The amount of debt paying a negative yield now stands at a staggering $17 trillion worldwide. This is something that, growing up as an economist, I was told could never happen: An increasingly connected world was supposed to make it easier, not harder, for capital to find a higher return — and besides, negative yields were thought to be impossible.
Clearly this received wisdom was wrong. Yet so is a lot of current thinking about negative interest rates. The problem is not necessarily a surplus of capital, but a shortage of labor.
There are various hypotheses attempting to explain the development of negative interest rates: expectations of a recession, a global growth slowdown, the growing search for safe havens, the notion that a lot of corporate investment involves less physical capital than it used to (compare the General Motors of yore to the Facebook of today). Without dismissing those possibilities, I would like to add to the pile by thinking more specifically about the difficulty of starting a business.
Venture capitalists will tell you that there are plenty of great ideas; what’s lacking is execution. There simply aren’t enough talented founders to go around. Indeed, economic research shows that the number of new companies has been slowing down. That is a troubling sign for the economy, and it also may help explain those negative yields.
Consider this scenario: You are invested in German bonds at a negative yield. This is not a very attractive proposition. Yet maybe you are already heavily invested in German and US stocks. And since stock markets move together more than before, due to globalization, you may be reluctant to raise your level of risk. Furthermore, in the US, by far the single largest equities market, the number of publicly traded companies has been shrinking dramatically.
So you might seek out less correlated equity investments that will give you a higher return. In particular, you might consider investing in venture capital. That is one way of investing in new companies.
But while new companies can eventually become highly profitable, most of them fail. Under one estimate of the return to venture capital, perhaps only 20% of funded projects succeed, and that is in the portfolios of the top venture capital firms. (The estimates vary considerably, but everyone agrees big winners are hard to come by.)
Now consider a scenario from an alternate universe: There is greater opportunity and mobility all around. Educational inequality is being addressed. There is less discrimination against women, minorities and other groups. America has a sensible immigration policy, and its cities are taking steps to become more affordable. All of this makes it easier for startups to attract and keep talent.
The result is that there is a lot more talent for startups. When it comes to venture capital, rather than having 2 out of 10 companies do well, maybe it is 3 out of 10, with more mega-winners too. That brings a big increase in returns, roughly 50% more, if the new talent is proportional in impact to the old.
Under this scenario, capital would flow out of negative yield securities and into the venture arena, or into other ways of starting and funding new companies. It is then probable that yields on government securities would move into positive territory, to attract the funds from portfolios. In other words: The great stagnation in returns stems from a stagnation in finding and mobilizing talent.
There are plenty of lamentations about how the world is squandering human potential. There are also numerous hand-wringing discussions about negative yields. Rarely, however, does anyone note that these two problems are related: They reflect an imbalance between how well we mobilize human and non-human resources.
I am not suggesting that the shortage of talented labor is the only reason for negative nominal yields. But the negative yields are now so widespread that they can no longer be dismissed as an aberration. It is also noteworthy that the US has the most developed venture capital markets in the world, and it has not yet moved into negative yield territory.
I agree with the notion that negative yields are the result of larger structural forces. That’s precisely why the best way to think about them is not in purely financial terms but as a symptom of the difficulty of finding talent.