A No-Grow World

Company treasuries are sitting on cash. Investors have cash.

Interest rates, meanwhile, are remaining low for the most part. Is this just central bank manipulation?

Not fully: central banks can set a low rate, but government debt gets placed in the market — and bids to buy it are at low interest rates, with the exception of some countries in the Eurozone (where the interest rate expresses a risk premium that they’ll be forced out of the Euro and devalue).

Welcome to a no-grow world, one where the reason the money stays on the sidelines is that there is no opportunity worth seizing.

That’s not to say that there aren’t opportunities. But many of them don’t need the wash of funds available. Few of them have the returns that make big money interested.

Opening a shop on a high street, or three people in an apartment working on an iPhone app, after all, aren’t very exciting — even though these employ people and feed families.

I am mindful of a comment given to me by a friend who at the time was working for an extremely large global organisation. “If we can’t make at least a £2,000,000,000 business out of it in its first year, it’s not worth starting.” When I asked him why he didn’t have a portfolio of a thousand ventures each striving for £2,000,000, he said “those don’t interest anyone here”.

Meanwhile, of course, when you insist that everything has to be “go big or go home”, risk rears its ugly head.

A portfolio of a thousand ventures has most risks covered. Yes, some of them will fail outright, many will limp along, some will succeed admirably, and a few will blow the doors off with their rise. You could probably bank on making that two billion, more or less.

A single venture, on the other hand, requires that all the risks be assessed and mitigated. It starts slower, it’s managed more closely. Until the risk profile is satisfactory, the money stays on the sidelines — or gets tossed into the most liquid investment there is, government debt, until it’s needed.

(This is why there are so many ads today for investing in non-conventional oil and gas plays: they require bigger blocks of capital, and are high risk. The growth of the shales is limited by capital availability, and it’s why most of the finds will never be commercially produced.)

But all the new debt being written comes with its own price tag. Every ounce of interest — even the low rates of today’s new debt — requires income from somewhere to service it beyond what’s already being collected. Yet the debt is being written because we’re spending more than we collect.

The hope, of course, is that growth in the economy increases revenues (and that the excess spending can be drawn back at that point).

Good luck with that: it’s the very process now underway that’s limiting growth.

There’s only one thing that can unlock this deadlock.

The same thing that unlocked it previously: a sustained burst of cheap energy.

There’s only one problem with that: the chances of supplies suddenly making years of $20/bbl oil available can be expressed as “slim, fat or none”.

We tootled off down the highway for years burning that stuff up. We sent tonnes of it to produce cheap plastic junk that breaks.

Now we’ve got lots of supply, but only at much higher prices. Prices which, in turn, constrain growth, forming risks, that keep capital on the sidelines.

And bankrupt governments.

The era of “big” is over. That’s what a no-grow world really means.


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