Tuesday, June 7, 2011

Corporate Debt vs. Wages



What can't go on forever, won't.

March 13, 2009
The Triple-A Rating: Going Extinct?

"There are a lot of dead soldiers that are former triple-A rated companies."

Source Data:
St. Louis Fed: Custom Chart

16 comments:

Jerry Critter said...

I keep hearing that corporations are sitting on a lot of cash. Does this graph mean that they are sitting on both a lot of cash and a lot of debt when they at least could be using the cash to pay down the debt?

Stagflationary Mark said...

Jerry Critter,

That's how I see it. Further, the debt is a LOT more than the cash.

getyourselfconnected said...

It gets better, they take on debt at all time low rates to buy back stock, which pushed up EPS! Amazing work.

The Arthurian said...

Plus, they can write off the interest payments.

Interesting combination of data series.

I'm looking at the big hump of 1984-1990, the big anti-hump of 1990-1995, and then the long, gradual increase of 1995-2004 which corresponds to the years often acknowledged as the economy's best performance since 1947-73.

ArtS

Stagflationary Mark said...

GYSC,

It gets better, they take on debt at all time low rates to buy back stock, which pushed up EPS! Amazing work.

It gets even better. It also boosts the value of those executive stock options (assuming investors don't care much about the debt).

This ensures that there is at least one buyer of the stock when the executives are selling.

Stagflationary Mark said...

The Arthurian,

That 1990-1995 anti-hump was part of our last consumer recession (July 1990 to March 1991).

Assuming this consumer recession was far worse (safe assumption in my opinion) then it would stand to reason that we're probably not done feeling pain yet. We're still ABOVE the red trend line.

Wisdom Seeker said...

@Arthurian -

I think that "prosperous" long gradual increase might have been a credit binge!

When everyone feels rich because they're borrowing more and their interest burden is dropping, they might spend more but they're not better off!

Of course, the denominator in the ratio has also been suppressed. We could, and arguably should, restore the ratio to a goldilocks level by raising wages and salaries rather than cutting debt...

Stagflationary Mark said...

Wisdom Seeker,

Unfortunately, we are raising wages and salaries thanks to our ultra low interest rates. We're just not doing it in our country. Sigh.

As China’s Workers Get a Raise, Companies Fret

Rising wages and strengthening currencies in Asia are making it less attractive to move higher-value industries like auto manufacturing out of the West. But little mentioned by almost anyone making or trading consumer goods in Asia these days is the possibility of moving these relatively labor-intensive manufacturing industries back to the United States or Europe.

The Arthurian said...

Wisdom --
I think that "prosperous" long gradual increase might have been a credit binge!

Sure. And the 1947-73 'golden age' was also a credit binge, but nobody objected to it then, because accumulated public and private debt was still at a low level.

When everyone feels rich because they're borrowing more and their interest burden is dropping, they might spend more but they're not better off!

But what about 1947-73? We were better off then, right?

Wisdom Seeker said...

@Arthurian - I wasn't around 1947-1973 to know whether the additional debt was worth it. From the debt/gdp and marginal growth per marginal debt charts I've seen, perhaps it was. It may be that the long K-wave winter from 1929 - 1946 left everyone so debt-averse that the nation was carrying less than the optimal level of debt?

@Stag-Mark -

"Unfortunately, we are raising wages and salaries thanks to our ultra low interest rates. We're just not doing it in our country."

True, but I think we have to close the wage gap in order to stabilize the U.S. labor markets. Exporting inflation to the rest of the world might be a good thing for us (that way at least), though we don't see it here yet.

Stagflationary Mark said...

Wisdom Seeker,

Here's my concern.

Mix a billion people paid next to nothing with 300 million making a lot more.

In theory, we won't even meet in the middle. Sigh.

Further, automation is going to really put a damper on the "everyone is working" party for reasons you have pointed out elsewhere.

Textile, Textile Product, and Apparel Manufacturing

The textile, textile product, and apparel manufacturing industries include establishments that process fiber into fabric and fabric into clothing and other textile products. While most apparel manufacturers worldwide rely on people to cut and sew pieces of fabric together, U.S. manufacturing has become highly automated. Because the apparel industry has moved mainly to other countries with cheaper labor costs, that which remains in the United States must be extremely labor efficient to compete effectively with foreign manufacturers.

...

Jobs in textile, textile product, and apparel manufacturing will continue to decline rapidly as advances in manufacturing technology allow fewer workers to produce greater output, and growing imports compete with domestically made textile and apparel products.

The "decline rapidly" part should scare the you know what out of us, because it isn't just textiles that are being automated.

The Arthurian said...

Wiz --
It may be that the long K-wave winter from 1929 - 1946 left everyone so debt-averse that the nation was carrying less than the optimal level of debt?

Yes, and we are at the start of another such winter, now.

K-wave

Absolutely. And the previous downtrend on the Debt-per-Dollar graph occupies the whole period of the FDR presidency.

Stagflationary Mark said...

The Arthurian,

Your chart link has an ominous feel about it.

Wisdom Seeker said...

Arthurian, thanks for that chart!!!!

Mark: " The "decline rapidly" part should scare the you know what out of us, because it isn't just textiles that are being automated. "

No, actually, that's the part that makes me most hopeful! We just need to rebalance the rewards of that automation. The 1930s saw the shift from 6-day to 5-day workweeks (far more significant than Social Security or longer education), which was a huge step forward for human happiness. We should now be able to take more steps in that direction.

We just need to wake people up to the possible ways to absorb 5% more workers into the active labor force, without increasing the amount of work being done, and without handing all the fruits of that labor over to a kleptocracy...

P.S. Not sure about etiquette here -- should I follow up comments on stale posts, or shift commentary to the most recent post a la Hoocoodanode?

Stagflationary Mark said...

Wisdom Seeker,

We just need to wake people up to the possible ways to absorb 5% more workers into the active labor force, without increasing the amount of work being done, and without handing all the fruits of that labor over to a kleptocracy...

That is certainly the hope! Unfortunately...

If corporations could instantly automate nearly all jobs through a powerful new technology breakthrough, then I would argue that we should put a fork in the middle class American worker and call him done.

A perfect society would handle this case by calling it Utopia and allow its workers to pursue other interests and hobbies while simultaneously enjoying the fruits of that automation.

George Jetson worked 9 hour work weeks and had ample income to enjoy a full life. I would argue that we're not in a George Jetson world though.

Technology is destroying jobs faster than we are thinking up new ones. An acceleration of this process will simply accelerate the inability for workers to make mortgage payments.

As you say, we need to wake people up before it is too late.

Stagflationary Mark said...

As for the etiquette, whatever makes you happy!

If you want to pull an older discussion into the present so that others might read it, you are certainly welcome to do so.

I read all comments from all threads. It makes no difference to me. Further, I generally enjoy reading off topic comments. Sometimes they inspire new posts.