Wall Street’s Perpetual Profits Machine

Wall Street’s Perpetual Profits Machine

WASHINGTON — The federal budget deficit continued to rise in the first quarter of fiscal 2019 and is on pace to top $1 trillion for the year, as President Trump’s signature tax cuts continue to reduce corporate tax revenue, data released Tuesday shows.

The monthly numbers from the Congressional Budget Office also show an increase in spending on federal debt as rising interest rates drive up the cost of the government’s borrowing.

The widening deficit comes despite a booming economy and a low unemployment rate that would typically help fill the government’s coffers. Federal spending outpaced revenue by $317 billion over the first three months of the fiscal year, which began in October, the budget office reported. That was 41 percent higher than the same period a year ago, or 17 percent after factoring in payment shifts that made the fiscal 2018 first-quarter deficit appear smaller than it actually was.

-       Federal Deficit Climbs Again, Putting It on Track for $1 Trillion This Year, NY Times

By JM Hamilton (1-13-2019)

Why does the yield curve invert, or appear to have nearly flat lined? 

Many economists will tell you that an inverted yield curve, or a flattening yield curve (that’s where the two year Treasury yield is little different than the 30 year), may signify an imminent recession.  But in today’s world, w/ over a decade of hyper-accommodative central bank policy around the globe, it could signify something entirely different.

One thing does appear relatively certain, however.  And that is the global financial aristocracy - perhaps intentionally or unintentionally – have built a perpetual profits machine, and have locked in central bank accommodative policy for decades to come.

A perpetual profits machine?  How?  And does such a thing exist?

Look around you and what do you see?

Ø In industry after industry we see M&A and industry consolidation that all but guarantees a steady flow of profits, given some consideration for elasticity of demand.  Factor in financial engineering – often fueled by record low financing  - and who needs to make the top line grow, when a stock buyback or a LBO can do the job.

Ø Globalization has taken hold, so that supply chains, manufacturing, and patents are housed w/in the country w/ the least onerous regulations, lowest tax rates, and least expensive labor.

Ø We see a very low tax regime that benefits high net worth individuals, and multinationals, at the expense of austerity & higher tax rates for the middle class.  If the plutocracy can’t obtain compounded interest anymore, from fixed income assets…   thanks to crony democracy, there’s the compounding power of lower tax rates over time.

Ø And the piece de resistance, or engine that drives the perpetual profits machine, and the metaphorical gun held to every central bankers head, a global tsunami of private and public sector debt. It’s this ocean of debt that keeps central banks accommodative, interest rates suppressed, and central bank balance sheets expanding… and ironically, the Wall Street perpetual profits machine motoring along.

It’s ironic because a great deal of the US national debt (which more than doubled, from 2008 to present, by some ten trillion plus, dollars) was accumulated bailing out Wall Street banks, financing tax cuts for the wealthy, and fighting an entirely over the top global war on terror.  The bailout, tax cuts for the one percent, and the credit card wars – you guessed it – enriched the financial aristocracy.  And now, these very same robber barons use this cataclysmic debt to insure the Fed Chair doesn’t stray too far from home, that is to say, provides accommodative monetary policy for as far as the eye can see. (Everyone else isn’t so lucky, as debt is the father of inequality, instability, and indentured servitude.  When many of us pay our taxes this Spring take a close look; I can assure you Apple, or GM, aren’t paying anything close to the tax rates you are paying, that’s if they pay any taxes at all.)

Together these four items (consolidation, globalization, low taxes, and cheap debt - provided by central banks) all but guarantee that the financial aristocracy can’t lose, or let’s just say the game/monetary policy is rigged and their financing, & refinancing, risks have been immunized & mitigated.  Now, growth and profits may not continue to rise overtime, but profits are all but locked in w/ as much certitude as this world can offer: that’s the power of a monopoly & financial engineering supported by cheap debt.  

Owning the government, via a battalion of K-Street lobbyist, doesn’t hurt either.

Source: US Department of the Treasury

There’s just a couple of problems. Remove anyone of these four components, and the perpetual profits machine begins to malfunction, and the financial elite and Wall Street banks can signal their dissatisfaction, via capital strike or what has become to be known among stock market aficionados, as a taper tantrum.   Distortions, instability, & volatility can occur – or be reverse financially engineered - which can give the Fed Chair heart palpitations, or wreck a President’s career, possibly both.

Remove M&A, financial engineering, disrupt global supply chains, take away the low tax rate regime, or highly accommodative central bank policy…  and all sorts of hell can break loose.  And not just for the financial elite.  As industries consolidate, the leverage these cartels or monopolies hold over the economy, labor, markets, and politicians only expands and grows…. So if they are not happy, nearly everybody else can be made miserable or worse.  As for the federal government, higher interest rates (i.e. higher debt service loads) means much beloved entitlement programs, Social Security & Medicare, come under threat.

(It’s one of the reasons Trump’s moves on trade – during a moment in time when the Fed is seeking to normalize monetary policy – are so bold.  And while Trump has many issues, and a long list of flaws, the necessary renegotiation of US trade agreements, particularly w/ China, takes tremendous courage.  Essentially, Trump & Lighthizer are treading where no administration has dared tread for several decades.)

There’s another problem: theories on perpetual motion machines have been around for centuries, but the laws of thermodynamics guarantee that no such machine can exist.  A machine can only produce as much energy as it can consume; and judging from the manner in which the financial elite continually harvest profits, and manipulate debt, from their perpetual profits machine… we all know this machine will eventually breakdown.  Call this profit taking analogous to the second law of thermodynamics, which states that energy disburses, and, in this world, is subject to friction.  That friction, in this example, being the front loading of profits, bonuses, & dividends that are paid out every time a private equity firm, or C- Suite, loads another company up w/ debt.  Essentially, setting the business up for greater risk than necessary, when faced w/ market disruptions or during the next economic downturn.

Put another way, any number exogenous and/or endogenous shocks – individually or in combination – can disrupt the Wall Street perpetual profits machine.  Add in a global web of derivatives, swaps, and repos, and the odds of contagion only increase, in the event of yet another financial crisis.  (Although at the moment, I’d place my bet on political crisis.  Just ask Mr. Macron about the best-laid plans of mice and Rothschild’s bankers.)

So back to our original question:  Why does the yield curve invert, or nearly flat line?  Or in some countries, like Japan, stray into negative territory.

It’s based upon insider knowledge that central banks are being held hostage by the avalanche of debt they amassed, and created, bailing out banks, the billionaire class, multinationals, and, in the case of the US, paying for multi-trillion dollar credit card wars.

As for when the perpetual profit machine ultimately breaks down, well there’s certainly money to be made in chaos.  That is, when this profits machine, inevitably, runs off the road and ends up in a ditch, if past is prologue, there’ll be some tycoon(s), banks & shadow banking, and private equity fund(s) ready to pounce, pick up the pieces, and we’ll see even greater industry consolidation (which means far greater leverage over the economy, labor, and governments). 

Some folks call this “creative destruction.”  Yes, as JMH has written before, the financial elite’s creativity and our destruction.

In short, buckle up, because the air bags just might deploy.

Copyright JM Hamilton Publishing 2019