The Economy

Perhaps we can put this to rest, although unfortunately I already am certain that facts won't get in the way of a narrative for some people. ...

We are finishing earnings season and with 91 percent of investment-grade companies having reported eranings, excluding energy and financials (due to their volatility), earnings in the first quarter were down 8.3 percent year over year and revenues were up 3.3 percent (well below the measured rate of "inflation;" pick your index of choice).That follows a 10.9 percent annual decline in fourth quarter earnings ex energy and financials.

The narrative of companies being able to charge anything they want for discretionary food items, and consumers buying like there are guns to their heads, made no empirical sense. But the numbers back that up. Profits aren't growing. ... and in real terms, companies in the aggregate are eating margin.

 

https://www.cnbc.com/2023/05/11/pac...s-deposits-fell-9point5percent-last-week.html

 

The short answer is that you can earn 5.1 percent right now buying a 6 month T Bill, which the debt ceiling drama notwithstanding, feels safer to a lot of people than counting on the solvency of many of these banks. Money market funds that are investing in similar AAA rated short-term paper are paying a yield of between 4.5 percent and 5 percent.

Many bank savings accounts (not CD or high-yield accounts, but safe savings accounts) are still paying .1, .2 percent. And the reason they can't afford to pay more than that is intertwined with their solvency issues. People aren't stupid. With the Fed being forced to raise its overnight rate, it has sent yields on a lot of things higher, and savers who have been robbed of safe yield for a decade and a half are acting rationally.

The banks can't afford to compete with the yield on those 6 month T Bills, because while the Fed had its thumb on the scales of finance for a decaed and a half, almost all of those banks were finding it impossible to earn anything; their net interest margins were anemic. So they fell into the trap of borrowing short (taking deposits) and lending long (extending maturity on their loans and debt that they bought) in order to earn a few more pennies. That is why they are all in trouble now. They didn't realize it, but they were picking up those pennies in front of an oncoming steam roller that was unleashed when the Fed felt forced to let interest rates rise because of the consumer price inflation they unleashed. Any kind of long-term debt instrument started losing a lot of value as rates rose.

Our government lets those banks use dishonest accounting rules that don't mark those assets to market. But people slowly became aware that all of these banks are under water on a marked to market basis (i.e. if they were forced to sell assets to meet depositers withdrawing money, the banks would be insolvent). That started people looking for weakness.

It's kind of a perfect storm. Depositers are pulling their money because they can earn more elsewhere just as safely due to rates rising, and those rising rates are saddling banks with huge marked to market losses which make it impossible for them to pay competitive yields. As a result, those banks capital ratios are teetering, and as the sharks in the water are circling them, it is freaking out depositers who then pull more money out of the banks, especially those who have more than the FDIC limit. Which hastens the banks' failures.

This isn't over. This is part of the payback for zero percent interest rates for so long.

 

Income: noun money received, especially on a regular basis, for work or through investments.

Her universal income has no income component. People proposing suspect things always misname what they are proposing in order to obscure what it is they really are proposing. It's how the "inflation reduction act" becomes the exactly opposite of what it is called.

More accurately, what she is proposing is "universal money for nothing."

And then the question is where that money for nothing comes from. The only possible answers are: 1) Government runs up debt (and monetizes it) for as long as it can, robbing the future to live a populist fantasy today (and that game is almost done anyhow, now -- we've reached the limit) or 2) Government steals from some people to benefit other people. And as the saying goes, the problem with socialism is that you eventually run out of other people's money.

No matter how you slice it, it's destructive economically and it's morally deplorable. If you go the debt / monetization route, we will pay with runaway inflation (the monetization component) and stagnant economic growth into the future as you take capital away from way more potentially productive uses. We're already paying that way for the last couple of decades of stupidity. This just ups the stakes. The arsonsists who caused the fire, always ride in on the fire truck promising that their new hose is more powerful. Wash, rinse, repeat. And we all suffer. If you go with the Robinhood model, it's oppressive government / theft. That isn't a free society.