Jul
The bailout of Boeing and other large companies by the United States has made a mega-trend crystal clear: small business owners are growing increasingly frustrated with the attention “systemically relevant” corporations are receiving and the fact that, just like in the aftermath of the Great Recession, large entities are positioning themselves as spoiled children of the financial system.
Why?
Simply because:
- When times are good, large corporations are far better positioned than their smaller counterparts with respect to proverbially playing the system so as to maximize rewards. As such, the year 2010 for example (despite not that long having passed since the Great Recession, where corporations have branded themselves as innocent damsels in distress that needed to be saved to survive) brought about records in terms of executive pay and bonuses. The same way, large corporations have been more than happy to use easily obtainable capital so as to engage in share buybacks, with the net result being an increase in share prices that also helped top executives, many of whom are major holders
- On the tax front, many of the large companies that are seeking bailouts today have been engaging in extreme tax optimization schemes, to the point that let’s say many cruise operators were sailing under the flags of nations such as Lebanon for this very reason. In stark contrast, small businesses cannot exactly afford to hire an army of lawyers/accountants and as such, are left with a comparatively higher tax burden
- When times are bad, systemically relevant large corporations inevitably end up in the spotlight, with politicians rushing to their rescue for a wide range of reasons, from the lobbying capabilities of said corporations to the fact that a large number of jobs are on the line. Once again in stark contrast, smaller businesses don’t have nearly as large of a presence to end up on the radar of governments and central banks to as great of a degree. Of course, various bailout packages and central banking policies do mention small and medium-sized businesses as well, but how much of that is plain rhetoric and how much actual deployable money on the table?
Needless to say, this status quo is anything but sustainable because it brings about an extreme concentration of anything from market share to wealth. We therefore end up in ironical situations, for example the fact that the Great Recession was to a more than decent extent caused by large banking institutions, yet the policies which followed enabled precisely those large institutions to gobble up smaller ones and end up even more systemically risky.
Leaving mergers and acquisitions aside, there is also the ideological component or, if you will, the fact that “corporatism” as it is called (an environment where large corporations are on the receiving end of a wide range of unfair advantages) attacks the very core of capitalism by leading to a system where entrepreneurship on a granular level is inhibited dramatically. As such, the proverbial dream transitions from becoming a small business owner who starts from scratch and ultimately makes it to becoming a high-paid executive. Furthermore, any failures of this system are quickly labeled failures of capitalism despite the fact that, again, “corporatism” is indeed a better-suited term.
This status quo inevitably leads to significant build-ups of tensions and in the aftermath of the 2020 pandemic, they became more than obvious on two fronts. On the one hand, small businesses demanded to be included in the trillion-dollar bailout programs that emerged all over the world, from China to the European Union and United States. On the other hand, the average individual demanded the same treatment, which led to Universal Basic Income-like programs being implemented, which manifested themselves in the form of $1,200 being granted to eligible individuals in the United States and similar initiatives elsewhere.
The more time passes, the less other players are willing to accept the limitations of corporatism and therefore, the authorities find themselves in yet another binomial predicament. On the one hand, they can decide to turn governments and central banks into perpetual ATMs which stimulate all economic actors on the fiscal side (infrastructure investments, loan guarantees and even money deposited directly into people’s bank accounts) but risk bringing about a generalized loss of confidence in the worldwide currency system altogether, as more and more “printed” money finds its way to the real economy and leads not just to asset price inflation such as the post-Great-Recession injections but consumer price inflation this time around as well. On the other hand, they can decide to do the exact opposite by stepping back and letting the market sort itself out, knowing that they risk about bringing about another 1929-style Great Depression.
This much is certain: in pretty much all jurisdictions, small and medium-sized businesses as well as the average individual are making it clear that the Great Recession approach (heavily favoring large corporations) will no longer be tolerated. Therefore, stimulus programs from all around the world carry much greater weight in this direction and it remains to be seen what the long-term consequences will ultimately be.
For the time being, it is not difficult to observer that the “universal ATM” approach is chosen all over the world. As the dust settles, it once again remains to be seen what the consequences (if any) in terms of confidence loss in the worldwide currency system will be. Ask a libertarian and he will state that the system is doomed. Ask a Keynesian and he is likely to state that the status quo is not at risk. Ask the ChinaFund.com team and we will quickly provide the only honest answer in this context: we don’t know, neither does anyone else and for this reason, the only approach that makes sense revolves around keeping our ear to the ground and reacting to the events which unfold as quickly as possible, with us of course keeping readers and especially clients posted.