Around the world central banks and governments attempt to bring the return of growth to their domestic economies. Ever lower interest rates and bouts of quantitative easing in various amounts, have become widespread across the globe. As each nation attempts to gain a competitive edge in exports by forcing the value of their national currency lower, it only encourages the next nation to follow suit. The hope remains that if only enough liquidity is injecting into the domestic economy, the halcyon days of the latter part of the 20th century will return.
The problem with the endless amounts of cash being pumped into the world economy, is that it is not bringing the desired result. The return to sustainable growth remains elusive. The massive amounts of liquidity presently being injected, is not being used in a manner that would help the stagnant economies of so much of the developed world revive. Instead, it has been used in a way that distorts traditional methods of business development and expansion.
When there is little to almost no cost in borrowing capital, much of it will be used in less than efficient endeavors. There was a time that companies borrowed money to finance an expansion in equipment or physical plant, that was expected to bring a return that could be justified to loan officers, as well as to shareholders. An investment was made in expanding the assets of the company, based on the needs of the market. Money was scarce, so there was a need for it to be employed, in the most expeditious manner possible.
Many businesses would actually use corporate profits, to finance expansion. It was often a much better deal than borrowing money at interest rates that forced managers and company leaders to consider the acquisition of new debt, in a very hesitant way. Wrong or ill advised decisions forced companies to downsize or even go bankrupt in some cases. A judicious use of the financial resources of a company, became one of the most important traits encouraged by owners and upper management throughout the business world. It was the hallmark of good business practice.
Treasury Department In The United States
Where did this contagion start? Some analysts will say the United States, others will identify Japan as the first country to make the wise use of money, no longer primary in the business world. Regardless of the epicenter, it has now spread to every greater parts of Asia, Europe, Latin America and elsewhere. More businesses are now borrowing ever greater amounts of money, to finance activities that have limited value in increasing productivity, one of the true measures of economic growth.
In the United States, businesses are borrowing money at historically high levels, with equity capital rapidly disappearing. In the last 15 years, real investment in the business sector has declined by a third. Who is to blame for this? None other than the Federal Reserve, which is the central bank in the United States. The financial balance sheet of this institution has gone up 900% since the year 2000.
In reality, all this easily available liquidity is funding trillions of USD (United States Dollars) in the form of cheap loans, that are not being used to increase output or efficiency. Instead the money is being used for more recent business maneuvers that include leveraged buyouts, mergers and acquisitions, that do not actually benefit the productivity of the company in question.
The Former Lehman Brothers Investment Firm In New York
In order to keep shareholders complacent, money is lavished in their direction with increasing dividends and stock prices through a common practice today known as the share buy back. That is the company buys its own stock, making the remaining outstanding shares more valuable. This does not add any additional fecundity to the company.
These financial activities also do little in adding real economic growth in the economy, which would provide jobs. In the end, that is what is needed to reduce the growing unemployment rate, which far exceeds the government published rates. In the United States and elsewhere, individuals who are chronically unemployed are simply no longer counted. This artificially lowers rates of joblessness, when the actual figures are double and triple to what is being reported. Youthful unemployment in particular, is reaching dangerous levels for society. These rates are now exceeding 40 percent in a number of countries.
Now that quantitative easing in Europe will be pursued on a massive scale similar to what has occurred in the United States, it is likely that the same business practices will develop. Why is this so? It is a great deal more challenging, for company executives to grow the company balance sheet by investing in a new product development or by investing in new equipment, to increase productivity. It is much easier to grow the company by some financial maneuver that allows a quick acquisition. In itself this is not bad thing, if it allows the parent company to become more productive. What is often the case, is quite the opposite. Therefore on the national level, you have little or no real growth in the domestic economy.
The statue of the Little Mermaid, an icon of the city and a popular tourist attraction In Denmark
Another problem is where all this new money is coming from. It is not from savings from companies and individuals, but rather created money. When one adds low to near zero interest rates, it allows business practices that end up being quite destructive for the larger economy. In Europe you are actually experiencing negative interest rates. Denmark and Sweden are two prime examples of this. It is an interesting phenomena that makes absolutely no sense and cannot be sustained over time.
Corporate debt is reaching dangerous levels in many cases. In the United States the artificial low rates of interest have fueled speculation in stocks, that is creating a bubble in the markets. More money continues to pour in, because there is little alternative for investors to make money in other sectors of the economy. To simply save money is no longer financially viable, since interest rates and therefore returns, in this arena are almost nonexistent.
United States Private Debt To GDP By Sector
This year alone, well over $200 billion USD corporate bond issues have already been made. This is an annual rate that is approaching $1.5 trillion USD. This is nearly twice the rate from before the financial meltdown of 2008 and 2009. Where is all this money going? To fund much of the speculation on Wall Street of course. In the month of February alone for example, the buy backs of stocks exceeded $100 billion USD for the American S&P 500. This is an astonishing rate and a figure that does not bode well for future economic growth. It is no wonder that more businesses are now closing in the United States, than are actually being created.
Every time there is a hint that the Federal Reserve at long last will increase these absurdly low rates of interest, panic ensues in the financial and stock markets. It has been well over 6 years now. Traditional savers have been devastated and more conventional ways of preparing for retirement have been practically wiped out. The policy of artificial cheap money, cannot be sustained forever. It is creating vast distortions in the economy that does not bode well for the future.
When the Federal Reserve finally does raise interest rates, they will be hampered by a world where almost everyone else is moving in the opposite direction. With the United States Dollar at an 11 year high already, a surge in interest rates will lay waste to whole categories in the export sector. This would cause an immediate rise in unemployment, which will eventually negate the impetus for raising interest rates any further.
Higher interest rates in the United States will also cause an international flood of money, that will arrive to take advantage of these higher rates. Additional money will be poured into stocks, bonds and other assets of the country. Speculation in these sectors will increase proportionally, to the increase in the value of the American dollar. It could easily lead to imported inflation something that financial planners in the United States will be hard pressed to prevent.
A Banking Panic In The United Kingdom
Therefore, it is unlikely that interest rates will increase substantially in the United States, this year or next year for that matter. Why? A correction in the American Stock Market will arrive soon enough, as it will be heralding the next Great Recession. Contrary to the belief of some investors and so called financial experts, the policy of the Federal Reserve can forestall, but not prevent the normal business cycle. There will be a recession in 2016 or possibly a bit later. This will move interest rates down even further, not only in the United States, but almost everywhere.
For investors and money managers all over the world, the amount of debt now being accumulated by governments, corporations and on the individual level, is totally unsustainable and quite dangerous. A financial and monetary calamity will arrive soon enough. The fiscal liabilities are now at such an astronomical level, that they will be totally unmanageable when the next crisis arrives.