Behind almost all of the economic problems we are now facing is the need for economic restructuring. The world needs to move on and politicians and others are fighting to keep things as they are.
To me, this is one of the reasons why the common liberal/Keynesian solution to our current difficulties is more government spending, more stimulus. The common refrain is to push things right back into where they were. Push people back into construction jobs; push workers back into the auto plants; and push the untrained into information technology. Unfortunately, the world has changed. We cannot keep trying to push people back into the jobs they once held, or, push people into jobs they have not been trained for.
Everyone is excited about the boom in mergers and acquisitions. I have been among those, like James Less, Vice Chairman of JPMorgan Chase & Co. who said, "The Goldilocks era of post-crisis M&A has never been an if, but a when."
For two years or more, I have been writing that the larger, better off companies, the larger money managers, are just waiting for the right environment to begin the acquisition binge. In terms of high profile the Dell (DELL) deal kind of kicked things off.
In the past two weeks, there have been at least four major deals announced. These have included the Dell buyout; the Comcast (CMCSA)(CMCSK) acquisition of GE's (GE) stake in NBC Universal; the acquisition of American Airlines (AAMRQ.PK) by US Air (LCC); the Berkshire (BRK.A)(BRK.B)/3G Capital acquisition of H. J. Heinz Co. (HNZ); and the Liberty Global (LBTYA)(LBTYK)(LBTYB) proposal to takeover Virgin Media, Inc. (VMED). Each deal is worth more than $10 billion.
But, note, these transactions will not necessarily add to economic growth … at least, not immediately. Big deals like these result restructuring, layoffs, plant consolidations, and so forth. These transactions transform industries, modernize them, and economize them.
To me, the key word here is "restructuring." The world has changed. Consequently, the economic structure we have been working with needs to be re-structured!
We need to go through this restructuring in the United States. Right now, however, we are seeing this scenario play out in the eurozone. Europe continues to slump in the middle of cries to end the austerity. Fears that Silvio Berlusconi and his populist party will get elected in Italy and block needed but unpopular reforms that have been proposed by the current government. France is wavering in the face of negative economic growth. And the other countries in the periphery of Europe wallow in stagnation.
The recent figures, the growth rate in France was negative 0.3 percent; in Italy growth was negative 0.9 percent; in Spain growth was negative 0.7 percent; and even in Holland, growth was negative 0.2 percent.
The basic problem across the board is that the economies of these countries are just not competitive. And, further fiscal stimulation is not going to make them competitive. Fifty years or so of fiscal stimulation has gotten these countries where they are today. You cannot just keep putting economic resources back into the jobs that are not in existence any more.
Gillian Tett, in the Financial Times, quotes one large American investor, "The competitive problems in France are horrible and current policy is making this worse." The same goes for Italy, Greece, and Spain … and others. Tett adds, "What worries many American investors are the long-term structural challenges that are sapping growth." These American investors are looking toward Europe to find more attractive yields.
What is true of Europe is also true of the United States. After 50 years and more of government sponsored credit inflation, artificially stimulated economic expansion as a policy of the government, America needs to restructure. When under-employment runs around twenty percent or so, when capacity utilization in manufacturing peaks at 80.0 percent of capacity or less, and when real economic growth seems to run under 2.0 percent per year, something needs to change.
We cannot just "goose up" the economy over and over again with more and more credit expansion. Doing so just unbalances the economy leading to predictions like those of Bain and Company that in 2020 we will have a $90 trillion real economy, but we will also have created $900 trillion in financial assets to achieve this size. If this isn't credit inflation, I don't know what it is.
But just, "goosing up" the economy is not going to really reduce under-employment or raise capacity utilization in manufacturing. We have seen that over the past fifty years, credit inflation has just exacerbated these problems, not reduced them.
Restructuring is painful! That is why politicians can play off this pain to get elected … and re-elected. And, nothing sells better than "I will see that the government spends more money to put you back to work," and "I will see that you get more credit to buy your own home, even if you are unemployed, because every American should own their own home! And, constructing more homes creates jobs!"
My view of the future is that this is not going to change! In my view this is the environment we are going to have to live within … and invest within. A world of badly needed restructuring.
Now, I need to be careful here because I also see an environment of inflation … credit inflation. But, not all credit inflation comes out in an increase in prices, at least those prices included in the consumer price index. The prices included here are flow prices; prices of groceries or clothes or rents on houses.
Credit inflation can occur in other ways that don't impact these flow prices. For example, the price of houses is not included in the consumer price index. The price of commodities is not included in the consumer price index. The price of stocks is not included in the consumer price index.
Bubbles can occur in these "stock" prices. And, recent publications by Bain and Company, in the scenario discussed above, predict that "bubbles" will occur more frequently going up to 2020 and will also be more volatile. These "bubbles" will not be included in the consumer price index.
Furthermore, we have seen that credit inflation can result in the pyramiding of financial assets. Securitization of mortgages, credit card debt, auto loans, and so forth result in one structure of finance building on another. Money market mutual funds, alternative financial firms, collateralized debt obligations build up a pyramid of finance with little or no impact on the economy or on the consumer price index.
How can all this finance take place with little or no impact on the consumer price index? Just look at the 1990s and the 2000s. And, then the financial collapse came.
With little or no change in attitudes in our politicians or in the electorate or in popular opinion I believe that it is highly likely that we will be in the world envisioned by Bain and Company -- a world of credit inflation. Future posts will discuss living and investing in such a world.