American businesses are borrowing at historic high levels, but the only thing growing as a result is how fast their equity capital is vanishing, according to David Stockman
, White House budget chief during the Reagan administration.
Stockman, a reliable critic of Federal Reserve policies, said much of the blame can be laid at the feet of the central bank and the bank's Wall Street cheerleaders.
He said the Fed's balance sheet has ballooned by 9 times since 2000, yet real net investment in the business sector has cratered by 33 percent during the same time period.
"Once upon a time businesses borrowed long term money — if they borrowed at all — in order to fund plant, equipment and other long-lived productive assets," Stockman wrote.
"Today American businesses are borrowing like never before — but the only thing being liquidated is their own equity capital. That's because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A [mergers and acquisitions] and LBOs [leveraged buyouts], not the acquisition of productive assets that can actually fuel future output and productivity."
In Stockman's view, central bank "financial repression" — in the form of artificially low interest rates that have been orchestrated to provide a false prop to the economy — is responsible for fueling stock market bubbles that makes stock repurchases and other short-term financial engineering maneuvers profitable.
For 2015 to date, corporate bond issues total $241 billion — a giant $1.4 trillion annualized run rate, or nearly double the run rate prior to the 2008 financial meltdown, he noted. "Yet virtually all of this massive debt issuance has been cycled into after-burner fuel for the rocketing stock market. During the month of February alone, stock buybacks for the S&P 500 were a record $104 billion," he added.
"Is it any wonder that Wall Street threatens a hissy fit upon even a hint that the Fed's rotten regime of ZIRP [zero interest rate policy] might be ended after 80 months?"
Stockman explained that the titanic splurge in corporate debt issuance conceals the fact that real net investment in the U.S. business sector shrank sharply from $400 billion annualized in the fourth quarter of 2007 to only $300 billion annualized in the fourth quarter of 2014.
"This drastic shrinkage is something totally new under the sun, and not in a good way at all," he declared. "So thanks for the corporate bond bubble, Fed. It's just one more nail in the coffin of capitalist prosperity in America.
With the European Central Bank expected to start a $1 trillion quantitative easing (QE) program next week, an echo of the Fed's QE binge, European companies could follow America's corporate lead, Reuters
"European companies are likely to join a boom in share buybacks as central bank cash floods the economy, risking criticism that they are recycling capital rather than investing to promote growth," Reuters said.
However, the news source predicted, "Political pressure will probably grow on companies to use ultra-cheap funding for creating jobs rather than simply buying back their own shares."
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