Wednesday, March 30, 2011

Obama is a cat person (the fat kind)

Mergers and acquisitions are up 84% this year, happy days are here again. That is if you are in the top 1%, of course the “happy days” never really left for you. President Obama has been chiding corporate fat cats to start investing the 2 trillion in cash they have been sitting on and he brought on board Jeffery Immelt from GE to make that happen. Immelt, who is the fattest of corporate cats had a really good year with his company making 15 billion dollars in after tax profits. Five billion in the US before tax, 7 billion after tax as they got money back instead of paying in.

Mergers and acquisitions are a favorite of the Wall Street crowd ever since Ronald Reagan de-criminalized the many of the practices they use. Highly profitable and barely taxed (if at all) these M&A operations have been instrumental in the export of jobs and the lowering of wages in the US.

Touted as “increasing efficiency” the real result is higher unemployment, the elimination pensions and benefits. This leads to higher prices for consumers from the stifling of competition. The small investor eventually gets left holding the bag as massive amounts of corporate debt created by the M&A activity ultimately drags companies down into bankruptcy wiping out the unwary stockholder or pension fund. This of course costs still more jobs and eliminates more middle class wealth.

Indeed several trillion in corporate junk bonds will be coming due shortly, probably reaching a peak in 2012 along with several trillion in expiring commercial real estate loans that are underwater and will fail to be renewed.

This sort of widespread debt collapse is just the sort of thing that brings about the kind of deflation that Great Depressions are made of. The Federal Reserve is in the middle of printing an extra trillion USD and using it to buy Treasury Bonds from the secondary market with the intent of heading this off.

The good news is that Wall Street has stopped waiting for the crash to go on a spree of M&A so maybe they don’t see deflation looming right away, or maybe they are just being fooled by the price of gas. Rising prices are not really inflation, not that it doesn‘t hurt the economy, just in a different way. The bad news is that Wall Street making money doesn’t really do the rest of us any good.