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Let them eat credit



The Federal Reserve cuts the federal interest rate for the first time since the 2008–9 financial crisis. On Wednesday, Federal Reserve Governor Jay Powell announced that the U.S. central bank would trim interest rates by a quarter of a percentage point, bringing the benchmark price to a target range of 2 to 2.25 percent.

Powell's decision to reduce the federal fund rate marks a U-turn from last year when the Fed was eager to tighten. But these days, problems are on the horizon. Trump's trade war – the collapse of talks with China, the steep tariffs imposed on Mexico – fuels concern over the overwhelming effect of "global factors" on the markets.

The move toward relief puts the United States back in line with its global allies. The Bank of Japan voted only to keep the interest rate at -0.1

percent and will continue to buy more than $ 700 billion a year in bonds. Mario Draghi, President of the European Central Bank, recently announced that the ECB will cut interest rates again this year and dip further into negative territory, while the Bank of London says they will cut rates before December.

Low interest rates have become the new normality of global capitalism – necessary, as Morgan Stanley chief economist Ellen Zentner recently observed, "sustaining enlargement."

Characterizing the last decade as an "extension" is a peculiar kind of euphemism. What exactly is maintained through central bank-designed, low interest rates?

Observers point to the fact that official unemployment has not been so low since the 1960s, that stock markets are soaring, that the United States is enjoying the longest growth since the Civil War.

But these achievements have an air of unreality around them. Perhaps not to a small extent because wages have barely stopped during the last decade with so-called enlargement, despite low official unemployment.

Lack of wage growth is actually one of the reasons Powell provided for the "mid-cycle adjustment," Congress told last month that wages "do not respond" to the expansion. Fed officials had hoped for a gradual easing of slack in the labor market, which would in theory push up inflation (to more than 2 percent) and raise wages – which would, overall, justify setting the federal fund rate on a path toward a more “Normal” 4 to 5 percent.

But that has not happened. Official unemployment is expected to fall to 3.5 percent by the end of 2019, but wages for factory workers and non-executive service workers (82 percent of the workforce) have remained steady for three decades. During the ten years of enlargement, only the top decile has had significantly improved salaries.

Recently, some economists have argued that wage stagnation is a myth. By pointing to Americans' larger homes, increased numbers of dishwashers, better cars and smartphones, they claim that people are doing well. They blame the appearance of stagnation on one of the economists' preferred calculations, the Consumer Price Index (CPI), which they claim understands how much workers are being compensated and overestimates actual price growth.

But no amount of computer turmoil can hide peculiar features of supposed recovery. Nearly 40 percent of Americans would not be able to cover an unexpected $ 400 expense. One in four children relies on food stamps to meet their dietary needs. More than half of US households do not have enough savings to cover more than a month of spending, and according to the New York Fed, household debt reached a new high in Q4 2018. Americans may have more color television than they did before, but the United States is still the most prosperous country in the world.

The lack of wage growth is not the only notable feature of capitalism's new normal. A decade of light credit (on top of a multi-billion dollar quantitative easing program), combined with a corporate sector designated by a generation of business-friendly reforms, has exacerbated a number of trends exemplifying the worst trends of capitalism. [19659002] A shining example is the repurchase of shares. Buy-back – when companies buy back their own shares to take them out of the market and thus increase value – is a key feature of neoliberal capitalism. Both shareholders and corporate executives (who are often partially compensated for shares) love them.

Over the last ten years, buybacks have become even more popular. Shareholders received a record $ 1.25 trillion in share buybacks and dividends in 2018, bringing the decade after the crisis to nearly $ 8 trillion in shareholder and company dividends.

Today, more than 90 percent of the company's profits go to share repurchases and dividends. More and more companies are using cash to buy shares instead of investing in jobs or research and development. For example, Alphabet announced its first buy-back program ever; The tech giant will buy $ 25 billion of its own shares.

In our financed economy, where so much wealth is riding on stock market fluctuations, companies are being pressured by institutional investors (including pension funds) to invest in stock repurchases. But most Americans do not benefit – 85 percent of all shares are in the hands of the ten percent.

