We have long said at MoneyWeek that we think very low interest rates do more harm than good. We think they discourage capital investment, worry people into saving more than they would otherwise, and generally make a mess of what we like to think of as capitalism.
We are much less alone on this one than we used to be. In the magazine this week, Peter Warburton tells subscribers why he thinks low interest rates are killing capital expenditure in the UK. And a note from Skenderbeg Alternative Investments this month makes similar points.
Things have now got to the point, says Skenderbeg, where “negative interest rates are transforming companies from agents of growth production and employment into financial sloths that exist only to borrow money.”
Think about that, and it makes total sense. Last week the papers reported that some €700bn of investment-grade corporate debt was trading on negative yields (largely thanks to central bank bond-buying) and furthermore that two major firms (Henkel and Sanofi) had actually issued new debt at negative rates. They have arranged to be paid to borrow money. Nuts, yes. But that’s what it is.
And if the ECB keeps buying corporate bonds (something the Bank of England is to do as well, by the way) more companies will do the same. Why wouldn’t they? Who wouldn’t lift a few fingers for free money?
Here’s Skenderbeg on this: “to seek profits why go through the laborious and uncertain process of developing new products and seeking new customers when all you have to do instead is simply borrow money from lenders and pay them back less. It is fool proof… and it is infinitely scalable as long as the central bank keeps buying” – which it probably will.
This wouldn’t matter as much as we think it does if the firms borrowing all this money took it and invested it in the future – in training, in R&D and in new equipment. But that isn’t a given. After all, negative rates mean that companies don’t have to create profits to pay back the debt: they have the money already!
So why would they focus on business operation itself? Why not just focus on finding more ways to make money by borrowing money? Why hire inventors and engineers? Why not just hire more accountants? You get the picture. It isn’t a good one.