Financial Immortality

Around the turn of the 5th century, St Augustine of Hippo, a Christian theologian and philosopher, wrote in his ‘Confessions’ a whole section (Book XI) devoted to the nature of time. He sought to illustrate how difficult it is to define time and presented it as an enigma. He observed that the past does not exist anymore whilst the future does not exist yet; and that the present does not exist either since it cannot have any duration. He concluded that time cannot possibly exist: ‘If […] time present […] only comes into existence because it passes into time past, how do we say that even this is, whose cause of being is that it shall not be -- namely, so that we cannot truly say that time is, unless because it tends not to be?’ I remember translating this from Latin as a teenager with my father.

Only human beings would feel compelled to agonize over the notion of time. That is because they are acutely aware of their terrestrial temporality. This separates them from any eternal divinity on the one hand, and from other mortal creatures on the other hand. Indeed, studies demonstrate that even animals live in the present moment, with no concept of finitude.

Now consider the relationship between the future and the present in corporate finance. According to the ubiquitous concept of the time value of money, money owned today is worth more than an identical sum in the future since today’s money can be invested to earn an interest rate. The further away in time cash flows are generated, the less worth they hold today. At infinity, cash flows are worth nothing on a present value basis. In other words, the present value of future cash flows withers until it eventually dies.

Everything changes with an interest or discount rate set at nil. In this extreme case, the future is worth as much as the present. The passage of time becomes irrelevant. In that sense, monetary policy at the zero-bound produces some sort of financial immortality since future cash flows never die. But without the constraint of time, there is no incentive for excellence. By setting interest rates at a ‘divine’ level, central banks lead economic actors towards unproductive investments as ultra-cheap capital gets allocated to unworthy endeavors.

Both physical and financial mortality drive individuals’ quest for sublimation. Thus, paradoxically, financial immortality is pushing mankind further away from being a creator of value and towards animal existence. In that sense, the death of the time value of money represents perhaps the greatest economic and human cost caused by the current health crisis. Indeed, the uncontrolled explosion of government debt levels is likely to force interest rates close to zero for decades to come. Sorry kids.

And all this because of humans’ primal fear of mortality.

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