The greatest malinvestment boom, ever

The economy needs low interest rates to recover

So, at some point after the crash of 2008-2009 both business and consumer confidence are dismal, investment and consumption are awful. There’s a decent debt overhang in the west, public and private. So naturally, growth is subpar. We need growth to float more boats, both literally and figuratively. To get it, we need investment and consumption. If the private sector doesn’t want to invest and consume, the public sector (both governments and central banks) can in theory incentivize it. Usually, it’s in the form of fiscal (budgetary measures like easing the tax burden) or monetary (central bank policy measures like lowering interest rates) easing. However, since most OECD governments are heavily indebted already and political undercurrents all but preclude lowering taxes in any significant manner, the burden of getting the economy moving again lies squarely with the true masters of the universe – the central bankers. So they do what they think might get people to consume and businesses to invest again. Interest rates go down and – as conventional wisdom would have it – the wheels of the economy should start moving again. But they don’t. Or they do, but it’s clearly not what everyone is hoping for.

Low interest rates don’t help much, except financial engineering

After several years of dismal growth (and nonexistent interest rates, way past anything that can be described as a market bottom) the only party in town who has any means to influence the behavior of others, finds out that low interest rates don’t really work. Money costing nothing apparently doesn’t make people consume more stuff and businesses make investments. All it does is inflate asset (including home) prices and lower the bar on financial engineering for businesses.

Coercing market participants to invest and consume

If giving out effectively free capital doesn’t spur investment, it must mean that the cost of external capital is not the problem. It’s people’s unwillingness to deploy their own capital. What if we try to coerce people into consuming and making investments by punishing savers.

The ramifications

Money costing nothing for an extended period of time (years past cycle bottom) is a HUGE anomaly, yet we as humans get used to something pretty-pretty-pretty-fast. So this is now “normal”. In fact, it has been “normal” for years now. Enough to have filtered through to almost every excel spreadsheet, feasibility analysis, investment strategy and decision. Projects that would never have been undertaken in “old normal” circumstances, have gotten greenlit, en masse. Same for assets bought. Now we are seeing some major economies going from ZIRP to NIRP. The central bankers are probably hoping this makes for good investment, will probably eventually bring about inflation and growth, and – most importantly – won’t be unravelling in a disorderly fashion. Seems to me like we’re living through the greatest malinvestment boom of all time. I don’t see how the unwinding of this can be pretty.

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