Prelims

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Negative Interest Rates

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Critical Studies on Corporate Responsibility, Governance and Sustainability

Series Editor: William Sun

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Critical Studies on Corporate Responsibility, Governance and Sustainability Volume 13

Negative Interest Rates: The Black Hole of Financial Capitalism

Jacques Ninet

Former Associate Professor, University of Poitiers, France

United Kingdom – North America – Japan India – Malaysia – China

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Emerald Publishing Limited

Howard House, Wagon Lane, Bingley BD16 1WA, UK

First edition 2021

Copyright © 2021 Emerald Publishing Limited

First published by Classiques Garnier as Taux d'intérêt négatifs: Le trou noir du capitalisme financier Copyright © Jacques Ninet, 2020

English language translation published by Emerald Publishing Limited, 2021 The moral right of the author and translator has been asserted.

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British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-1-83982-377-0 (Print)

ISBN: 978-1-83982-376-3 (Online)

ISBN: 978-1-83982-378-7 (Epub)

ISSN: 2043-9059 (Series)

Endorsements

Originally published as Les taux d'intérêt négatifs: le trou noir du capitalisme financier.

Classiques Garnier Paris 2017

Translated from French by Nicholas Ferrar nicholas.c.ferrar@gmail.com

Editorial Revision by Wesley Coll wesleycoll@gmail.com

We can't solve problems by using the same kind of thinking we used when we created them.

(Albert Einstein, 1946)

And if things always went like this, I believe I would become a [financier] for the rest of my life. This is the best craft of all; for whether you cure or make worse, you always get paid. We never have to bear the burden of bad work, and we cut, as we please, from the material that presents itself. A cobbler, in making shoes, cannot miscut a bit of leather without eating the cost; but here one can mishandle [capital] without a loss. Botched results are nothing to us; for they're always the fault of the [person who loses].

(Adapted from Molière, Le médecin malgré lui, 1666)

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (these banks) will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.

(Attributed to Thomas Jefferson, 1802)

La crisi consiste appunto nel fatto che il vecchio muore e il nuovo non può nascere: in questo interregno si verificano i fenomeni morbosi più svariati. ¹

(Antonio Gramsci, 1929–1935)

Table of Figures, Tables, and Insets

Preface

We have entered a world of Volatility, Uncertainty, Complexity, and Ambiguity, or VUCA, as acronym aficionados like to call it. These qualifiers, introduced 30 years ago by analysts at the US Army War College to explain the geo-strategic environment of that era, seem even more relevant today. They certainly apply to the growing presence of economics in daily lives of modern societies, with emphasis on finance that instead of being an economic component among others has become the reference of the economy and, beyond, of the global society. We therefore speak of the “financialization of the economy,” along with the “financialization of society,” as a square dependency that might be called dual embedding. ¹

For the past decade – primarily to cope with the fallout of the 2008 global financial crisis – central banks of Japan, the United States, and the European Union have implemented accommodative (unconventional) financial policies, which has led to a permanent reduction of key interest rates and virtually unlimited purchases of debt securities (quantitative easing).

Most of the world's top companies have greatly benefited from these accommodative monetary policies, which have provided them with virtually unlimited funds (bank lending or debt issues) at a very low cost, thereby reducing their average cost of capital and modifying their funding structures. That said, the productive investments made over the past few years by major companies were in no way exceptional and remain in line with the average of previous years.

Accordingly, many businesses and groups are sitting on surplus cash waiting for investment. By contrast, we've seen a significant increase in share buybacks carried out by listed companies, in particular in the United States where this type of transaction is subject to less monitoring than it used to be. This has led to support for stock prices and an increase in the leverage effect, besides a double leverage effect when such buybacks are financed by additional debt.

Financing facilities, in addition to tax breaks accorded by current US legislation, have produced excellent net profits, boosting stock market prices even higher.

These different elements are adding up and may evolve into profitability profiles of listed companies, with financial and stock market performance, and unusual balance sheets simultaneously incorporating over-abundant cash on the asset side and considerable debt on the liabilities side.

This situation, which many corporations worldwide find to their satisfaction, seems concerning as to its deeper meaning, its intrinsic quality, and its permanency. Financial performance and certainly stock market performance are no longer directly linked to the business model employed, but rather to financial transactions being carried out (use of debt, share buybacks, etc.). Nothing guarantees that current positive effects will still be in place in the future unless such monetary policies are renewed (for the cost of borrowing) or through direct intervention on the securities market (for share buybacks).

The context for Jacques Ninet's “The Black Hole of Financial Capitalism” is the debate on the meaning of these accommodative monetary policies, their effectiveness, and their permanency. Published by Editions Classiques Garnier in paperback, (as part of the Bibliothèque de l’économiste Collection), the text originated from a 2017 essay by the author published in standard format by Garnier. That essay was based on Ninet's observations, analyses, and comments for investment funds and other financial institutions where the author exercised significant responsibilities.

