How do negative interest rates impact leadership and risk globally?

It just came out that the Bank of Ireland and RBS bank have introduced negative interest rates on large deposits. Germany and Japan both have banks with negative interest rates, as well as some of the Scandinavians. That’s got to qualify as a megatrend. It looks like negative interest rates are spreading fast.

We are in uncharted territory. Likely the reasons we have done it are going to have some major unintended consequences. What it does to leadership might be the biggest one of all.

Why would you think that leadership and negative interest rates would be linked anyway? Surely one is about finance, the other about – well leading and leadership. No relationship right?

Well first to negative interest rates. Let’s call that the Big N, just for the sake of convenience. So why go Big N anyway? The economists and central bankers tell us that it is a disincentive for banks and consumers to hold on to their money, so they will go out and either loan or spend it instead. That’s supposed to kickstart economic growth.

Hmm, so far that hasn’t happened. In fact in places like Japan and Europe it seems to have had the opposite effect. Instead there is mounting evidence that consumers, in instead of blowing their savings on froo froos, are actually increasing them (see “Economists Mystified that Negative Interest Rates Aren’t Leading Consumers to Run Out and Spend”). The reason: they can see no economic growth, and they have observed that banks will take their money from them if they keep it in the bank. So they’re scared. That makes them hunker down and save more. Hence growth actually declines. Not what was intended.

And as the Big N hits, currencies are supposed to go down, which then kickstarts growth through increased exports. But that isn’t working either. Instead currencies in developing countries seem to be heading in the opposite direction i.e. up, e.g. Brazil and Turkey. It’s even happening with developed countries like Australia. Another strike against the economists.

We all know that economic growth continues to decline. Let’s call it the end of alpha as we know it. The Big N  exacerbates this by reducing demand. Government regulation adds to this by reducing risk even further and that promises to continue, as e.g. the plan by some politicians to restore Glass Seagall. That may well be justified but it will reduce growth even further.

Instead of investing for the future the trend is for companies to repurchase their own shares. That increases EPS but reduces long-term growth potential. Leaders are reducing risk, and propping things up by financial engineering rather than innovating and investing. So CEOs, just like consumers, are hunkering down too. Leadership is becoming timid, limited and focused just on the short-term rather than on visions for improvement.

One straw in the wind. Goldman Sachs, the global growth and profitability champion whose revenues and profits are both declining precipitously. The same thing is happening globally both to financial and other companies. Globally CEOs are pulling in their horns, investing less, innovating less and taking less risk. That’s the reason for the end of alpha as we know it. CEOs are opting for safety rather than venturing, financial wizardry over forging new paths. The Big N is exacerbating this trend.

Behind all this is declining population growth and in most developed countries, actually population declines. The Big N and population decline seem to be linked. If you think the economy won’t grow you put off having kids. That’s leads to declining consumer demand over time and declining growth. It’s a vicious circle.

Safety nets are becoming less effective. Almost all social security systems globally are in disarray and actuarially insolvent. Insurance companies aren’t able to meet their payment commitments to their insured clients because interest rates are too low for them to get the returns necessary to make their insurance commitments. Banks are in trouble because interest rates are too low for them to offer high enough returns to depositors and make a profit themselves.

Meanwhile, despite popular beliefs to the contrary, US entrepreneurship is on the decline (see “The decline of American entrepreneurship — in five charts”). Of course we still have entrepreneur heroes like Jeff Bezos and Elon Musk, but in general they are a declining minority of people.

It might look as if this is just a private sector phenomenon. But the public sector in all countries is also impacted by the same leadership trends. Countries are becoming less liberal or more illiberal. Amazingly the trend is now away from globalization, free-trade and growth. Public sector leaders are also embracing more limited goals for leadership even while averring that they want growth.

Amidst all this it’s difficult to see where the growth will come from that will lift poor people out of poverty. More limited goals means less growth and less to redistribute.

The Big N coincides with and exacerbates the narrowing of leadership globally. We are all on the downside of a long slope following the expansive visions of the last decade of the 1990s. The 2000s so far are the fin de siècle aftermath.

Only an exogenous short sharp growth shock can get us out of the current plateau and decline. Hopefully it’s going to be one that like I have already posited in a previous post, namely that space exploration is poised to become the next global engine for growth.

Hopefully.