again, you make no reference to the debt aspect. that is however the CRUCIAL point. the perceived difference between inflation rates that are higher than reported and GDP growth that is lower than reported is fully explained by the extent to which debt in the economy grows faster than GDP. look at money supply growth over the past five years...it exceeds even the overstated GDP figures by a WIDE margin.
what has the current account to do with corporate debt? that's apples and oranges. of course the current account is fully covered by the capital account surplus, which in turn must be dissected to fully appreciate WHAT has actually been done with the money. for the better part it has been invested in treasury securities, and the stock market. even the direct business investment has not created any new production capacity, at least not directly. e.g. today Nestle took over Ralston Purina - great, $10 billion for the capital account. but what has been added to the REAL economy? the Ralston shareholders will re-invest the proceeds in the stock market, which as you know is a place of ephemeral values. one day you see them (Nasdaq 5K) , a few months later, they're off to money heaven. of course we HAVE been in the particular phase of the k-wave where capital investment, and the profits derived from capital investment rule. however, the dollars recycled via the capital account are exported as fast as they come in, feeding the current account deficit. a dangerous situation at best, as the Asian crisis has shown.
but let's get back to the topic of corporate debt. what has it been used for? well, share buybacks at inflated prices were a fashionable destination, but so was, as you correctly point out, capital investment. however, typical for a disinflation boom during which asset and credit bubbles build (this is a well known phenomenon: the CB, lulled into keeping rates too low due to the apparent lack of goods and services inflation, allows asset inflation to take over and induces a credit spree, which for the most part finds its way into inflating assets, financing speculation,as well as CONSUMPTION. this is very important, consumption has been financed by dissaving and debt), malinvestment soon begins to proliferate, as economic decision making is now based on misconceptions about the future consumption that the too low interest rates will create.
in the end, you end up right were we are now, with corporate debt at record highs in both absolute terms and relative to equity and GDP, and much of the debt, especially that taken on late in the cycle when credit creation grows geometrically, supported by malinvestments that will never create the cash flows necessary to support the credit bubble (i.e. pay for both interest and principal).
the most glaring example of this is telecommunications related debt and investment. in the past twelve months alone, almost $600 billion in ADDITIONAL telco debt have been created globally, and if you have followed the absolute madness of the bidding for wireless licenses, been invested in something the amortization of which is highly doubtful at best, and so far in the future, as well as being linked to even MORE spending on infrastructure, that it is highly unlikely that the margins that will eventually be achieved will ever justify taking on the debt (and i haven't even mentioned technological obsolescence issues yet).
MALINVESTMENT...DEBT...ASSET BUBBLE...the deadly combination resulting from the most profligate Fed policy ever witnessed in history.
i repeat, the debt will have to be paid, if not by the borrowers, then by the lenders.
PS: i am an optimist, in spite of my misgivings over the above issues. but i realize that progress in capitalist societies is subject to cycles, small and large...and we have just witnessed a part of the cycle that has played out exactly as predicted by the kondratiev wave, as well as being expertly explained by Austrian theory. now comes the debt and asset shredding part, a necessary, and inevitable development. |
