The Long-term Free Money Damage:
Facing economic reality:
If printing money worked for an economy, then Zimbabwe, Venezuela, and Argentina would be wealthier than the United States. Incredibly, the world’s “smartest” and most powerful economic bureaucrats have all adopted debt monetisation, known as quantitative easing QE, as their core economic remedy. Anyone with a shred of common sense, or any understanding of human nature, or history; knows this won’t work for long. Not paying debts is a lot easier and more fun, than facing a sober and sound economic reality.
The long-term damage caused by the world’s largest economic areas adopting “free money” – zero-percent interest rate – ZIRP- policies is colossal. Actually without interest rates, a free market cannot exist. It has become a bizarre world, where everything about how a normal economy works, gets turned upside down. Zero and negative interest rate policies, and the creation of money out of nothing, are immensely destructive for our civilisation.
Unlimited amounts of capital available:
A look at the harm these policies have caused to large companies shows where this kind of economy will lead to; Outrageously, for-profit companies aren’t simply interested in profits anymore! – Since 2010 there are virtually unlimited amounts of capital available for any company who wants to borrow.
This has led to a huge expansion in the amount of junk bonds outstanding – including companies like oil-exploration firms that haven’t previously had access to large amounts of long-term credit. – But the impact has been even more significant for “investment grade” credit. Virtually unlimited amounts of credit have become available at almost no cost.
Usually, the costs of doing business are limited to capital and labour. Technology has greatly reduced the labour inputs for most businesses. With virtually free capital and greatly reduced labour inputs, the costs of products or provided services, have plummeted across the economy.
That sounds like an improvement: Lower costs should equal bigger profits. However, there’s also competition. When everyone has access to unlimited capital and technology, that reduces the per-unit cost of labour, consequently there will be a race to lower prices, ultimately to zero. So, no one will be able to make a profit because there’s no scarcity of capital, and therefore no ability to increase relative productivity.
What is the outcome?
Over the last several years there has been a rise of companies that are experts at exploiting technology to reduce labour costs. Free capital and zero per-unit marginal labour costs are equivalent to a whole new form of capitalism that’s genuinely unlike anything else the world has ever seen before. These are companies of a massive scale, massive sales growth, and virtually zero profits. Amazon is the most famous example.
In just the past three years, the Internet retailer’s revenues have almost doubled from $80 billion to $140 billion. Meanwhile, its profit margins haven’t budged. These remain less than 2%. With this kind of scale and almost no profit, Amazon has been able to grow faster and faster, into all kinds of new businesses. The company doesn’t have to worry about cash flows to power investments into new lines of business because, after all, capital is free.
So even though Amazon has only earned profits of $3 billion over the past three years, with corresponding revenues of 320 billion, it has been able to invest $17 billion into growing its core business and building new businesses. The world has never seen a company of this size borrowing such a high proportion of its annual net income to spend on capital investments. Now, think about the consequences:
On total revenues of $320 billion, Amazon has only earned $3 billion in net income. Meanwhile, it has spent $17 billion on investments in just the past three years. It borrowed $7.5 billion in the past two years to help finance these investments.
The result of these kinds of ongoing massive investments is that a company with a market cap of close to $500 billion that has lifetime – cumulative – retained earnings of less than $5 billion. And since it has never paid a single dividend, these are the company’s total, cumulative lifetime earnings.
Free Investment Capital:
Amazon is a for-profit company that doesn’t intend to make a profit. And it doesn’t have to, because there are unlimited amounts of additional investment capital, available, essentially for free.
It hasn’t been good for IBM. In the face of competition from Amazon’s Web Services business – its cloud services, IBM’s revenues have declined for 20 straight quarters. IBM can’t shed per-unit labour costs because it’s stuck with tens of thousands of legacy engineers.
It hasn’t been good for the retail industry. Amazon can afford to build unlimited numbers of new warehouses and distribution centres. Again, capital is free. But retailers can’t possibly compete on per-unit labour costs. They’ve got to staff each store.
And it’s going to prove to be bad for media companies. By tying entertainment content to its “Amazon Prime” memberships, Amazon is pointing a gun directly at the head of every media/entertainment company. Good luck competing with a firm of $500 billion that doesn’t have to bother with profits and has the world’s best online technology.
But, is this ultimately good for the economy? What happens when investors realise, much to their dismay that Amazon isn’t ever going to make any money? What will happen when investors realise that Amazon’s core competitive advantage is that it will never make a profit?
Then, what is the point of capitalism?
There are dozens of companies whose entire business models are predicated on access to virtually free and unlimited capital. Their only competitive advantage is a central bank that has lost its mind. It is a good bet, that these firms won’t last for long because the current policy is unsustainable.
Why is it unsustainable? What will cause it to collapse?
Think about commodity prices.
Industries, like automobile, housing builders, and so on, have been very effective at passing on the central banks’ free money to their customers. These enterprises hold billions in loans and leases. Do you think the management of these companies should be betting on the ability of their customers to repay billions in car, housing etc. loans?
What could possibly go wrong?
Commodity prices and markets are where the central banks’ policy of free money is going to crash on the rocks of reality. The real world can only consume so much production of food, clothing etc. or burn so much oil. Real-world growth limits the uptake of this massive increase of capital. And it’s in this friction that financial risks lie.
The glut of oil is one of the primary signs of excesses in capital markets. By estimation, close to 30% of all the “free money” lending the central banks have financed between 2010 and 2014, ended up in the shale oil sector. The result has been an explosion in oil production.
Supply almost never exceeded 30 days – ever. Supplies hadn’t crossed that threshold in almost 40 years. But since crossing over 30 days’ supply in early 2016, a new all-time high supply mark was set in March, when the 34.2 day mark was reached.
Meanwhile, despite the obvious glut, the rotary-rig count continues to grow. Every day, more and more drilling takes place. Why?
Because free money also means lots of speculation. Speculators have never bet more on higher future oil prices. Historically, betting on higher prices when OPEC cuts production has been a one-way trade – a guaranteed way to make money.
This won’t prove to be true this time, a result that will shock oil traders, that will cost them billions. – But in the meantime, producers can finance more additional production today by selling production into the futures markets to these speculators.
The futures markets, when functioning normally, help smooth out prices between peak-demand seasons. But now, thanks to the central banks and the speculators they’re financing, they’re perpetuating an epic oil glut that will make the coming bust in oil prices even worse than in 2015.
Central Banks Destructive Economic Policies:
Central banks’ free-money policies have led to a massive bubble in commodity prices, and increased credit structures that have financed these huge gains. This commodity bubble will in all likelihood blow up first, and lead to the next major financial crisis.
Central banks’ free-money policies generated the buying of shares that has now permanently linked the value of every currency in the world to the value of the stock market. As a result, they have turned the global economy and the value of every currency in the world into ticking time bombs.
The next panic in the stock market won’t merely hurt stock investors, it also will hurt every human being on the planet, because every currency in the world is now tied to stock and bond prices. The central banks haven’t merely wrecked the world’s currencies. They’ve destroyed the political systems, too. Although it’s probably hard to believe and comprehend, these changes are the most dangerous aspects of what’s happening right now.
John Perkins… about Middle East, and oil scam: