On Artificial Interest Rates And The Forfeiture Of Growth For Dividends

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Diapason Commodities' Sean Corrigan provides an insightful introduction to the critical importance of a market-set rate of interest and central banks' manipulated effect on the factors of production.

"Fixated with using their illusory ‘wealth effect’ to avoid a full realization of the losses we have all suffered in a boom very much of those same central bankers’ creation - or else cynically trying to achieve the same denial of reality by driving the income-poor into accepting utterly inappropriate levels of financial risk - they are destroying both the integrity and the signalling ability of those same capital markets which are the sine qua non of a free society."

As Ron Paul also confirms in the clip below "with artificial interest rates, we get an artificial economy driven by mal-investment leading to the inevitable bubbles" and while central banks hope for this 'created credit/money' to flow into productive means (Capex), instead it has (in today's case where QE is no longer working) created an investor-class demand for yield - implicitly driving management to forfeit growth-and-investment for buybacks-and-dividends.

 

Ron Paul's interview with Laisses Faire outlines the impact an artificial interest rate has on the economy...

and Sean Corrigan of Diapason Commodities provides a more in-depth look at the process by which a manipulated interest rate impacts the factors-of-production (or the risks and rewards of the real business cycle)...

What is not to be overlooked is that the applicable rate of interest is not some abstract entity, utterly variable according to the whim of the banking system, but rather is one of the fundamental ratios prevailing in the vast, interconnected topology of exchange - in this case, between the value put on goods available at once and on those only accessible at some future date...

 

Take the act of deciding upon the launch of a new or expanded line of business. Obviously the entrepreneur will make his best guess as to the stream of revenues he may gather and will set these off against his estimates of what it will cost him to achieve them. Thus it is, of course, that a lowering of the rate of generally accepted rate of interest makes his challenge seem a less daunting one: our man will not only have less to pay out on any hired capital he requires, but the possibility of earning a greater return in some other fashion...Yet - whether he recognises this or no - his reckoning is intimately bound up with the information which the interest rate is conveying with regard to the likely relative abundance of his inputs and the relative demand for his outputs over the entire investment horizon of his project...

 

It should be all too apparent by now that if we are to enjoy conditions which are favourable to both the greatest degree of co-ordination between the market’s multitude of actors; if we are to remove all impediments to the early recognition of such lapses from that co-ordination as must inevitably occur in a shifting world of imperfect knowledge and changing tastes, then any interference with the spontaneous, holistic formation of prices is not to be countenanced, much less embraced as a tool of dirigisme.

 

Rather, it is vital that the myriad interactions between buyer and seller, producer and consumer, saver and spender, employer and employee should be allowed to make its due contribution to the universal field of prices thence to reveal how best to marshal our limited resources in order to deliver more of what appears to be the more urgently required and to expend fewer efforts on the less. This is not true only in the here and now, but also over time.

Clearly, we have no gold standard to impose discipline on either the ruling elite or the bankers who are their political symbionts... granted, we have a wider range of  non?bank and other credit instruments to confuse the issue; but none of them alter the fact that investment is best undertaken when both the money and the means corresponding to that money have been voluntarily set aside to finance it, or that, conversely, investment is worst entered upon when it is launched on a soon cresting wave of counterfeit capital, conjured up by the banks or the government printing press.

12-11-20 TA - As a Matter of Interest

 

which leads to the current remarkably non-traditional text-book situation that Citi describes - where equities are now the yield-providing asset as management is punished for spending capital on growth or investment and is praised for buybacks and dividends as the Fed's artificial premise in which we live has created a monster...

Policy-makers have adopted aggressive methods to push interest rates and bond yields down to unprecedented levels. It is hoped that these low rates will trigger a stronger recovery in corporate capex and jobs. Evidence of this remains sketchy...

 

We think that QE may be having the opposite impact to that intended. Instead of encouraging capex and job creation, ultra low interest rates are bringing yield-starved capital into the global equity market. These investors are more interested in dividends and share buybacks than corporate expansion. Those CEOs who give them what they want should be rewarded by share price outperformance. Those who do not may find themselves replaced.

 

Citi Equity Yield

 

If we are to salvage any residue of our liberty, restore any semblance of our prosperity, and again secure to ourselves the right to enjoy our property, this [manipulation] must be ended before it consumes our capital...

If all this means that we have fewer projects underway at any one time, so be it: we will waste far less of what we hold scarce and end up holding fewer things as scarce as we do now.

The Garden of Eden may well be denied us, but that does not mean the only remaining choices are the debtor’s gaol or the soft totalitarianism of de Tocqueville’s worst imaginings...

...it is saving that makes us rich, not spending, and it is only by saving – not through authoritarian fiat ? that a naturally lowered interest rate confers a lasting aid to capital formation.

If policymakers hope that listed companies can help drive down current high levels of unemployment then it could be a long wait. Corporate expansion plans are likely to remain constrained by uncertainties about the global economy and a shareholder base that is more interested in share buybacks and dividends than capex and job creation.

Source: Citi, Diapason Commodities