From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic
In order to explain why markets have been caught up in a trap of what one might call the greediness of their governments and the other just a lack of sense to predict possible outcome, looking back at the data of the past three years all we could see is that there have been billions of share repurchases, while at the same time huge amount of money is being spent in order to lift up prices of corporate shares from the companies themselves.
The fact is that the reason for the governments to borrow was covering their operating costs, while companies have borrowed to increase, to develop new segments, as well s to buy their shares making up the prices.
However, none of them was able to follow the rule of selling or buying at lowest or highest since during the crises especially American companies have taken advantage of such a chance to buy back their own shares at a reduced prices. Those prices are high again, they give the impression almost each and everyone wants to buy, even though it must surely end. It is easier than ever to predict what will happen when stock prices will collapse.
After the crises governments have added billions of dollars to their public debt, and if we look at the previous data and at converted value of dollars from the historic to the current one we see that what has been done in the past eight years in most countries exceeds the amount of debt of the whole XIX and XX century.
There is an opinion that many governments had no other choice but to maintain to pump up the credit bubble. From this standpoint comes the comparison of this situation to that of a person who would take a hot air balloon journey and who unexpectedly realizes that the hot air does not bring balloon flyers exactly where they wanted to go, while at the same time there is no choice but to persist to bring in the air or, if he stops, the balloon will crash to the ground and he will die.
This comparison has been a subject of many debates during the past few weeks and has continued to involve other aspects of the problem. Those who oppose call this nothing but the demand for the credit boosts, hoping that they will increase growth and make debt more supportable. However, the economic boom that is supported by nothing but hot air is deceptive and it will never lead the government or the company to real growth until they meet the zero point by returning whole amount of debt to the creditor.
At the beginning credits grow and asset prices rise, but later the credit becomes too small and asset prices decrease, since they usually await consumer prices. As a result of this kind of credit inflation we could expect to see a deflation when the bubble bursts, as it always happen when spending stops creating the sense of wealth since its limitations create the sense of poverty. These occasions lead to the change of consumers’ behavior since they stop spending on what they think they actually do not need and create the deflationary effect. The reality is that a debt deflation does not generate bad debts or bad funds, though it basically drives people to recognize and accept their own mistakes in consumption. On the other side companies go bankrupt as they cannot have a loan of almost boundless resources at near-invisible yields.
The credit cycle has nothing to do with the ambiguity since the wealth created money that goes where credit is removed. It is clearly visible that the most serious errors have been made by the central banks of those countries whose private and public sectors are still willing to be more indebted, as companies still buy back their own shares while asset prices are still climbing. This could continue for a while, but sooner or later this must end and when it ends it will be too late to change habits.
It is unlikely that the new recessions could be fully eliminated and therefore the nature eliminates errors. Regardless the creativity, inventions and ideas for new businesses the capital is limited and if it is being used for bad projects and ideas, the people have no other way but to become poorer. The best way to define which projects are bad and which are good is to check what will happen after the next increase of interest rates that bad structured businesses cannot stand. That will not be agreeable but will bring the markets back to reality.