#76. The point of no returns


Bonds trading at negative yields now equate to almost half of all Western sovereign debt. Government bonds, offering both safety and a reliable income, have traditionally been the bedrock of pension systems, so the elimination of returns is destroying the provision of pensions across the world.

In Britain alone, pension scheme deficits are reported to have reached almost 50% of GDP after the latest knee-jerk cut in policy interest rates.

The destruction of pension provision is just one example of how reckless monetary policy is undermining the real economy. By keeping otherwise-failed businesses afloat, monetary largesse has undermined the essential “creative destruction” required to free up both market share and capital for new entrants. Markets are no longer able to put a price on risk.

Markets distorted by reckless polices are no longer capable of meeting the business investor’s key needs, which are to weigh risk and return.

Making an epic disaster

A couple of years ago, I was contacted from Hollywood with a somewhat unusual request – a scriptwriter was looking for help with the plot of a disaster-movie on the theme of economic catastrophe. I was on holiday at the time, and I don’t know if my cursory thoughts helped him.

But I realise now that no flights of imagination were necessary – all he needed to do was watch the conduct of the economy under today’s powers-that-be, and then extrapolate into a not-very-distant future.

After this beginning, you might expect me to remind you that an addiction to debt, and to countering the dangers of excessive indebtedness with cheap money, have turned the global financial system into a gigantic Ponzi scheme which is destined to end as all such schemes do. You might expect me to point out the consequences of deliberately-induced hyperinflation in asset markets.

I’m not, though, because readers know all this. It is surely obvious that the financial system is heading for policy-induced disaster. It is equally obvious that potential crash-triggers are proliferating across the system.

Instead, my focus here is on the consequences for the real economy of the grotesque mismanagement of the financial system. The mad magicians of monetary policy, not content with trashing their own financial bailiwick, are wreaking havoc in the real economy of goods and services as well. A string of mechanisms, vital to the functioning of the real economy, are being destroyed.

Killing the future

Here are two striking figures which illustrate the consequences of monetary madness. First, and according to the Financial Times, the $12.6 trillion of bonds now trading at negative yields equate to almost half of all Western sovereign debt. This sovereign debt is the bedrock of private (including employer) pension schemes around the world, because pension schemes require both the security provided by government debt, and the regular and predictable income received from fixed-income investments.

Amplifying this point, one consequence of the Bank of England’s latest (and surely unnecessary) rate cut has been to increase the deficit in British private pension provision to £945bn (which, incidentally, is about 50% of GDP).

Both of these numbers are gigantic. If half of all sovereign debt delivers negative returns, pension provision right across the West is no longer viable. The British private pensions deficit is in addition to a shortfall, generally put at about £1,000bn, in unfunded public employee pension provision. In theory – though the practice might be problematic – the taxpayers of the future are likely to be bled white just to keep the pension promises that governments have made to their employees. This may or may not be possible, but it surely rules out any taxpayer bail-out of private pension provision.

The British pensions issue is part of a broader national malaise which is looking increasingly existential. A forthcoming article will explain why, in my analysis, the British economy as a whole is looking increasingly unsustainable. Here, I focus on the global (or, at least, the pan-Western) consequences of monetary madness. One of these consequences is the destruction of our ability to provide for old age.

We are not simply dismantling the system of pension provision, which is bad enough in itself. Even worse, policy madness is stealing the future security in which millions of people have already invested.

The point of no returns

This problem is a wholly logical, direct and entirely predictable consequence of “low or no” interest rate policies. Interest rates determine the returns that investors make on fixed-income instruments. Pension schemes rely on these returns to meet future pay-out requirements. So “no returns” means “no pay-outs”. Well done, policymakers – you have just destroyed the futures of millions of people.

Some of this was already pretty obvious. For a start, annuity rates collapsed when rates were first slashed in 2008-09, and monetary policy has been destroying savers’ wealth ever since. But only now are the full implications for pension provision emerging.

Obviously, if someone buys a bond yielding 5%, his return is pretty much 5%, plus or minus any capital gain or loss that he makes on the principal. So a 0.5% yield equates to a 0.5% return – and you cannot run a pension system on that. A zero yield means a zero return, putting the final nail into the lid of the pensions coffin. A negative yield means that capital is being cannibalised.

Adios, pensions.

Of course, an investor in a nil- or negative-return instrument can still make a profit, but he can only do so on the basis of “greater fool” theory. This says that buying something overvalued can be profitable if you can sell it on to someone else (the “greater fool”) at an even more overvalued price. Buying a bond yielding -0.1% can be profitable, then, if you can sell it on to someone else at a yield of -0.5%.

