rockefeller university, a pre-eminent biomedical research institute with more nobel prizes to its credit than most countries, knows how to run experiments. since its founding in 1901, the university and its scientists have been pioneers in a broad range of fields. from infectious diseases to alzheimer<u+2019>s disease, aids and opiate addiction. but today, the university, like many endowed institutions, has become a subject in a grand experiment run by global central bankers exploring uncharted territory in interest-rate policy and market intervention. in this monetary experiment<u+2014>to paraphrase <u+201c>pogo<u+201d> cartoonist walt kelly <u+2014>we have met the lab mice and they are us. barring a monetary u-turn prompted by the trump administration, our future may not be rosy. since the onset of ultra-low interest rates in 2008, returns to savers, both individual and institutional, have been in relentless decline. they are expected to fall further, even while costs for services like health care and education continue to rise well above the rate of the general consumer-price index. pension plans are increasingly underfunded and the boards of most universities are anxiously discussing the implications of lower endowment returns for budgets going forward. according to cambridge associates, in the decade that ended june 30, 2016, the average annual return for even large sophisticated endowments (those with assets over $1 billion) fell below 6%. with average annual spending rates of 5% or higher, and the inflation-measuring higher education price index growing at an annual rate above 2%, most endowments have lost ground unless they had substantive new giving. this means less research, less scholarship aid and less opportunity for future generations. for scientific research in particular, declines in endowment funding coinciding with persistent declines in government funding would be particularly unfortunate. good scientists know that correlation does not imply causation<u+2014>the coincidence of extreme monetary measures with declining real, or after-inflation returns does not prove that monetary policy has caused returns to decline. but the concurrence should prompt some questions. most obviously, negative real rates<u+2014>below-zero rates, after adjustment for inflation<u+2014>punish bond investors. the more conservative the investment strategy, the worse the punishment, pushing both individuals and institutions further out on the risk curve than they otherwise would or should be. in theory, all prudent investors hold some bonds to provide much-needed diversification and guaranteed income<u+2014>a haven from equity-market volatility. negative real rates destroy this safe harbor. first, the guaranteed income is now a guaranteed loss. second, at very low interest rates, the price of bonds becomes much more sensitive to even small changes in interest rates. in bond speak, the duration of all bonds is increasing<u+2014>making any upward adjustment in interest rates extremely painful. negative real rates may hurt investors in more insidious ways as well. an extremely low cost of capital may result in excess capital investment that in turn results in boom-bust cycles of increasing frequency and magnitude. housing, energy and steel come to mind as recent examples of excessive investing gone bad. shopping malls and retail may well be next up at bat. evidence of this can be seen in periodic blowouts in credit markets. it can also been seen in the sustained increase in the rolling 10-year observed volatility of the s&p 500, which has remained nearly double its long-term average even while implied or expected volatility remains very low. more broadly, a lower cost of capital lowers the bar for returns on capital investment<u+2014>potentially reducing the productivity of capital overall. we might also ask what happens to consumption spending when unprecedented aging in the world<u+2019>s largest economies meets punitive treatment of pensioners. by 2030, rockefeller university scientist joel cohen notes, based on united nations predictions, the proportion of the population over age 65 will hit 20% in the u.s. and 30% in japan and germany, even while expected lifespans continue to increase. that we will have to raise the retirement age seems obvious, but what will this mean for consumption and job growth? there may be a tipping point where low expected returns on savings forces more savings instead of more consumption. whatever the cause, declining returns on investment deplete the coffers of america<u+2019>s most important incubators of science and technology. the grand experiment may well be stimulating demand in some corners<u+2014>but it is undoubtedly killing savers, pensioners and endowed institutions. it may also be impoverishing the elderly and increasing the burden of their care on the young. these are serious consequences indeed. at a very minimum, we should be examining these costs with greater urgency, honesty and analytical heft. if we have to be mice, let<u+2019>s not be blind in the bargain. ms. falls is the chief investment officer at rockefeller university, where she oversees the university<u+2019>s $2 billion endowment.
any relief for the monetary-policy guinea pigs? - wsj
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