February 15, 2013
If zero or near zero interest rates provide no return on holding cash, profit-seeking businesses will surely mobilize said cash, at least in theory. However, there is a parallel complication to that theory. As much as businesses are penalized by holding cash, they are afforded the opportunity to invest financially.
Going back to the Flow of Funds Report, nonfinancial corporate businesses were indebted to the tune of $7.11 trillion, on average, in 2007. By Q3 2012, that same business segment increased the level of borrowed funds to $8.37 trillion (+17.6%). Notice that the increase in cash levels is very close to exactly matching the increase in debt levels. The ratio of cash to debt in 2007 was .1676, while the ratio of cash to debt in Q3 2012 was .1674.
A capitalist system produces those wealthy stockholders, but their paper wealth was predicated on actually producing productive wealth. If productive wealth is the only measure of economic and monetary success, producing wealthy people actually requires productive investment leading to successfully increasing the living standards of all participants. Goods and services are produced more efficiently and cost effective, wages are proportionally assigned according to profit potential and wealth generation leads to the rising tide of economic health.
Given all the financial interference, this new modern system has delinked (quite intentionally) profits from wages. The emphasis on financial over productive is the limiting factor here. Increasing minimum wages will not change that fact, it will only increase the cost of production and reduce future profit expectations in the segments that are most affected (while favoring perhaps less profitable industries and segments that are not as affected). The economy generates no additional value or wealth from federal interference in market mechanisms.
February 14, 2013
By Fred Kingery
Today, the U.S. federal government borrows 40 cents out of every dollar it spends and the Federal Reserve directly or indirectly prints money to fund 80 cents out of every dollar of that government debt. So far this financial arrangement has produced rising financial asset prices and no significant “officially measured” consumer price inflation.
The question that begs an answer is: How long can such an arrangement last? Why hasn’t debt-financed consumption, coupled with Federal Reserve money printing, coupled with lagging wealth creation, resulted in massive price inflation?
Is the Fed simply “pushing on a string?” Did the financial collapse of 2008 convert bankers into prudent lenders who are unwilling to extend credit to needy borrowers? Has the private sector decided to pay down debt and simply forego borrowing because of government-created uncertainty or a lack of desirable investment opportunities? Or, is it something else altogether?
The truth is no one knows. Another truth is that it may not matter. What is perhaps most important is to recognize that there is no historical precedent to act as a contextual reference for what is happening. We are in uncharted territory.
On the rebound?
The amount of stuff we manufacture has recovered in a V like pattern, without adding very many employees. Since the end of the recession, it looks like around a 17% increase in output but only around a 4% increase in employment. Notice that in the last downturn both series fell substantially (17% fall in employment, 19% fall in output) so it’s probably not a labor hoarding story that explains the jobless recovery in manufacturing).
So what is manufacturing? The products or the jobs?
Modernity provides too many variables, but too little data per variable. So the spurious relationships grow much, much faster than real information.