WHY and HOW THE US ECONOMY IS COLLAPSING?
Corporate microeconomic policies of
capital misallocation (implemented in an attempt to appease investors) are
negating all of the intended benefits of Fed policy. This means we are fully reliant then on
fiscal policy which, as we already discussed, is off the table for as far as
the eye can see. And so even if we accept that
all existing economic policy frameworks (fiscal, monetary, microeconomic)
really do have the very best of intentions we are still effectively dead in the water.
By Thad Beversdorf via FirstRebuttal.com,
Here only extracts of his art in: http://www.zerohedge.com/news/2016-09-16/88-probability-we-just-entered-recession
My last piece
“The Matrix Exposed” generated a bit of a stir. And as per usual
the PhD’s had some fairly colourful things to say to
me regarding the notion that
more money and more credit may actually stall an economy. But look
I’m not trying to be offensive to anyone. I’m simply making a case that
when consumer credit becomes the basis of growth, well you have a real problem.
And that is a pretty reasonable argument even without the hoards of
data backing it up.
A allow me an attempt to mend some bridges. Let’s start by
looking at the various existing frameworks that drive economic policy. We have
Monetary policy (the banks), Fiscal policy (Congress), Microeconomic policy
(Corporations). So let’s look at each.
Let’s begin with Fiscal
policy.
The very first issue that should
jump out to everyone is that Congress has been utterly ineffective for almost 2
decades now. That is because the partisanship has become so intense that
there simply seems no room for compromise in an effort to get any reasonable
piece of legislation done. What we are left with is a slew of outdated
fiscal policies. Perhaps most detrimental is
a corporate tax rate nearly twice that of many other developed nations.
The problem with relatively (to other nations) high
corporate tax rates is it means that any domestic investment, everything else
equal, has a significantly longer breakeven point. Said another way, the return on
domestic investment is much lower than the return on foreign capital investment
(ceteris paribus). This is a very intuitive concept, easily digestible by
all. The implication is that the relative level of corporate tax rates here
in the US incentivize corporations to invest elsewhere.
And corporate tax, because
government transfers, have become such a
robust part of the societal fabric. We need the high corporate tax
level for the transfers but the transfers are in part a result of the high
corporate tax level. This quickly becomes a highly sensitive
political point of dispute. And again with Congress completely locked
down by partisanship there is essentially zero
probability of any significant legislation (either tax cuts or spending
initiatives) being passed anytime soon. And so Fiscal policy is
off the table.
Now let’s look at Monetary
policy and the Fed.
If you follow
my research and writing you’ll know that I’m not the Fed’s biggest fan.
That said,.. how does the Fed affect the economy? [ is the question.] Well
it does so through interest rates and money supply. Now the major problem
with monetary policy is that it attempts to stimulate economies by
incentivizing capital allocators (corporations) to be productive. It does
so by essentially dictating the cost to borrow, which flows through to
breakeven point and thus return on investment. It also increases the
effective money supply in the economy (through credit i.e. fractional reserve)
in an effort to kickstart a demand side that then incentivizes capital
allocators (corporations) to be productive.
By being productive I mean initiating domestic capital investment, which should lead to jobs and
thus demand via improved incomes; and the boom cycle begins. And the
Fed had some success historically. But Fed/Monetary policy has been ineffective during its
latest recovery program post financial crisis. Why? Well when
we look at things like corporate debt levels we see that Fed easing did incentivize
corporations to borrow but what they did with that capital countered the Fed’s
objective and this is the main problem with monetary policy. It is indirect and requires allocators to
play along and this time they didn’t.
And so when we look at what
corporations did with that money we find the broken mechanism of monetary
policy.
Rather than initiating productive domestic investments a
significant amount of those funds went to dividends, buyback
and foreign capital investment. None of which hit on the Fed’s objective
for easing monetary policy. And so while the Fed may have been
genuine in its attempt to stimulate the domestic economy, it was reliant
on corporate microeconomic policy to follow suit. And that simply
didn’t happen.
Let’s visualize this
story with real data. Open chart : http://www.firstrebuttal.com/wp-content/uploads/2016/09/Screen-Shot-2016-09-15-at-1.17.32-PM.png
Here’s
the Fed’s implemented monetary easing post financial crisis.
Next chart shows that Fed
policy did incentivize capital allocators (corporations) to borrow. OPEN: http://www.firstrebuttal.com/wp-content/uploads/2016/09/Screen-Shot-2016-09-15-at-1.12.07-PM.png
Next chart shows that corporations have been increasing
dividends as their borrowing increased. OPEN Dividend Payout ratio at: http://www.firstrebuttal.com/wp-content/uploads/2016/09/Screen-Shot-2016-09-15-at-12.52.40-PM.png
Next chart shows that corporations have taken buybacks to
record levels as borrowing increased. If you summate divs and
buybacks you’ll note it is more than 100% of net income. OPEN Baybacks to Net income : Trailing twelve months at: http://www.firstrebuttal.com/wp-content/uploads/2016/09/Screen-Shot-2016-09-15-at-12.53.29-PM.png
Next chart shows the increased
debt is used almost exclusively to buy back shares (cash distribution – the most inefficient use of capital).
SEE CHART BUYBACKS ARE MAINLY FOUNDED by DEBT at:
http://www.firstrebuttal.com/wp-content/uploads/2016/09/Screen-Shot-2016-09-15-at-1.20.35-PM.png
Next chart shows that
real private domestic business investment peaked in Q1 ’15 at a much lower
level than where it was in the late 1990s and has
again been contracting for the past year despite the most extreme monetary
easing in the history of the Fed. SEE
CHART AT: http://www.firstrebuttal.com/wp-content/uploads/2016/09/Screen-Shot-2016-09-15-at-1.01.37-PM.png
This means that the
significant increase to borrowing that was incentivized by Fed policy in order
to stimulate productive domestic investment actually went to the most
inefficient use of capital, i.e. cash distributions. And that means the
Fed’s monetary policy objectives failed to be realized.
Next chart tells us exactly what happens. Return on investment and balance sheets
deteriorate. So we add risk while reducing return. An
investing 101 No – No.
The result of perpetually
misallocating capital is that everyone dies in the end. And look I
have sympathy for CEOs. In fact, I’ve given CEOs a pass on criticism.
It is because CEOs are simply pawns in the
system. They are
beholden to what investors demand. And investors want returns.
The problem is that
while this is generally ok on a short term basis as an individual firm awaits
its demand universe to correct, things are different this time. Demand isn’t coming back because all firms have
implemented the same survival policies, which become destructive to both demand
and productivity on the macro level.
The result is
that these corporate microeconomic policies of capital misallocation
(implemented in an attempt to appease investors) are negating all of the intended benefits of Fed policy. This means we are fully reliant then on fiscal policy which,
as we already discussed, is off the table for as far as the eye can see.
And so even if we
accept that all existing economic policy frameworks (fiscal, monetary,
microeconomic) really do have the very best of intentions we are still effectively dead in the water.
So then what in the hell do
we do?
Well there is a
real and viable solution that would require no central banker, legislator or
CEO involvement by creating a fourth policy framework. Let me know if you’re interested in hearing more.
----
Source:
----
===
----
No hay comentarios:
Publicar un comentario