Lowering the federal fund rate will not force companies to invest in workers or expansions of bricks and mortar. Or, at least, in a decade of low interest rates, we have seen little evidence that it will.

What is more likely is that it will encourage more stock buybacks, and reinforce the trend of creating wealth by manipulating stock prices. In 2017, one-third of share repurchases were purchased with debt.

A lower reference rate also strengthens the vultures. Private equity companies thrive in a low-interest environment like what we have now, and it seems to have that for a long time to come. PE firms such as KKR and Blackstone operate using a utilized purchasing model, forcing the companies they take over to borrow a boat load of cash to pay for their own acquisition. companies they take over for bankruptcy, no problem. The US's two-century limited liability model ensures that PE companies are never on the hook for more than the equity contribution. Whether the company survives or dies, PE executives get paid.

Simple credit means that PE firms can collect debt on companies leaving – the average PE-owned company today has debt levels that are eleven to twelve times earnings before interest, tax, depreciation and amortization. And because interest rates are so low, PE investment becomes an extremely attractive destination for other investors who want higher returns and perpetuate the utilized acquisition model.

The untreated greed displayed by American companies is not just the result of simple money. It is also nurtured by a broader ideological climate that privileges the privileges of business – which sees the private sector as a place for efficient, rational investment, innovation and progress. In this climate, cheap credit is linked to a tool for expanding and expanding the maneuverability, impact and scope of private companies.

This is the story we have been told for a decade anyway. The reality is far different. In addition to the huge waste of share buybacks and unwanted destruction of PE firms, the last ten years of expansion have seen privileges for companies that fail even on capitalism's own terms.

Think about the equestrian sector. Uber lost $ 3 billion last year. Lift lost a billion. Still, these companies, along with dozens of other "unicorns" who are losing out, are Wall Street darlings. Their soaring valuations rest on the promise they hold, the stories they tell about a future where AI, platforms and self-driving cars solve everything.

In a low interest rate environment, it does not matter if these companies make a profit. They can simply borrow money to boost cash flow and dump billions into companies of questionable value.

Instead of investing in modern, sustainable public transport – something both rural and urban areas need – capital is allocated to retrograde projects that increase fossil fuel use and promote consumer behavior antithetically to society's needs. We don't need self-driving cars – we need green subways, buses and trains.

Some politicians challenge the new norm.

Elizabeth Warren recently introduced draft legislation called the "Stop Wall Street Looting Act" – a radical proposal that would effectively destroy the utilized buy-back model. Warren is calling for an end to the rights of private equity companies. The rules of her bill would make PE firms liable for the debts they pile on the portfolio companies. If they run a company for bankruptcy, the PE firm will be liable for the company's debts, and by extension, to pay the creditors – including workers and pensioners – what they owe.

Meanwhile, Bernie Sanders tackles the issue of share repurchases. Together with Chuck Schumer, he recently proposed legislation to prohibit companies from buying back their own shares until they have shown that they are first looking for other stakeholders. Companies that want to buy back shares must demonstrate that they pay a living wage to all their employees (including paid sick leave) and that they provide health and pension benefits.

The likelihood of these bills passing is not given the makeup of Congress. Nevertheless, they signal a changing common sense. They are driven by a growing recognition that the Fed's expansion is so desperate to maintain it's really only a decade of expanded profits for companies and elites.

The new low-interest-rate norm is designed to calm the heartbeats of capitalists, not to improve the lives of the unemployed. Not only do companies dump cheap credit into speculation instead of new jobs and investments, but also a lower federal rate doesn't mean cheap credit for everyone. Students cannot borrow loans for the school at federal interest rates. A low reference rate does not help the people who are desperate enough to take out payday loans, or the families who rely on credit cards to buy groceries and gasoline.

The contradictions of financed capitalism are increasing, but most elites and policy makers remain fixated on the balm of monetary policy. It's time to try something different. If the decade after the crisis has shown anything, it is that monetary policy will not bind the company's privileges to the needs of workers.


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