by Karl Denninger, Market Ticker:
It’s really not very complicated.
If there are negative real rates of interest, defined as the cost of borrowing is less than actual inflation (not what some government wonk claims) then I can trivially run a cash furnace — literally — and show good “earnings” for as long as that continues.
Why?
TRUTH LIVES on at https://sgtreport.tv/
Think about it. I can borrow $1 million tomorrow, at a rate of interest of let’s say, 1%. This was not hard not long ago, was it?
Ok, so I must post up $10,000 a year in interest (1% of $1 million.) Fine. The true rate of inflation is 5%. I make a product and lose 1% on every unit I sell, but the price goes up by 5% a year (inflation.) I can pay the interest, sell the product at a loss and claim a 3% net margin!
This assumes I don’t lever anything, which of course I will do. If I “turn the crank” 10 times I now can claim a 30% return.
In truth I lost 20% (2% times each turn of the leverage crank) but that’s in real terms and all financial statements are in today’s dollars, that is, nominal terms.
Everyone in the society is forced by said inflation to subsidize my actions. That is, I never actually made any profit; I stole the money from you, your neighbor and everyone else. I’m not the only one doing it either; everyone in business is doing it and you’re getting robbed blind.
The problem with this paradigm, which is what we’ve done for the last 30+ years, is that the ratchet job keeps getting bigger because it has to; inflation is a compound function and further, everyone wants more and more profit and therefore more turns of the crank. You, as a consumer, are forced to eat this — right up until you can’t.
So the real estate agent, for example, has to have a reasonable and pretty-new vehicle to drive customers around in. The 10+ year old Camry or Mazda with 200,000 miles on it and a few dings and interior wear will not do. But that nice Tahoe LT that was $36,000 in 2002 is now over $70,000 in equivalent trim, a clean double.
The house she’s showing? It doubled twice in that period of time; what was a $100,000 home is now $400,000. You’d think this is all good because she gets paid a commission as a percentage, but you’d be wrong because her costs have gone up faster than the income did. In particular food, energy and health care have all skyrocketed in cost. Health care you can avoid if you’re both wise and lucky, but food and energy — not so much. In addition since the value of everything in “nominal dollars” has gone up so have insurance costs. The insurance companies love this since that ratchet drives their profits higher and, being a regulated industry with a 10% profit cap that’s the only way to make their business grow!
