costs associated with off-balance-sheet financing obstruct infrastructure funding; short-termism pervades listed companies. European venture capital, never robust, has shifted focus from the funding of early-stage business to the buyout of established ones.
As policymakers of my generation congratulate each other on the financial innovations they call unconventional monetary policies, we can only hope that our children and grandchildren will think better of us than we deserve.