A Case for Increasing Interest Rates and Speeding Up Quantifiable Tightening Just a Little Faster
An episode of The Daily podcast, "The Economic Cost of Authoritarian Rule", though not mentioning stock buybacks, leads me to think that the US needs to increase interest rates just a little faster to encourage the increase in worker's wages.
Based on the next couple podcasts I cite below & random errata I've read and heard over the years,
My reasoning:
Low interest rates make saving in
unattractive compared to stocks (though the liquidity, stability, and security of some of these options can make them attractive if your goal isn't just maximizing the profit on your investment for emergency funds, expense accounts, etc.).
Low interest rates make it easy to borrow money. Per the cited Slate Money podcast, companies actually finance stock buy backs through borrowing.
Stock buy backs increase per share value because buy backs take shares out of the open market, creating more scarcity and/or altering the balance between supply and demand. Executives and other employees paid in stocks and options get tax advantaged cash since stock buy backs are taxed on a capital gains basis rather than an income or dividend basis.
While profiting insiders & employees with liquidity, people who continue owning stock profit since their shares increase in value. The total value of the company doesn't increase, but the value of shares held onto by investors go up, so insiders selling back stock likely "break even" in stock value while "outsiders" profit a good amount on the increase of their shares of stock in their portfolio.
Per the cited Daily Podcast ep, there are three ways to stimulate the economy: low taxes, borrow money, and low interest rates (and a way to cheat: print money). The problem with stimulating the economy fully through all three means or not moderating them: growth can happen too fast. It leads to hyperinflation, leaving a good amount of people in the dust. In attempts to control an out of control inflation bubble requires austerity measures and that screws everyone, then the economy crashes and bubble bursts.
The 2018 tax cuts were stupid. It's rarely a good idea to increase deficits in a good economy when money doesn't need to be borrowed. The United States government won't do anything about it, though, because attempts at populist politics and the rich wanting to preserve their wealth have the run of the country presently.
Governmental borrowing money is obviously stupid, too, but the tax cuts pretty much require borrowing. Not much can be done to reduce borrowing when tax deductions require the borrowing to pay for what taxes aren't paying for.
Increasing interest rates seems like the best bet. It's in the control of the Fed. Federal Reserve Jerome Powell has already stated that he's beholden to facts and the state of the economy, not to politics. Arguably, his slow interest rate increases, as much as they could be about not trying to cause a sudden bubble burst by reaching an austere level, could also seek to work with the politics of Trump. Even though Trump wants to keep interest rates low longer to slow down the increasing value of he dollar, imagine how much more crap Powell would have to deal with from the President if he increased interest rates a little faster to direct the speed of the economy toward employees, not investors and CEOs and other highly paid executives.
How increasing interest rates will help cool down the high-asset, high-income class economy and speed up the economy for mid-income to low-income employees:
Investing in stocks will become less attractive. Since stocks are so attractive, the market has become heavily invested in them, pushing their value sky high. Many would argue that their values have increased this high with good reason and base that argument on pretty complicated finance and economic terms. That's all very well, but it has the potential of creating a stock market bubble that could burst.
Investing in just stocks also stunts the rest of the economy since it halts value from circulating except through complicated machinations like stock buy backs. Increasing wages and hiring new employees has become unattractive because it doesn't seem like "a worthwhile investment" and can make a single company "uncompetitive" since that money for wages has to come from somewhere, generally by increasing the price of a product, making it less attractive to consumers.
I guess stock buy backs makes some sense here since they're a one time outlay versus new employees and higher wages are ongoing outlays, thus making stock buy backs more predictable and less risky down the road if the economy halts or something like that. This type of decision might make sense in the short view and microcosm of of an industry.
My problem here comes down to slowing down the economy eventually because if all the companies engage in stock buy backs rather than hiring and increasing wages, all the money will rise to the top and the bottom will get sucked dry through inflation. Prices will increase while wages and salaries will become smaller (nominal value of the pay check remains the same while the price of goods and services increases).
The consumer base will shrink as the base can't afford products that they want or need. This creates an obvious moral and ethical issue that tugs at my heart, but this economic discussion doesn't need it. An economic trope addresses the matter well enough: Distributing wealth to the poor leads to better economic growth, mainly because those with less wealth will tend to spend that money while those who already have enough will tend to save that money (or invest it in a company that will later buy back the stock). That's one reason why Trump was right about one thing: 'The economy does better under the Democrats'.
Increasing interest rates will also lead to a faster growing economy by making investment in stocks less attractive. Investing in savings accounts, money market accounts, CDs, and bonds will become attractive again (I could write a whole other essay about how these accounts do good work building REAL wealth rather hot potato wealth based on a lot of money in circulation is actually borrowed money, but such an essay has little place here). People will take money out of the stock market to put into these secure and more liquid accounts become attractive again, causing stock values to go down again. The stock market bubble will deflate, which would be safer than the bubble popping because the consumer base grew too small or disappeared.
