We Were the Balance: Looking Back on Low Interest Rates
REVIEW ESSAY
The Trading Game: A Confession
by Gary Stevenson
Crown Currency, 2024, 332 pages
When the rich get richer, they do not spend more—or at least in the right way to stimulate the economy. And low interest rates after the financial crisis benefited the rich disproportionately, keeping the economy sluggish and backfiring as a policy measure. Those are the primary lessons from Gary Stevenson’s The Trading Game, an economics course for our time masquerading as an updated mixture of Liar’s Poker and Good Will Hunting.
Stevenson traded short-term foreign exchange swaps on a desk that was part of Citigroup’s larger fixed income trading operation in London and Tokyo from 2008 through 2014. Citi itself bought Travelers in 1998, a year after the latter had acquired the then premier bond house, Salomon Brothers. All of that adds to the irony that Stevenson’s economic education may have come in the same group that employed Michael Lewis a generation earlier.
If Western economies have endured more anemic growth in the decades following the immediate postwar period, memoirs about trading society’s debts have been a booming industry. The two phenomena may be related.
But Stevenson’s ascent to “the City,” the financial district of London, whose major buildings loom within sight of his childhood home in working-class Ilford on London’s eastern periphery, is an unusual one.
Uncommon math (“maths,” as the English say) skills catapult him to the London School of Economics despite being expelled from high school for selling £3 worth of cannabis in a misguided outlet for his early entrepreneurial spirit. But Stevenson rallies to ace his entrance exams, overcoming the setback and putting himself back on course.
Finally in a school that can deliver him from his impoverished upbringing by vaulting him into one of the buildings in whose shadows he lived as a child, he finds himself among the children of Russian oligarchs and Chinese Politburo members “sent to study simultaneous equations for a few years, before flying home to take over the running of the mother country, perhaps with a few years of working at Goldman Sachs or Deloitte in between.”
Undaunted, he sits in the front of each class determined to soak in as much as he can on his way to a high-paying City job. He returns from his successful first year, however, to find everyone skipping class, using acronyms related to the bond market (ABS, CDO, CDS, etc.), dressed in suits, and spending all their time attending networking events for which he’s socially ill-prepared. “Second year is internship year!” he finally learns from a fellow student from Slovenia.
Stevenson is unable to compete on extracurriculars and in personal polish with students who have been “prepping for this since they were about four. . . . [by having] trekked the Sahara, or led the Junior United Nations, or played the fucking oboe at the Royal Albert Hall.” But he plays up his grades and math skills, stumbling into, and winning, a card game (the trading game) requiring both statistical and psychological skill, including bluffing, that Citi’s bankers organize for students.
Even here there is an odd obstacle, however. The Citi traders, in the final round held at the bank’s offices, can see that Stevenson makes roughly the same mathematical calculations as the others, but bluffs his way to victory. So, in the final hand, they rig the game, dealing his opponents cards that they’d have an impossibly low probability of getting randomly.
Stevenson goes down in flames, but he sticks to his strategy, bluffing the whole way. And that’s exactly what the traders want to see. They confess what they’ve done, and promptly award him victory. With that, he secures the internship and then a job at Citi.
Efficient Markets
The work of his desk generally involves borrowing in a currency at a price where one might benefit from a fall in rates, and lending in one where one might benefit from a rise in rates.
That makes for two highlights in the six-year period Stevenson spends on the desk. The first was lending U.S. dollars for a month and buying them back on a daily basis during the financial crisis when the world was starved for dollars and a dislocation had occurred between the thirty-day and one-day rates.
There’s a risk in every trade, Stevenson reminds us. And the risk in that trade was that the global financial system would collapse. The bet—correct, of course—was that political authorities wouldn’t let it.
Stevenson is floored when his first $10 million in profits for the bank result in a bonus of £395,000. It feels like robbery to him, and although he stays long enough to make himself millions, he leaves a few years later, presumably before insanity and cirrhosis set in as with so many other traders.
Before he leaves, the second trade ensues, and this is the one that contains the important economic lesson. When the turbulence from the crisis calms, everyone expects interest rates to rise and the economy to recover. In fact, the trade on Stevenson’s desk every year from 2010 onward is for economic growth and rising rates, and it winds up being a loser.
Rates, of course, never rose during this period, and the economy never strengthened very much even with (or, as Stevenson argues, because of) the incessant application of monetary stimulus.
