Natixis: Europe's 'Euthanasia of the Rentier' Isn't Worth It

Hurting savers without helping much else.

European Central Bank President Mario Draghi And Key Speakers At Euro Finance Week
Photographer: Martin Leissl/Bloomberg

"The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest. ...

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital."

—John Maynard Keynes, The General Theory of Employment, Interest, and Money

There's no intrinsic reason why central banks are obliged to provide an interest rate environment in which savers are entitled to a positive real return. As famed economist John Maynard Keynes once posited, the economy would be much better off if rentiers—people living off income generated from property and financial assets—were figuratively euthanized via lower interest rates. 

The state of the saver, in other words, ought not be the foremost consideration for those charged with nursing an economy back to health.

It's a point worth underscoring after Bundesbank President Jens Weidmann told the Financial Times that "People are not just savers"—a declaration that shocked the financial community given Germany's previous critiques of European monetary policy on these grounds.

The European Central Bank has pushed real interest rates to about zero, a level that Natixis SA's Chief Economist Patrick Artus deems tantamount to Keynes's prophesied "euthanasia of the rentier."

There is a trade-off to this low interest rate environment. Chiefly, savers experience a negative income effect that can crimp spending.

But this trade-off is only justifiable if it does one of three things, according to Artus: expedites the deleveraging process by boosting economic growth rather than credit growth; makes up for a prior period in which rentiers extracted excessively high returns; or fuels a pick-up in business investment by removing a key obstacle: an onerous cost of credit.

In aggregate, however, Europe's private and public debt-to-GDP ratios have not significantly moderated in response to the low interest rate environment. 

Source: Natixis Securities

This development can partially be attributed to austerity measures that crimped the economic growth and the denominator in the debt-to-GDP equation. However, Artus also expresses a more fundamental qualm with the ability of super-low interest rates to spur a reduction in indebtedness.

"The very low interest rates have result[ed] in only a very slight reduction in debt ratios, because they make those ratios sustainable," he writes. "If the 'euthanasia of the rentier' makes it possible not to correct very high debt ratios by making them sustainable, its effectiveness is debatable, because normally it makes it possible to rapidly reduce debt ratios at a small cost for borrowers."

This dynamic is what has led some economists, namely Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, to conclude that low interest rates "become self-reinforcing."

Ever-increasing debt loads in response to central bank stimulus mean that policymakers don't need to press down as hard on the brakes to sufficiently slow the growth of aggregate demand, thereby perpetually prolonging this so-called euthanasia of the rentier.

Artus also concludes that since 10-year sovereign bond yields approximately tracked nominal growth for much of the past decade and a half through 2014, this financial repression can't be justified on the basis of correcting past indulgences:

Source: Natixis Securities

In addition, capital spending hasn't been restrained by excessively high interest rates, he finds, though residential investment may have been dampened.

"We believe that the euthanasia of the rentier cannot be justified simply to stimulate housing investment, if the other justifications for the euthanasia of the rentier (deleveraging, compensation for past rents, a pick-up in corporate investment) are not present," concludes Artus.

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