We will see the return of capital investment on a massive scale
themarket.ch
themarket.ch
Just look at Japan. Now remember that it's the world’s largest creditor nation, while the US and many EU countries are huge debtors. In the past foreign governments and investors were happily financing both of them, but now they are calling on the debt and sanctions against Russia only accelerated the process. If you think that in such conditions you will have enough leeway to finance the "capex boom", you probably will be quite disappointed. Japan and the UK are nothing more than the first cracks in the dam, I am more than certain that we will see much bigger events in the near future.
All in all, it seems that we move according to the Ray Dalio's scenario of long-term debt cycles.
That will keep going until people overthrow said government (most likely with another with a collection of favorite industries to subsidize), but that won't happen for a while because most people will enjoy the growth in local making at first. The failure points come because the government doesn't know what is actually needed and starts spending on stuff that is not needed (creating bubbles in construction like China with cities that stay empty) or starts a war (defense is an industry too, plus hard to overthrow a war-time government).
Europe has started down this path already, while the US and Switzerland still stand as free market economies drawing in all the fleeting investment cash, until they bubble too much and lose their currency.
Why do you think the government would be overthrown? It’s merely redistribution. It will just last for a couple election cycles.
Do people really sit on cash as it's being devalued by inflation anymore? I thought savings of all types were at historical lows since the 90's where nobody saves, has debt (e.g. mortgage & credit cards), or invests in the stock market in some form - which has become incredibly easy to do over the last 2 decades.
High inflation also only makes a dent in existing long duration debt. It doesn't do anything to reduce existing short-term debt, nor to reduce the real cost of new debt that comes from new deficits (at least for government debt).
(That is because short-term debt needs to be either paid off or rolled over.)
Sure, a green loan guarantee spurs investment in that area but the business model must still be sound or it will be falter in the marketplace. And if government steps in and, say, also guarantees an energy price, that's just another form of taxation for the consumers that must pay the costs of a political choice in energy. This will quickly hit a wall of resistance from consumers if that particular technology is a mallinvestment.
Furthermore, the loan guarantees themselves might not be officially counted in the debt to GDP ratio, but rational investors will be aware of them and price government bonds accordingly. A state that over-guarantees bad loans will see trouble servicing their debt in the marketplace, and at least in Europe the well known structural fragility of the Eurozone will amplify those shocks and bring them into the foreground.
I don't know what the equivalent contemporaries would be, but in any case we would need to see public spending or nationalization on a scale incomprehensible to the current neo-liberal european business climate, not just some puny guarantees & price ceilings, which are not very sustainable anyway.
Both debt and equity are just different points on a spectrum that you mix-and-match from to can structure the liabilities side of your balance sheet.
However as the linked article points out, the big difference here is not debt vs equity, but that governments step in with tax payer money to guarantee the value of debt in a way that they don't do for equity.
Those government guarantees are the real deal, whether that's an explicit guarantee or the implicit 'too big too fail'.
Bankruptcy just means that the company's old equity is 'deleted' and that what used to be debt gets turned into equity.
Nothing about how the company operates has to change. In principle, workers can still make the same products, customers can still buy those same products etc.
Airlines are the prime example of this: airlines go bankrupt all the time, you could almost say it's part of their business model.
Of course, the process of bankruptcy also often comes with big changes in how the company operates. But you also often see those big changes and turnarounds without any bankruptcy.
(Those big changes can even include shutting the company down.)
High debt means high leverage. Low debt means low leverage. Whatever you are calling "high equity" is just low debt, because (as you said yourself) they have a direct inverse relationship. Unless I'm missing something here...
> If nobody wants your equity then you don't have a lot of room to adjust the ratio.
If literally nobody wants your equity, its price would be 0. I assume you are talking about your equity having a low price instead?
You can still take on debt to buy back shares (or pay a dividend) to lower your outstanding equity. Or you can issue shares to pay back debt.
Or you can use retain profits to pay back debt, lower both the absolute amount of equity and debt.
All of these moves are possible when your share price is low.
So was your comment about "high equity" just about leverage? Like, everyone worries about high leverage but no one seems to care about low leverage (which could be an inefficient capital allocation)? It's just an unorthodox way to put it, that phrase
At most they compare debt to GDP. You almost never hear these panic pieces talk about debt vs equity.
Btw, if people are worried about debt, the first thing we should do is put equity financing on the same footing as debt financing.
As it stands, companies largely service their debt with pre-tax money but pay for their cost of equity with post-tax money.
By "high equity levels" do you mean high levels of government ownership of corporations? Or do you mean high equity valuations?
If the latter, there are certainly some who voice concerns. For example John Hussman:
I was leaving that a bit ambiguous, because concerns about high debt levels are also often ambiguous about government debt vs private debt.
However the equivalent of government debt is not government ownership in corporations, but people owning equity stakes in governments.
(State owned companies are a problem, but not the problem I wanted to talk about in this comment.)
Yes, there are some people voicing concern about stock prices.
I just know that it's not government owning other entity's equity.
That doesn't necessarily mean they knew what they were talking about. Could be they just got really lucky.
In a recession we're always looking for a way out, a silver bullet, someone to whom we can hitch a ride (and our money) to.
Are you somehow assuming that the total amount of government debt is fixed?
this is a fantastically succinct summary of his principal thesis, well said
“A third possibility would be voters telling their governments to stop these policies by voting them out of office.”
In America we are about to go through a midterm where the Republicans will take back parts of Congress, effectively shutting down Democrats ability to continue that political economy. Our rhetoric and political climate is also setting up the foundation for another Trump presidency, and he won’t push for jack shit in terms of government programs (if anything, more tax cuts).
It’s a bipolar situation, we are either going to hit the breaks entirely on the political economy with the Republicans, or go full swing with it with Democrats, which I think will leave us in a stagnant place as we shift between both parties over the next 20+ years.
Not sure if this is good or bad.
Also makes me wish the Iraq war spending had been put into climate change prevention. Can only imagine how much better off we’d all be today.