Stevenson’s background—and an encounter with the only non-university-educated trader in his group who tells him to throw his books away and look at the world around him—renders him primed to understand that nobody in Ilford and many other places is benefiting much from low rates.
Economists spend years memorizing “representative agent models.” But in viewing the economy as a representative person, Stevenson argues, the models fail to account for precisely how money is being distributed or who spends it.
Accordingly, Stevenson defies the whole desk, betting on the economy to stay sluggish because he knows middle-class and poor people are not only not spending, but are also losing the assets they have.
Stevenson even chooses to work closely with a young Italian trader named Fabrizio, who adheres to establishment monetary views. Fabrizio, or “Titzy,” as Stevenson calls him, is a graduate of Bocconi, “basically just LSE for Italians.” Titzy serves the important role of being “the voice of. . . .Wall Street. . . .[because he] always thinks the market [is] right.”
In response to Stevenson’s assertion that everyone’s broke, and that’s why the economy is stagnant, Titzy imitates him mockingly, “I don ava no fuckina money—Come on. . . . It’s a monetary system. It’s not possible for no one to have any money. The whole thing has got to add up.”
And, at bottom, Stevenson accepts this standard monetary view. But he looks around at the millionaires on the trading desk and realizes that they, and other rich people who can borrow and buy assets, are the beneficiaries of low interest rates. “We were the balance,” he says.
In other words, it’s true that money is being made available with low interest rates—but only to those rich enough to borrow. And as long as rates were suppressed, “inequality. . . would grow and grow until it dominated and killed the economy that contained it. It wasn’t temporary, it was terminal.”
Stevenson finds himself running the euro desk after the ECB offers unlimited loans to banks at 1 percent. And as Stevenson says, “if you don’t control the quantity, then you don’t control the price.” The result was that there was no way of knowing exactly what the interest rate would be on any given day, but it would likely be pinned at low levels.
But with Titzy’s help staying on top of every daily move, Stevenson is able to ride the roller-coaster and become Citi’s most profitable trader.
Sparing the reader the financial details, Stevenson’s bets are informed by the theory that postcrisis low interest rates would perpetuate themselves, and that “[t]here would never be enough spending power in the economy to ever drive prices seriously up.” Only asset prices would go up as rich people spent borrowed money at impossibly low rates on homes and financial assets.
Stevenson’s point is that money isn’t a resource. It isn’t food, oil, a crop, health care, or anything useful by itself. It may be traded for those things, but it isn’t intrinsically useful. And that means allowing it to be borrowed for nearly nothing isn’t necessarily stimulative because those able to borrow it don’t need more of the resources it buys.
Stevenson, for his part, now runs a YouTube channel and is a political activist of sorts, agitating for taxing the rich and wealth redistribution. He’s also continuing to bet on lackluster economic growth and asset price inflation as he did at Citi. Who knows if and when his political activism will cause him to unwind that trade.
Beyond the Balance
We’ve now had a bout of inflation since Stevenson left Citi in 2014, with the U.S. CPI reaching 9 percent on a year-over-year basis in the summer of 2022. But with inflation in the low 3 percent range now and rates much higher, it’s hard to know—it always is—if a new economic regime is at hand.
The basic facts of Stevenson’s argument are incontrovertible. From 2010 through 2019, data from the World Bank shows U.S. GDP rose less than 2.3 percent annualized with short-term rates pinned at virtually 0 percent. Also, for most of the 2010–19 period, quantitative easing caused the ten-year U.S. Treasury yield to sit in the 1.5–2.5 percent range.
Not only were U.S. rates arguably distorted, but the ten-year German Bund carried a negative yield from the spring of 2019 through all of 2020, while the ten-year JGB hovered at or below 0 percent from early 2016 to late 2021. German GDP growth averaged 1.44 percent, and Japanese GDP growth averaged 1.2 percent from 2010 through 2019, according to World Bank data.
Still, this anemic growth combined with increasing inequality may not be attributable solely to low interest rates. Or, rather, low rates might be part of a larger project of shifting power from labor to capital. Western businesses have been reorganized in recent decades for maximization of their stock prices. That sounds reasonable given that they have a duty to shareholders. But in practice it has meant passing over only moderately profitable projects in favor of only the highest-return ones and doing share buybacks when those aren’t available (or also in addition to them). The result of only shooting for the most profitable projects is lower capital expenditures in aggregate.
