In the sound money community it’s generally understood that abandoning the last vestige of the gold standard in 1971 gave major countries effectively-unlimited credit cards – which corrupted them irredeemably.
Now – with government bonds yielding either next to or less than nothing – that corruption has begun to spread to corporations, whose bonds are being snapped up by yield-deprived investors. For example:
(Nikkei) — A shift is taking place in the Japanese stock market. Companies that take risks rather than playing it safe and transform themselves to seize growth opportunities are the new darlings among investors.
That last sentence is chilling. In a credit bubble, a rock-solid balance sheet becomes “risk-averse and complacent†while borrowing record amounts of money to make historically-huge acquisitions is just good business.
Since corporate CEOs, being human, find it hard to resist the siren call of empire, expect the negative interest rate world to generate a deluge of M&A which in turn produces mal-investment on a scale that dwarfs that of the junk bond, dot.com and housing bubbles.
Two more-or-less random illustrations of the ability of easy money to turn corporate CEOs into raging idiots:
William F. Farley is not a household name today, but during the junk bond bubble of the 1980s – when credulous investors lent money to almost literally anyone with a plan to acquire almost literally anything – this guy was a roll-up artist who eventually bought and ran the Fruit of the Loom underwear company. As Wikipedia tells it:
Farley would soon establish himself as a nationwide leader in leveraged-buyout transactions. Over the next decade, Farley Industries would grow to encompass numerous companies within the manufacturing, mining, and apparel industries, the largest acquisition of which was Northwest Industries, for $1.4 billion in July 1985.[8] This acquisition brought Farley national attention for its size and boldness.
Farley served as president and CEO of Fruit of the Loom from 1985 to 2000. During that time, Fruit of the Loom’s revenue grew dramatically, from $500 million to almost $2.5 billion. At its peak, Farley Industries employed over 30,000 employees worldwide.[2] Even while the company’s revenue was rising sharply, its debt proved increasingly unwieldy amid the shifting economy. In 1999 Fruit of the Loom posted a net loss of $576 million, and Farley stepped down from his position.