Indeed, the author of this book is not an “academic” by trade, even though his repeated activities in the “small world” of the Alma Mater could bring many university colleagues back. ² However, it is his solid professional experience that encourages us to take his analyses and questioning very seriously.

What does the author have to say in the introduction to his book?

The black hole I'd refer to then is about a deflationary effect, represented by the negative interest rates that Western economies have been pulled into and from which they can't escape, and which places the role of central banks in great danger.

And how did he end his essay?

Last but not least, the deregulation objectives set by Donald Trump very well might complete the re-establishment by the financial sphere of its freedom that was barely restricted following the 2008 crisis. However, in a world that appears far more dangerous, all that recovered trust could prove to be just a smokescreen and thrust us back into the black hole once again.

That was written in March 2017. Today, except for some one-time events, most of the chain of arguments developed by Ninet is as fresh as ever. Such urgency drove the publisher's decision to promote the distribution of this new paperback edition of Black Hole to encourage readers to get acquainted and engaged with this major debate about our economies and societies, both as potential protagonists and as citizens.

Professor Roland Pérez

Note to the Reader

Since the early 1990s, I have been delivering written commentary on a regular basis, about developments on the financial markets and their macroeconomic roots. Initially produced only for a professional audience (within asset management companies such as Fimagest – the “En direct des marchés” newsletter), these comments began gradually taking a different, more fundamental turn benefiting from my immersion in academic research. The increasing detachment from the commercial constraints of market newsletters, published by financial professionals for their customers, to a turn toward the development of a personal, non-conformist vision, took place in three phases.

The first phase occurred as I worked at Technical Future, an independent research bureau, in partnership with Gonzague del Sarte (Commentaires du jour, 1998–2002); the second took place at Sarasin France (Fil Conducteur mensuel, 2004–2009) and the third, as Director of Research and later Adviser to La Française (Flashes and Cahiers de la recherche, 2009–2017).

I must pay tribute here to my partners and/or mentors who granted me total freedom to think and write as I saw fit. And to a few of my role models, well recognized for their thoroughness and independence, often at the expense of their careers (Stephen Roach, for instance, the former Chief Economist at Morgan Stanley, distinguished for his unwavering denunciation of global imbalances).

Initially, I considered bringing together the bulk of these works as a testimony, a candid analysis of economic and financial events, and the warnings they raised. Thus the initial compilation of works published between 1998 and 2002, The Carnets de déroute (Diary of Disarray), which documented the crash of the New Economy. It was turned down by several publishers, though, probably unconvinced of the usefulness of approaching chronologically and critically what might have then appeared as a mere bump in the road.

The manuscript concluded on October 14, 2002, at the depths of the 'dot com' crisis, with an indication that “The party is not over.” It conveyed the conviction that the crisis and its subsequent recovery were rather an episode in a vast, continuous flow. Therefore, there would be a follow-up to the manuscript, coupled with the determination of using this literary disappointment as a springboard to get it published.

It is this very follow-up that you are now reading. The seriousness of the events it documents, and the descent of interest rates into negative territory, is comparable to the financial collapse of 1929–1933, and offers an opportunity to make a radical critique of the model for the accumulation of monetary wealth that has been ruling the world since the early 1980s. A development that was unthinkable just five years ago, and considered impossible from an academic standpoint until very recently, the descent of yields to below zero levels has been perceived as an irresistible advance, much like glaciation, since 2012. The only answer to recurring market crises and inevitable debt increases, this event consecrates the aberration of financial capitalism with negativity of return on investments and therefore negativity of time reward. It is not the least of the paradoxes that this disappearance of the reward of time coincides, at the beginning of the twenty-first century, with the dramatic rise of uncertainty about the future of mankind.

I could not turn down the opportunity to summarize dozens of works written between 2004 and 2016 to show that, as I have long believed, financial hysteria was ultimately the cause of its own demise. Such prophecy is often hard to defend because it can be fulfilled only over a very long time, which might include periods during which it seems that everything will work out. In fact, the responsiveness of finance and its plasticity and resiliency have allowed its sycophants to continue believing in its virtues, and mainstream economists to persist on with their fundamental errors.

Such economists believe in the universal rationality of homo economicus, the invisible hand of the market – the maximization of everyone's profits leads to general welfare optimization – and its self-regulating capacities, the unchanging nature of the economic cycle. They do not heed to the systemic nature of crisis. In their view, crises are caused not by financial instability, but by misbehavior (subprime loans, for instance) or political mistakes (US monetary policy in 1929, Japan's monetary policy in the early 1990s). Today, however, it is precisely the chronic financial instability that has led the global economy into an impasse, a real black hole, of which negative interest rates is the indisputable sign.

For the past 30 years, I have passionately worked as a teacher and researcher, in addition to a professional, and fairly fulfilling, life. The sharp criticism I have at times leveled at economics and its mainstream schools of thought, holds no desire for personal revenge. As for market economists, they are constrained by the ambiguity of their own mission, which often aims at both to inform – market practitioners – and to reassure customers and prospects. For these very reasons, their mostly poor track record for financial predictions is not worth dwelling on.