In general, businesses are being run for the boosting of share prices more than for maximum growth. And businesses with the highest return on invested capital, not necessarily the fastest growth, are awarded the richest share valuations by the market. That’s because profit growth doesn’t mean an increase in returns, if the growth requires significant capital investment. It’s earnings-per-share growth, not plain earnings growth, that investors have learned to care about. And investors are calling the shots.
Businesses would rather return capital to shareholders in the form of dividends and especially share buybacks, which are a more tax-efficient means of returning capital. To be sure, the tendency to return capital to shareholders via buybacks is facilitated by low interest rates. For decades now, and especially during the low-interest-rate period, companies engaged in leveraged buyouts of themselves, borrowing money cheaply to buy back stock. And so Stevenson’s point about low interest rates creating inequality reinforces this new capital allocation regime. But cheap money doesn’t have to be used this way unless other imperatives exist.
So, it isn’t just that money is winding up in the pockets of the rich who can borrow and buy assets without stimulating the economy, as Stevenson asserts. It’s that a new capital allocation regime has gripped capitalism so hard that low rates did not encourage companies to borrow and spend on new projects, but rather to borrow and do buybacks.
Some might think that deemphasizing growth would be bad for the stock prices. But not when it’s combined with a drive to higher profitability. As of this writing, the Shiller PE (price relative to the past decade’s average real earnings) of the S&P 500 is at 34, exceeded only by its late 1999 reading of 44. The market has achieved that multiple with nominal earnings doubling over the past decade while prices themselves have more than tripled.
Moreoever, the Shiller PE has averaged over 25 since 1990. It’s longer-term average, since 1880, is around 17. Investors award higher profitability with higher price multiples. Lower growth, with each increment of growth increasing profits per share, means more to shareholders than faster growth with little or no improvement in profits per share.
Professional investors have communicated their preference for profitability over growth to companies loudly and clearly. Your correspondent long ago lost count of the instances he heard fund managers say they preferred profitability to growth as a mutual fund analyst at Morningstar from 2004 through 2010.
Even Warren Buffett, who limits buybacks of Berkshire Hathaway stock to when the price is low enough (below 1.5x book value), has never expressed displeasure at Apple, Berkshire’s largest publicly traded holding, for repurchasing more than one-third of a trillion dollars’ worth of stock in the last six years and with seemingly no valuation criteria for doing so. Neither have any of Apple’s other shareholders.
In 2013, activist investor Carl Icahn urged Apple to spend more than $130 billion to buy back its own stock, and that’s been the posture of Apple’s holders ever since. It isn’t clear yet whether Apple is investing sufficiently to ensure its future dominant position, but it’s also not clear that investors, concentrating on current returns on invested capital, are worried about that. Perhaps platform companies have advantages that allow them to fend off competition and withstand a lack of spending more than industrial companies. Investors like share-count reduction so much, they’re willing to take it even at seemingly high prices.
The share buyback regime is, of course, a version of a public company doing to itself what a private equity firm might do to it, and low rates facilitate both versions of this activity. The private equity industry, doing what were once called “leveraged buyouts,” piles debt onto public firms in the process of buying all the stock and taking them private. If the firms fail under the weight of the debt, private equity firms usually insulate themselves from the losses by having already paid themselves exorbitant management fees and dividends before the collapse. They sort of own and sort of don’t own (while looting) the firm. If the firms manage to hang on, allowing themselves to be taken public again after the reorganization, it’s usually in the aftermath of massive layoffs.
In a recent example, the private equity owner of Red Lobster sold the firm’s property and began to charge the restaurants rent. But are owners truly owners of the business if they can sell off the business’s property to themselves without any benefit seeming to accrue to the business, and then charge the business rent?
The result of selling the property and imposing onerous rent was the closing of nearly a hundred restaurants affecting roughly thirty-six thousand workers, according to veteran business journalist Gretchen Morgenson. This kind of “asset stripping” makes one wonder if private equity owners are owners or looters, and whether a system that doesn’t punish owners for business failure can be called capitalism. The owner-managers likely paid themselves hefty fees and dividends before the asset stripping, so that closing many restaurants didn’t hurt them too much.