At some point in time, I think after the housing bubble burst, banks found investing in bonds more attractive and safer than taking chances on lending money to commercial and personal borrowers. Job losses, customer base disappearing, demand deflating, people going underwater on their loans, etc etc made loaning out money to the public too risky. Making a small amount of money on interest income with bonds is better than the public defaulting on loans, causing the bank to flat out lose a ton of capital. The Federal government also putting capital requirements on banks and other financial institutions also encouraged bond investment and saving money in the Fed rather than loaning out money (though I think these capital requirements are important). If the banks get more capital into their accounts through deposits (and payments of credit cards), they will be more willing to loan out money to some people and business they might have been willing to do so before, which leads to more spending, which leads to the economy growing more by increasing demand and actual purchasing of goods and services.
At this time, I don't believe commercial businesses are feeling enough demand for actual products and services to increase wages. We're living in this weird hypnagogic state of the economy in which companies have more willingness to hire part time and low-wage workers to address something that needs to be done, but not enough to warrant higher pay (since borrowing money to do stock buy backs is a more attractive allocation of resources to increase stock value and provide tax-advantages liquidity is "more valuable' than growing a workforce, putting money into the investor class's pockets rather than providing money to the employee class to spend and meet needs). Maybe hiring the part timers is about setting up a reserve force to address an expected and hoped for demand in the future.
If stocks become less attractive and interest rates increase, however, the best way to increase the profits of a company will be to actually sell goods and services. Companies won't find it profitable to finance stock buy backs by borrowing money. Their collateral value of stock to borrow money will also decrease, leading interest rates to increase there, also.
Initially, I could see a deflationary and economic shrinking stage occurring because less of that circular financial activity would occur, leading to less money circulating. Costs for goods and services would likely decrease because companies would feel more of a need to actually make sales and currently, the low- to middle-income consumer price point is lower than what companies can see as a profitable sale. Once the commercial price point of goods and services synchronizes with the low- to middle-income consumer price point, purchases of goods and services will increase. Increased purchases, especially for consumables and durable yet obsolescent devices, will lead to inflation because of consumer activity, not high-income financial activity. As this type of inflation and demand increases, companies will need to hire more people to help produce goods and services to meet the needs of consumers.
Other options for the government to help grow the economy for the low- to middle-income employee income class:
I don't see the current state of the United States Federal and State governments doing anything like that. Again, the high-asset and high-income financial, wealth, resource, and capital class control the government and want preserve all that. Voters can do something about that by going out to vote in November 2018 and other voting and campaign activities in 2020 and later to try electing officials willing to behave in the interests of The People and to put into place policy in the service of The People.
So until us voters and civic participants get out government into shape, my most rational hope at the moment is for Jerome Powell and the Fed to speed up interest rate increases and speed up on the quantitative tightening. Doing so will help cut down on the attraction and profiting off of abstract financial transactions when we need to take action to encourage the growth of profiting off of actual, concrete goods and services.
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3 comments:
Great episode brings up interesting topics: Did government bailout of banks prevent even worse resentment if government bailed out individuals that got screwed vs those who kept up with their mortgage bills? Also, is fracking, coal, and oil fueling a debt bubble as those industries don't profit (while the executives do)?
I'm only half way through, but I feel this discussion addresses my latest blog entry that interest rates & quantative tightening needs to quicken a tad.
https://pca.st/R2mT
Wrote a long comment that I actually deleted. . .to summarize: bailouts for individuals wouldn't have bothered me, as it would have got some others. I'm guessing bailout/forgiveness would likely have hit credit score/history or the path to get to that point would cause a hit to score/history. Reward of being a good borrower reputational: continued good rates & ability to get loans & additional capital. That would provide more long term benefits than getting that huge balance off your back.
A valid argument against my proposal: I was apprised to a new point: rising interest rates in the US would cause problems in Turkey & other countries that taken out loans in dollars & their currency has grown weaker, since their interest payments would get even worse.
That might make an argument that devaluing the dollar, encouraging inflation in some means, and so forth would be worthwhile. Then again, my argument is stating that increasing interest rates & quantatitive tightening would increase desire to make income off labor, increasing wages & salaries, which would also likely increase borrowing at some point for proposes of growth, which would increase money supply, thus creating inflation.
As I started in a FB discussion with someone: I'm making my argument within the current structure of the US economy. I don't necessarily support the current structure, but this comment thread is not the place to have a structural/ideological argument.
It would be interesting, however, to have the foreign debt refinanced into their own currency, though. Likely not to happen, but it would probably lead to more stability.
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