After the end of every era, a handful of images tend to linger in the mind. For me, the period of financial exuberance that came to a messy end in 2008 will always be encapsulated by the jobs fair I went to in my final year of university in 2006. I remember strolling from one recruiter’s stand to the next to gather up their extravagant freebies. I got a very nice shower radio from Goldman Sachs. Another company (I forget which) was handing out popcorn machines. There was no real question we would get good jobs; the question was which we would choose.
Of course it didn’t last. The decade that followed the financial crisis was grim by a number of metrics, notably in terms of people’s pay packets. Wage growth across OECD countries was unusually weak. In the UK, real wages grew an average 33 per cent a decade from 1970 to 2007 but didn’t grow at all in the 2010s.
Now we are watching another era come to an end. Not, sadly, the era of tough economic times, but the era in which those problems were accompanied by very low interest rates. Central banks around the world are raising rates to combat inflation. So what will we remember of the age of cheap money?
The answer probably depends on who you are. For homeowners, much lower mortgage payments helped to take the edge off stagnant wage growth. Low rates also helped to boost the prices of homes and other assets. People who owned houses had the weird feeling their properties were earning more than they themselves were. People who weren’t on the housing ladder watched the bottom rung move further away. In the UK, 55 per cent of those born between 1956 and 1960 were homeowners by the age of 30. For people like me born between 1981 and 1985, that figure was just 27 per cent.
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The car market changed too. Instead of buying a new car with cash up front, it became increasingly popular to use “personal contract purchase” schemes which allowed customers to pay a deposit and a monthly fee. This allowed people to drive fancier cars. In the UK in 2006, 46 per cent of new car registrations were financed at the point of sale by members of the Finance & Leasing Association. By 2019, that figure was almost 92 per cent. The UK wasn’t getting much richer as a nation, but you wouldn’t have known it from all the Audis on the roads.
Low interest rates also sent money gushing into loss-making start-ups that promised to grow quickly. From Uber and Deliveroo to quick grocery delivery apps such as Getir and Gopuff, investors subsidised people’s taxi rides, takeaway meals and 15-minute deliveries of treats such as beer and chocolate.
Then there was the expansion of “buy now, pay later” companies, which partner with retailers to give customers the option to pay for their stuff via interest-free instalments. This business model was perfectly placed to help retailers drive up sales in an era in which young consumers were feeling the pinch in their pay packets. Swedish company Klarna, for example, has said US retailers that offer customers four interest-free instalments report a 68 per cent increase in average order value and 21 per cent higher purchase frequency. A survey by the US Federal Reserve in 2021 found that while 78 per cent of buy-now-pay-later service users did it for convenience, 51 per cent also said it was the only way they could afford their purchase.
It would be overly curmudgeonly to say the opportunity afforded by low interest rates was entirely frittered away on services like these. Low rates also helped to foster important investments in renewable energy and to underpin the shale boom in the US. But I will remember the decade as a time when economic stagnation came with a veneer of affluence. Money was tight but people could summon cheap rides and buy things even when they couldn’t afford them.
These business models are now under strain. Uber’s and Deliveroo’s share prices have tumbled. Rapid grocery delivery apps are closing down or merging. The valuation of Klarna, once Europe’s most valuable private tech company, has dropped from $46 billion (€46.7 billion) to $6.7 billion.
For that reason, I think the lasting image of the era of cheap money for me will be the recent announcement that customers can now pay for a Deliveroo takeaway in instalments via Klarna. Deliveroo and Klarna say this isn’t problematic, given that plenty of people buy takeaways with credit cards. Still, it’s hard to escape the impression of two drunks propping each other up at the end of a long party. – Copyright The Financial Times Limited 2022
