Generally, investment bankers have been pleased with central bank policy over the past five years. So why are investment bankers happy with central banks?  There are two main reasons.

First, investment banks benefit from the increased risk taking, trading activity, and deal volume that lower interest rates encourage. Second, keeping interest rates low reduces any interest costs on investment banks’ balance sheets. With these two reasons in mind, it is completely unsurprising that investment bankers are nervous about impending rate hikes in the U.S.

Central Bankers’ Loosening Cycles

As of writing, observers of Federal Reserve policy place the end of the current loosening cycle (a time when the Fed is not increasing interest rates) somewhere around June 2015.  (The June 2015 is squishy; even voting members of the FOMC disagree strongly on when rate hikes will take place.) Presuming the Federal Reserve actually raises rates early next summer, it would mark the end of the current loosening cycle that began September 18, 2007.

A loosening cycle of eight years is quite long.  What makes the current Fed loosening cycle so interesting is that Yellen and company have not only kept rates low for so long, but that they have kept rates so low.  In addition to being the longest loosening cycle ever, the Fed has interest rates at the lowest levels in history.

Investment bankers, of course, cheer such policy on.  However, are investment bankers really happy with how much savings is missing in the world because of historically low central banks’ policy rates?

A Look at the Numbers

The first graphic shown contains a history of what central bankers across the globe have done with their main policy rate since 1990. Overall, rates have been on a long-term trend downward for some time. The chart also shows that central banks generally think alike, with very little competition for business.

1 Central Bank Policy Rates

Moving on to the topic of interest – savings. When investment bankers encourage the Federal Reserve and other central banks to keep interest rates low, they are adversely affecting some individuals. Chief among those adversely affected are savers, a large portion of whom are young workers and elderly or soon to be elderly Americans.

By how much have central bankers adversely affected savers? The following two graphics have the answer. (A note on the numbers: interest income statistics by country comprises a number of estimating procedures; the following numbers are best interpreted as rough estimates.)

The first graphic puts the missing interest income at about $1.6 trillion in 2014, or about 2% of global GDP. The second graphic looks at the missing interest income on a cumulative basis.  The cumulative missing interest income (savings) is around $7 trillion (2009 to 2014). The places where savers have been hurt the most are in Europe ($1.5 trillion), the U.S. ($1.4 trillion), and China ($800 billion).

2 Missing Interest Income

3 Cumulative Missing Interest Income

Is the Missing $7 Trillion Worth It?

How can investment and central bankers argue that the global economy is better off without the $7 trillion? The answer is that investment bankers and like-minded individuals think the global economy has been boosted by at least $7 trillion. Is there evidence that the global economy has been boosted by $7 trillion? The honest answer is – no.  There is literally no evidence.  In fact, if one simply takes correlation as evidence, the current economic situation is much worse than historical recoveries would have predicted.

Therefore, whether hurting savers has helped the global economy comes down to presumptions, not evidence.

The Question at Hand

Getting back to the question posed originally – are investment bankers happy with how much savings is missing in the world? The answer is probably yes.  Investment bankers, as a group, see the missing $7 trillion as more of a “thank goodness that cost is not there” situation. Whether they are right that hurting savers by $7 trillion is worth any potential benefit depends entirely on your assumption about the state of the global economy.  It has nothing to do with evidence.

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In the financial world everything is competitive.  Going along with the culture, of the three major sectors – investment banking, private equity, and hedge funds – where has employment expanded the fastest?  Here’s a look at employment growth by these three sectors since 2008.

Total Employment Growth Since 2008

In total growth terms, private equity has experienced the strongest recovery, up 4.3 percent since January 2008. In second place is hedge fund employment, up 3.3 percent. Coming in last is the investment banking sector, still down 4.7 percent.

1 Growth in emp

Employment Growth by Month

The total growth outcome leaves some questions.  The following is a look at employment growth since 2008 by these three sectors broken down by month.  Some interesting trends emerge.

First, the recovery has not been smooth for any of the three sectors, although private equity comes somewhat close.  The investment banking sector has gone through the choppiest recovery when measured by magnitude and frequency of declines.  The sector reached a low of -9 percent growth in both January 2011 and May 2012.  The best growth figure the sector has had since 2009 (relative to 2008) was in August 2010, where it was almost flat, to where employment stood in January 2008. The smoothest recovery has occurred in private equity.  The sector bottomed out at about -4.6 percent in May 2010.  The sector’s recovery has been relatively non-choppy, with consistent gains since May 2010 (with the occasional hiccup).

Second, the timing of the recession’s effect was somewhat different for all three sectors. The investment banking sector peaked in August 2008 at 2 percent. In contrast, hedge fund employment peaked in October 2008 at 8 percent followed by private equity employment, which peaked in December 2008 at 2 percent.

The bottoms did not coincide either, with investment banking bottoming out in September 2009 at -8 percent (at least for the initial bottom), hedge fund employment in November 2009 at -13 percent, and private equity employment reaching the bottom around May 2010 at about -5 percent.