This profit, however, is purely fortuitous, and is not the same thing as a return. It is not a reliable, predictable and continuing return on investment, on which stable pay-outs can be based. Rather, it is a purely incidental gain delivered by the continuity of policy excess.

Forgive me if I seem to be labouring the point, but we do need to be clear about this. If a pension fund (or any other investor, for that matter) is deprived of returns, it cannot meet a requirement for income. The ability to make a capital gain depends entirely on the indefinite continuity – indeed, implicitly the acceleration – of monetary looseness. This distinction between investment returns and investment profits is absolutely critical to what is happening.

Investors? Kindly get lost

Destruction of future pension provision around the world is only one aspect of the massive real-economy distortions being introduced by the mad monetary magi whose only answer to every challenge is to pour in more liquidity.

For a start, this policy is making rational investment impossible. Just like pension funds, both financial and industrial investors need returns, and they need at least some visibility on future returns. This they do not have in a situation of induced hyperinflation in asset-markets. They know that capital put into existing paper assets will continue to escalate in nominal value for as long as the one-trick ponies control the monetary system. They cannot predict the date of the eventual implosion, even if they are aware that this must happen. Critically, though, they cannot project returns on investment in new business ventures either.

One reason why they cannot do this is that monetary madness has undermined “creative destruction”. In the normal course of events, over-leveraged, out-dated or simply badly-run businesses go bust, which both creates space and frees up capital for new entrants. This isn’t happening, because ultra-cheap money keeps throwing lifelines to businesses which, under normal conditions, would have failed.

In this sense, the monetary authorities have created a gigantic welfare system for the world’s worst-run businesses. Like any welfare system, somebody has to pay for it, the “somebody” in this instance being both the owners of viable businesses and the would-be entrepreneurs who should be creating the next generation of enterprises.

A market which cannot supply returns, and which keeps failed businesses in being, obviously cannot fulfil its required function of putting a price on risk. The investor’s main objective, which is weigh risk against potential return, is thus stymied on both sides of the equation. He cannot realistically anticipate returns in an environment in which returns have virtually ceased to exist – and he cannot calculate risk in markets which have priced risk down virtually to zero.

On top of this, the investor might well wonder what happens when the ageing demographic collides with the inability to provide retirement income. Of course, people denied retirement incomes may well have to stay in work for longer – but all this is likely to do is to put further downwards pressure on productivity, especially in the feeblest economies.

The final question (for now)

Since we have seen how lethally destructive the central banks’ addiction to ultra-cheap money has become, one question remains. Why are they doing this?

(Or perhaps there is a second question – are these people complete idiots?)

Beyond following a momentum that they themselves have created, central bankers seem to be behaving in this nihilistic way for three main reasons.

First, they are trying to help the financial system cope with a global debt mountain that has become far too big even to service, let alone ever repay. They are doing this because they are – probably wrongly – more fearful of a one-off cascade of defaults than they are of the on-going destruction of the value of money.

Second, they really believe that stimulus can shock the world’s real economy back into sustainable growth. No amount of evidence or logic, it seems, can cure them of this delusion.

Third, they are delivering monetary stimulus – the only weapon in their arsenal – because the alternative of fiscal stimulus is not being provided by global policymakers. The explanations for this inaction by governments are, first, that they entered the post-2008 world with fiscal deficits that were already gigantic and, second, that politicians have largely abdicated from the economic arena, dropping the whole mess into the laps of central bankers.


Though I regard central bankers and their associated cheerleaders as “the mad magi” of monetary largesse, it is pretty clear that they are acting as they are as much out of lack of alternatives as out of an ideological commitment to recklessness.

The reasons for this madness, however, are secondary to its consequences. For so long as this recklessness continues, people will be robbed of the ability to provide for retirement, whilst the economy will be undermined by the inability of investors to project returns and put a price on risk.

On the capital side, we are caught between Scylla and Charybdis or, in the modern idiom, between a rock and a hard place. If asset market hyperinflation continues, it will inflict ever greater damage on an economy already trying to function with a concept of returns, without the vital pricing of risk, and without critically-important “creative destruction”.

If (meaning when), on the other hand, asset market hyperinflation ceases, it will crash the system in a tidal-wave of defaults.

Pension savers in particular, most of whom have yet to realise that their futures have been stolen, desperately need the restoration of returns – and so does the broader economy.