"Real
and Illusory Credit" bridged the destruction of phony,
1920s, Federal-Reserve wampum to Bernard Connolly's evaluation of today's
deadly path. The aftermath of the twenties, as described in David A. Stockman's
The Great Deformation: The Corruption of Capitalism in America, crippled
capital spending. Plant and equipment investment tumbled by nearly 80 percent
between 1929 and 1933. Inventories were liquidated. There were no buyers.
Employment and wages collapsed.
An ameliorating tendency is never mentioned
by Bernanke, "the Great Historian of the Great Depression." Prices
also dropped, which had traditionally been true in depressions. This was well
known and understood as inevitable to rebalancing an economy that had produced
beyond what could be bought at then-current prices. Bernanke and his comrades
have destroyed history, at least until history rebounds and destroys them.
Bernard Connolly explained that today's
central bankers have decided consumption must not flag despite the necessity -
history shows this - of a decline in consumption after a business peak. If the
professors had understood their limits, not taken control of prices, especially
the price of money (interest rates), industries, companies, and products that
grew faster than could be sustained would have already been combined or
liquidated.
Quoting Connolly, the current dynamic
inefficiency "reduces future consumption possibilities; and this, in turn,
means that much of the recent and current capital formation, notably in the
United States, has been based on excessively optimistic expectations of future
demand." Such attempts "to bring spending forward and to avoid
a near-term collapse simply reduce the (realistically) anticipated rate of
return on capital still further, in a vicious downward spiral."
Note the historical precedent in
Stockman's book. This must happen but will be more painful than if academics
had never entered central banking. The protracted issuing of unproductive debt
and sustained, false prices (the market signals to businesses and buyers alike)
will cascade. Assets, and their prices, will take note.
An attempt to interpret this fate adds
another layer in the valuation of companies. For instance, in the May 2, 2013, High-Tech
Strategist, Fred Hickey wrote: "EMC, the world's biggest supplier of
computer storage equipment, slightly missed sales and earnings estimates for
Q1. EMC's revenue growth (5.6%) was the slowest pace of growth since the 2009
recession. According to CEO Joe Tucci on the conference call, customers are
'still being cautious with their IT spending to be sure.' 'The customers are
for sure 'sweating their assets' more - it's a term we use. They are keeping
them longer,' Tucci explained. Tucci also noted that many enterprise customers
are now requiring higher executive approvals before signing off on
contracts."
The May, High-Tech Strategist issue
contains a litany of technology companies fighting a battle against an
uncooperative world economy. This presents the question of how companies will
fare after central banking funny-money and illusory-credit schemes fail. This
is not "if," but "when."
Just how useless, wasteful and destructive
is Bernanke's gizmo? Gary Shilling's May 2013 Insight shows the increase
in real GDP per dollar of incremental debt was $4.62 (of additional GDP for
each additional dollar of debt) from 1947-1952; $0.64 from 1953-1984; $0.24
from 1985-2000; and $0.09 for each dollar from the fourth quarter of 2001
through the fourth quarter of 2012: an extra nine cents of production for every
dollar of debt. Not a fraction of this will ever be paid off, short of a Weimer
inflation. (Shilling used Ned Davis Research and Federal Reserve data.)
EMC sales and profits have been artificially
lifted by businesses that can borrow at 3% but should no longer exist. Their
recalibration remains in the future. Those businesses employ workers who buy
products produced by P&G. And so on. Government transfer payments have
prevented the economy from sky diving. "Policymakers" have employed
this modus operandi since the millennium.
After the tech bust in 2000, the
percentage of sales by tech companies to the government rose sharply. That
saved them. Despite the recent attempt to brainwash the electorate into
believing the U.S. budget deficit is no longer a problem, that is only true as
long as the Federal Reserve continues to buy the majority of U.S. Treasury
auctions.
Parenthetically, the TIC (Treasury
International Capital) data released May 15, 2013, for the month of March 2013,
shows China, Japan, Taiwan, Singapore, and India were net sellers of dollars.
Andy Lees AML
Macro Ltd. writes: "Japanese holdings
were down USD0.5bn and have gradually been falling since October last year.
This may just be rotation into other assets, but it may also be a reflection of
a current account swinging into deficit in Japan and question marks over the
Chinese data." Whatever the case, if the New York Fed trading desk takes a
lunch break in Battery Park, the dollar will slip to 40 on the dollar (DXY) index
(currently 83.61).
Not to pick on
EMC, "the world's
biggest supplier of computer storage equipment" bears advantages during
the worst of depressions, but the loss of central-banking support will sharply
reduce its sales, thus inventory, thus capital equipment (or, R&D, for a
software company). The consequent loss of jobs, consumption, and falling asset
prices will slide "still further, in a vicious downward spiral."
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