Another trend fostering inequality is the decades-long diminishment of antitrust enforcement. Robert Bork’s 1978 The Antitrust Paradox influenced two generations of lawyers and economists to avoid blocking mergers. The book argued that the Sherman Act established a consumer welfare standard above all others, and that vertical integration shouldn’t be prohibited.
Bork was influenced by economists Milton Friedman and Aaron Director. Friedman, of course, began the shareholder rights revolution, arguing in a 1970 New York Times article that the social responsibility of business is to increase its profits.
As Matt Stoller has argued in Goliath and Jonathan Tepper and Denise Hearn have chronicled in The Myth of Capitalism, Bork extended the argument for leaving business alone and quelling regulation to rolling back antitrust enforcement. The result is that, today, most industries are dominated by a few large players. Those businesses tend to have monopsony power over employees who have little choice over where to sell their labor.
The Biden administration’s efforts to reverse this trend toward consolidation and oligopoly or monopoly have been one of its most surprising, if unheralded, aspects. Besides the administration’s efforts to break up big technology companies, Biden’s third State of the Union Address targeted junk fees, including those imposed by Ticketmaster, owned by Live Nation Entertainment. This left many observers scratching their heads, wondering why he was taking the American public deep into the line items of tickets purchased for entertainment events.
But it’s possible this case, more than others, may have alerted the public to the problems of corporate consolidation. In May 2024, the Department of Justice filed a lawsuit against Live Nation for its vertical monopoly in the entertainment business. The combined ownership of concert promotion and ticket sales gives Live Nation control over venues, artists, and fans. The lawsuit, combined with complaints from Taylor Swift fans and a recommendation of the stock by television stock market personality Jim Cramer for being “the best gouger in the world” (“alleged gouger,” he clarified), may have opened some people’s eyes regarding how lack of antitrust enforcement has allowed companies with extraordinary market power to manipulate prices and harm consumers. In a piece for CNBC, Helaine Olen said what concert-goers have long-known: “The American Economic Liberties Project . . . determined that the combination of convenience fees, processing fees, facility fees and the like could make up as much as 78% of a ticket’s cost. In other countries where venues can use multiple ticket sellers, competitive pressures result in significantly lower fees.”
Last, downward pressure on wages and the increase in inequality also result from neoliberal globalization. In the past two decades alone, economists estimate that millions of industrial jobs and tens of thousands of factories have moved overseas (many to China) from the United States. All of this was accomplished at the expense of U.S. workers in an effort to boost corporate profitability.
The push to elevate return on invested capital and satisfy shareholders is behind globalization and the offshoring of previously well-paid U.S. industrial jobs. Labor is a massive cost input for most businesses, and reducing that cost alters the economics of an enterprise dramatically. Doing so through offshoring, rather than technology investment, is also much cheaper in the short term.
Chris Arnade, in his book Dignity, has chronicled the loss of jobs in the middle of the United States, where there were once thriving secondary cities such as Gary, Indiana, and Portsmouth, Ohio. Part of his argument is that we’ve let Wall Street analysts dictate companies’ cost structures without considering what the effects of those calculations are on U.S. communities or national industrial-base capabilities.
There’s also been a dramatic decline in organized labor in the United States over the past decades. It is difficult to know, however, if that’s the result of typically unionized industrial jobs being offshored or for other reasons. The bottom line is that organized labor in the private sphere, despite recent stirrings, has become a shell of its former self.
Discounting the Future
Still, despite its incompleteness, Stevenson’s memoir captures a crucial aspect of what troubles capitalism and liberal democracy currently. An interest rate is also a “discount rate,” by which future cash flows are translated into present values of assets or businesses. Lowering rates does a number of things. It allows the rich to borrow and buy even more assets, as Stevenson says. But because interest rates are also discount rates, low rates also elevate assets values through the formula most analysts use to appraise assets—discounting future estimated cash flows. That’s independent of cheaply borrowed money pushing their prices higher. Finally, low rates also encourage the private equity model by which financial looters can take over companies with money borrowed cheaply, or companies themselves can repurchase their stock instead of using money in other ways.
All of this puts more money into the hands of people who will not spend in ways that grow the economy and benefit a strong middle class. Stevenson’s argument, incomplete though it may be, provides a good entryway into understanding how an economic system and interest rate regime benefited the rich at the expense of the liberal democratic social contract.