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Why we should be angry about the economy.

After the 2008 financial crisis most of the OECD economies used "Quantitative Easing" to provide cash to banks and corporations.  Quantitative Easing is where the Central Banks buy back Treasury Bonds before they have matured so that banks (which hold Treasuries as collateral) have cash which they then lend to customers, often at very low interest rates. 

Since 2009 the Bank of England has released £1655 bn of QE - see Bank of England QE. What happened to the Quantitative Easing (QE) cash?

A small amount went to large corporations but the banks failed to lend to Small and Medium Sized Enterprises (SMEs).

Bank of England Data
Only £185bn of UK bank lending went to business and hardly any went to medium sized and smaller businesses.  The bulk of the money went into property and financial corporations.
See positivemoney.org
The loans for property pumped up property prices and the financial corporations largely re-lent the money, often to US Corporations (see below).

In the UK the banks have used their new money to restructure by closing local branches so that they can focus on internet based secured debt and financial business.  The big UK banks are no longer suitable as a source of enterprise funding for small and medium sized companies. An alternative system of business oriented local banks is needed.

In the USA QE had a different effect, rather than pumping up property values it pumped up share values by allowing corporations to get cheap loans to buy back their own shares.  Why do corporations buy their own shares?  The answer is straightforward: buybacks reduce the number of shares in circulation so increase earnings per share, this raises share prices and directors who run companies with rising share values get big bonuses.  The corporations used the money provided by the government to make their businesses look successful.

This has been happening on the grand scale which is partly why the DOW has performed so well:

In the last 10 years the DOW more than doubled in a remarkable "bull run".

UK companies are not so involved in UK share buy backs which is probably why the FTSE has underperformed relative to the DOW.

Corporations in the USA have spent more on buybacks than on dividends:

PR Newswire
The US Investment Banks have been at the forefront of buybacks, spending as much as $7bn a quarter on buying their own shares:

Financial Times
 The top 10 US airlines spent 96% of the money they received from government schemes on buybacks.  In the USA corporate buybacks are a major political issue.  Does it matter?

The buybacks have created an unrealistically priced US stock market.  Coronavirus has drastically lowered corporate profitability and hence share prices.  Share price is related to the value and hence creditworthiness of a corporation so the corporates will be unable to buy back shares which will lead to further falls in share prices.  Perhaps the greatest damage inflicted by buybacks, from the point of view of corporations, is that the US Government may be less inclined to offer corporations money this time around.  There is an outside chance that US shares will crash, so far a real crash has not happened because US shares are only down c.30% and back to 2015-16 levels.  A major US share crash (60%+ fall) would bring down the global economy.

Perhaps the greatest lesson from QE is that the banks cannot be trusted.  This should have been the lesson from the Financial Crisis but we did not learn.  If we give the banks cash they will spend it on what is best for them, not what is best for us.  Is anyone surprised?


6/4/2020

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