Too much of economic growth and the accompanying bull market in stocks is the result of financial engineering. Increasingly, companies seek to improve earnings or increase their share price by means that are not necessarily directly linked to their actual business.
Companies have increased the use of lower-cost debt financing, taking advantage of the tax deductibility of interest. In private equity transactions, the level of debt is especially high. Complex securities have been used to arbitrage ratings and tax rules to lower the cost of capital…
The Fed has inflated our money to the point of no return just to give unlimited buying power to a select few individuals and banking corporations. When the monetary system crashes because of their manipulation, they’ll still own all the assets they bought.
You want to fix the economic system, reduce political bribery and reduce rising income inequality? Shut off the cheap unlimited credit spigot to banks, financiers and corporations.
Cheap credit–newly issued money that can be borrowed at low rates of interest–is presented as the savior of our economic system, but in reality, it’s why our system is broken. The conventional economic pitch goes like this: cheap credit enables consumers to buy more goods and services (and since the system needs growth or it implodes, that’s good).
Cheap credit also enables companies to invest in new productive assets (capital).
Last but not least, low rates of interest enables the government at all levels to borrow money at relatively low cost.
That all sounds good in theory, but let’s see how cheap credit works in the real world.
The first thing we observe is those closest to the central bank credit spigot get the lowest rates and nearly unlimited lines of credit. J.Q. Citizen may be thrilled to get a 4% annual-rate mortgage, but the mega-millionaire closer to the credit spigot can borrow 10 times as much as J.Q. can, and at half the rate of interest.
Mega-corporations and financiers can borrow billions at rates as low as 1%, which given an official inflation rate of 2%, is actually a negative rate of real interest.
Money-center banks own the credit spigot, so they can create money out of thin air at .5%.
In other words, cash isn’t king in this perverse system: cheap credit is king. Those with access to cheap unlimited credit can scoop up all the productive assets, greatly increasing their wealth–and they can buy the political class, too, with campaign contributions and donations to false-front foundations.