John Maynard Keynes was a 20th Century economist most famous for his work on economic cycles. His revolutionary idea for the government to lower interest rates in order to increase demand and stimulate employment set the foundation for current monetary and fiscal policy. In The General Theory of Employment, Interest and Money, Keynes lays out a vast and ground-breaking economic model. But given the recent state of our economy, political backdrop, and changes in societal moods, a seldom referred to phrase – “euthanasia of the rentier” – taken from the appendix seems especially relevant today.
Rentier is not in common use today, even though economists invoke “market rent” as a prominent feature of monopoly power by major corporations today. As used earlier, rentier referred to the landed gentry class of the 19th Century. The argument is that rentiers did not add to the economy but rather exhausted their capital because of a lack of re-investment. Even Marx identified Industrial Capitalists as useful, as they reinvested money back into their business, a key feature of productivity enhancement and growth.
Euthanasia has a tumultuous recent political history in the U.S. It was first used in the 1640s in England, as a combination of two Greek words – “eu” meaning good + “thanatos” meaning death. By the time Keynes wrote his comments, England had been allowing legally sanctioned mercy killings for decades, as such euthanasia had a similar meaning to its current use.
Keynes viewed the euthanasia of the rentier as inevitable. His focus was on achieving full employment, as underemployment was one of the largest societal problems of his time (this was published in 1936). One of the key ideas was that a reduction in the rate of interest would increase the employment rate. Thus, he argued interest rates would be continually reduced over time to increase employment, which would squeeze out the rentier.
Why bring up an 80-year-old economic text? The similarities in the economic backdrop that Keynes laid out for the euthanasia of the rentier are strikingly similar to the current investing environment.
First, Keynes argues that interest rates would be continually lowered as policy makers and politicians would favor increasing employment. Interest rates have both increased and decreased since his prediction in 1936, but over the last 40 years interest rates in the United States have fallen dramatically. There are many factors that have contributed to lower interest rates, the most prominent of which has been the decline in inflation. Regardless of the reasons, investors today are forced to deal with an environment of very low interest rates. The chart of the yield on the 10-year U.S. Treasury below well illustrates the destruction in the savings power of a dollar.
Keynes states that along with lower interest rates, there would be lower marginal efficiency of capital. This is economic speak which translates into, continually throwing money at a problem will simply require ever larger amounts of money to be thrown at the problem to get the same results. The chart below tracks the growth in the Federal Reserve’s (Fed) Balance Sheet (money thrown: blue line) versus the velocity (impact: brown line). Money thrown has increased almost 5x, and the impact of that money is now about half as effective. Lack of velocity suggests stagnant capital or a lack of economic investment. This is a prescription for low economic growth, another factor leading to low interest rates.
Lastly, Keynes predicts a situation in which “the use of capital instruments would cost almost nothing.” This brings to the forefront two trends. First, there is almost $16 trillion of debt globally that has a negative interest rate. This would flabbergast even Keynes, as he states clearly “that the rate of interest can never be negative.” Also, in the U.S., our deficits are growing, but the outstanding debt in the public markets is growing at a much slower rate. To be clear, the United States Government ran the largest deficit on record for fiscal 2020 at $3.2 trillion. However, the Fed purchased over $2.0 trillion of outstanding U.S. Government debt at the same time, indirectly offsetting the growth and government debt required to finance the deficit. This $2 trillion was the amount spent by the U.S. Government on COVID relief. When the Fed monetizes debt in this fashion, it increases the amount of cash in the system and provides a boost to the financial markets. By purchasing vast amounts of outstanding U.S. Government debt, the Fed places downward pressure on interest rates.
The conditions are set. More importantly, a quick review of one’s financial statements reveals how much harder it is to live off of one’s savings. As interest rates in general have trended lower over the years, a portfolio does not have the same income-generating capacity as in the past. The table below shows the annual income of holding a 10-year U.S. Treasury, equities (represented by the S&P 500), or a portfolio that is half of each. The income generating capability of a $1 million portfolio has declined dramatically.
Keynes was correct in his prediction of the euthanasia of the rentier, as that class essentially died out after World War II. Lower interest rates, a drive to an industrial society, and massive programs to re-build Europe, all but ended the landed gentry. The old negative connotation of rentier was replaced, as the word came to mean a person that gains income from ownership or control of assets that generate economic profit. Or, an investor.
The current backdrop, while challenging, does not have to lead to the euthanasia of the investor. Most investors are facing a similar problem: the inability to generate income from their portfolios to maintain a comfortable living while ensuring their savings will not run out. At Crawford Investment Counsel we have helped investors navigate 40 years of turbulent markets, with a specialty in income-producing equities that grow their dividends over time. We believe we can identify alternatives to help investors increase and grow income from their portfolio.
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