Negative yields, the euthanasia of the rentier & political economy

About $13 trillion of government debt now has a negative yield or, to put it another way, more than half of the outstanding stock of advanced economy government borrowings.

S&P, the FT reports, now say 500 million people live under negative rates.

Back in February, when the negative universe was a “mere” five and half trillion dollars, I pondered how this would all look in a decade’s time.

Either, this will be the start of a brave new era in which we come to accept that sovereign yields can often be negative, that there’s nothing especially special about zero — or, people will look back and say “what on earth was everybody thinking?”

Personally, I think we’ll all be asking “what one earth was everybody thinking?” but the point of this post isn’t to speculate about the future but to ask how we got here. And the honest answer is I don’t understand it. Or rather, I understand the mechanics of engine that took us here but not what the driver was thinking.

The simple answer is that since approximately mid 2010 (I’d date it to the Toronto G-20) an incomplete economic recovery in the developed economies has been increasingly reliant on monetary policy to accelerate it with fiscal policy acting as brake (or at best staying neutral). This (and most of this post) applies especially in the Europe and to a lesser extent in the US.

We ran out of conventional monetary policy road and are now firmly off the beaten track. Years of tight fiscal policy and monetary loosening have taken us to where we are: negative or at best negligible government yields.

I can understand that macroeconomic story. but what I am really struggling with is the political economy that drove it. As I wrote three years ago, I’m a firm believer than “political economy trumps macroeconomics” when it comes to policy decisions.

In effect the fiscal/monetary mix may be achieving Keynes’s euthanasia of the rentier but without putting something (the “somewhat comprehensive socialisation of investment”) in their place.

And the euthanasia is coming through a very different mechanism to what he foresaw. In Keynes work (this is chapter 24 of the GT for the very keen) this is a benign outcome, the elimination of the functionless investor:

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

What we have now though is not that relatively painless scenario. In the Keynesian story, low rates plus active government investment have led to much higher investment (the level consistent with full employment) and an increased supply of capital which has pushed down its marginal efficiency and hence kept rates low. There is simply so much capital and investment around that the returns to owning capital have withered away.

Instead what we have seen in the past few years is a scarcity of supposedly safe assets as government issuance of decent credit has been less than private demand whilst central banks have bought up much of the stock. This has pushed the price of those assets up and the rate of interest on them down.

The death of the rentier was supposed to be a side effect of an economy operating at full employment. Instead, across much of Europe the rentier is being gradually euthanised whilst workers continue to suffer from weak real income growth and high unemployment.

Who the rentier is that risks being euthanised?

To be clear — it’s not the “1%” of Occupy banners. They will generally be fine. But the class of (in Keynes’s term) “rentiers” is far wider today than it was in the mid 1930s, if we take it to mean people dependent for a large part of their income on interest from investments. I’m thinking of those with pension pots who wish to use the interest of their accumulated savings to supplement state provision in old age. What they generally want is exactly what is vanishing: a steady and safe income.

Sure, there are plenty of reasons why one might buy bonds with a negative yield — not least the fear of a bigger loss elsewhere or the hope for a capital gain (something which has very much been happening in 2016). But a bund or gilt today is a very different proposition from what it was a decade ago. Yes, you might get a decent capital gain but the income is non-existent and there is an increasing risk of a (large) capital loss. In effect, the monetary policy aim of pushing people into riskier assets has made “safe” assets more dangerous.

And this is why I don’t understand the political economy that has brought us tight fiscal & easy money — it simply isn’t creating enough winners to be sustainable.

Rising asset values certainly have created a block of beneficiaries (particularly in the UK case property owners). But as more people reach retirement age and realise that with gilt yields at around 0.5% then years of saving isn’t worth as much as they hoped, I’m not at all sure owning a more valuable house will be seen as adequate.

Raw demographics suggest this cohort will get bigger each year and this is an age group which is not only getting larger but which tends to exercise their right to vote.

In other words, whilst the macroeconomic argument for more active fiscal policy has always been strong, the political economy conditions that may drive it are becoming clearer. Aggressive deficit-financed state spending may (unusually) create two sets of winners — the workforce who benefit from faster growth, tighter labour markets and stronger real income growth and the mass of (relatively) small scale rentiers who would benefit from higher rates.

Of course the voting public don’t seem particularly keen on deficits. I’ve wondered myself recently — whatever happened to deficit bias? It may be that, as Eric Longeran has argued, this is the best argument for helicopter money. If fiscal policy makers won’t do what is required, then perhaps monetary policymakers can.