Finally, investment banking employment growth continues to lag, while hedge funds and private equity are taking off.

2 total emp change since 2008

The Investment Banking Sector’s Trouble

What’s behind the weakness in the investment banking industry? One main force appears to be most influential in the investment banking industry’s troubles.

The detrimental factor is the passage and implementation of Dodd-Frank in July 2010.  Interestingly, employment in the investment banking industry shows as clearly being adversely affected by Dodd-Frank.  In fact, employment in the investment banking industry was just about positive in July 2010.  Following passage, employment in the industry went south quickly.


Overall, private equity is in first place for employment growth (up 4.3 percent) among the three large investment industry sectors.  In second place is hedge fund employment (up 3.3 percent).  Last place belongs to the investment banking industry, still down 4.7 percent from where it was in January 2008.  Only time will tell if the investment banking industry will ever catch up with its finance industry cousins.

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It’s been well over a century since there was a question about where the most powerful and innovative businesses were located.  Over this time frame the United States has been the leader in military might, has been innovative and productive, and has had the most influential financial system.

That is changing, however.  And it’s changing quickly.

Here are three graphics that show why markets increasingly view the American economy as a “has been,” heading in another direction – China.

Global Employment Growth – 2007 to Current

Perhaps surprisingly, the behemoth of the group is not business in the U.S. or the E.U., but China.  The dominance amounts to the location of about half of all global jobs created since 2009 (sample is 65 countries; see table that follows).  Overall, of the approximately 102 million in net new jobs, 53 million have been created by individuals and businesses in China.

Far behind in second place are businesses and individuals in Indonesia at approximately 14 million.  Rounding out the top five are Turkey at 7 million, Philippines at 4 million, and the United States at 400K fewer than the Phillippines.

In a somewhat sad note, the other end of the net job creation scale is heavily comprised of E.U. member countries, including Spain at -2 million net new jobs, Greece at -1 million, Italy at -800K, Portugal at -600K, and Romania at -400K.

Growth in Employment since January 2009

IB-Global Employment Growth



The second graphic shows the relatively mediocre performance of the American economy based on productivity.

On top, in terms of productivity, are workers in China, having experienced productivity growth of nearly 38 percent since 2009.  Next on the list are workers in Indonesia at 15 percent growth.  The remainder of the top five productively growing economies include Russia at 11 percent, South Korea at 9 percent, and Spain at 8 percent.

On the other end are the U.K. at 1.6 percent, Italy at 1.9 percent, and Switzerland at 2 percent.

The lackluster American experience is clearly shown with productivity in the U.S. smack dab in the middle at 6 percent.

Productivity Gains since 2009

Employee Earnings Growth

The third figure supporting the view that markets are increasingly giving American economic conditions a ho-hum view is employee earnings growth as measured by growth in unit labor costs. As a note of explanation, unit labor costs represent the percentage of output going to workers.  When worker pay is going up as a percentage of output, employee pay is usually going up. Unit labor costs have grown the fastest in China, up 65 percent since 2009.  Other high-growth earners include workers in Indonesia (up 47 percent), Australia (up 13 percent), South Korea (up 7 percent), and Canada (up 7 percent). On the south end, as with employment and productivity, business conditions in E.U. member countries look terrible.  On the bottom is Spain at -9 percent, Japan at -5 percent, and Switzerland at 1 percent.

Unit Labor Costs since 2009

Overall, although the U.S. still has a very influential military and large economy, the recent growth trends have led markets to increasingly abandon the U.S. as a global leader for growth, instead switching attention to such countries as China and India.

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The Global Retail Sales Recovery

September 1, 2014

Over the past thirty years there has been an emergence and almost deification of retail sales as the driver of economic growth.  For instance, in the U.S. it is quite common to hear economists talk about how 70 percent of GDP growth stems from consumer spending and therefore if consumer spending dries up, so does […]

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Money Supply and Equity Market Performance Since 2007

August 18, 2014

Financial market observers, investment bankers chief among them, have long theorized about the relationship between the growth in the money supply and the performance of equity markets. Here’s an empirical update on the discussion. Money Supply Growth The first chart below shows the growth in money supply by country since 2007, as measured by M2.  As […]

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A Look at the Federal Funds Rate by President

August 4, 2014

Market observers (investment bankers chief among them) have long debated how political Federal Reserve policy is.  Some economists think officials at the Federal Reserve are completely immune from political pressure, akin to the way some legal observers think Supreme Court justices are impartial observers.  Others, perhaps the more enlightened ones, see Federal Reserve policy as […]

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The Financial World’s Biggest Numbers

July 21, 2014

Not that long ago, politicians and economic leaders trumpeted the idea that they had prevented the worst economic collapse since the Great Depression.  In the same breath, they generally gave the impression that they had taken steps to prevent another financial collapse similar to the 2008 financial crisis.  Those steps apparently encompassed punishing banks with […]

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