We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.
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Allister Heath on the great global bond bubble QE has had another effect which is rarely quantified. The Newedge study calculates that 47 per cent of all S&P 500 earnings growth since 2009 has been derived from the interest expense savings from declining interest rates, a large chunk of which has been created by the Fed’s interventions. A puncturing of the credit bubble would send the cost of borrowing shooting up, and thus reverse many of these gains.
We have had the tech bubble (partly driven by cheap credit); we had the property bubble (driven by cheap credit), we now see a bond bubble (ditto)…….
Read the whole article. The CityAM piece is not the first to broach the issue, but as an overview, it is very good indeed.
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Not to gainsay that very thoughtful piece, but there are other considerations which are particularly strong in the case of the US economy.
The “value” of capital is determined by what and how it can be used for productive effects (including improvements in distribution).
That value of capital has been steadily eroded by the constraints on how capital may be redeployed, and by the factors that limit what capital can be used for, both growing out of continuing political intrusions into commercial activities.
The political intrusions have a degree of symbiosis with Managerial Capitalism in which the various levels of management structures attune their functions to harmonize with politically determined social objectives. Simplified: no significant management decisions are made without consideration of politically determined rules, regulations and taxation. In fact, most significant decisions are largely determined by those elements.
Mull over the alternative answers to the question of the use of surpluses (earned surpluses of enterprises – profits) of those enterprises where the beneficial ownership is fragmented and the control over those decisions flows to control by the motivations of managers, which may not match the interests of beneficial owners.
There is capital accumulated in large-scale business enterprises and in many other business enterprises having fragmented beneficial ownership resulting in control by the motivation of managers. What are the dispositions of current “profits” in those enterprises? They certainly are not being fully distributed to the beneficial owners. What are the purposes for the continued accumulations? What will be the effects of the accumulations that exist and continue? Those will probably have direct effects upon the costs of credit in the coming years.
Only 47%?
So the other 53% is the result of other forms of Corporate Welfare and fraud.
And before the cry of “libertarian left” goes up, few people hate the “libertarian” left more than I do (I have fought them for years and will continue to fight them till I am dead).
But I have no love for the Corporate Welfare crowd either.
So where do you reckon to ride out the next storm, Jonathan?
Competition being what it is, the odds are that the bulk of said savings have actually been passed on to customers rather than retained as profits, just as lower raw material costs and other efficiencies are. Indeed, if lower interest rates actually spark increased investment, particularly mal-investment, they will actually lower profits once the new capacity comes on line.
Personally, with that last thought in mind, I am encouraged by the apparent tendency of large corporations to sit on cash and/or refinance debt over the last few years. At least they are not being drawn into investing in unneeded capacity by an artificially low cost of capital.
Re: phwest
“At least they are not being drawn into investing in unneeded capacity by an artificially low cost of capital.”
Compare that position to that taken by the insufferable moron, Ed Balls.
“We should borrow more as the costs are so low..”
As if a Labour government ever plans to pay back any of the debt, and thus assuming that interest rates will always be low – just as the housing bubble could go on and on…
At our last corporate finance department meeting, our CFO spent an hour patting himself on the back for increasing EPS and cash flow through stock buybacks, trading our X% dividend shares for debt at about half that carrying cost. So basically, we are levering up our equity, thanks to the Ben Bernank, rather than borrowing for capital expenditures or other operational strategies that would be aimed at growing both the top and bottom lines. Can’t blame him for doing it … expanding EPS through financial engineering is, at least in the short run, far less risky than operational moves. But, multiplied across the economy this is a very bad development, and explains why capital investment is so weak, and job growth (other than the transformation of full time into part time workers) has been lacking.
I share the concern of earlier comments that cheap funding might lead to malinvestment in capital projects by companies; however, the thing about manipulating the cost of money is that the market distortions that result are probably never the same from episode to episode. In China, credit expansion has resulted in “ghost cities”, but here in the US, at least from where I sit (in one of the top 10 US corporates), it has resulted in an erosion of our equity cushion and has tipped the scales of decision in favor of short term gain. Our company knows that we have to fundamentally switch over a large portion of our business to a next gen technology. But we are not borrowing to do that, because the most profitable move right now is to lever up. THIS IS NOT A GOOD THING.
Something similar is happening to many people on a personal level. Normally, low interest rates should incentivize consumption and reduce savings. But the opposite is happening. I believe that “savers” (notice I didn’t say the general populace, they are not the same) are saving an even larger portion of their incomes now because zero interest means that they have to save more to reach their savings goals.