Stockman: Corporate America Is Cannibalizing Itself

American businesses are borrowing at historic high levels, but the only thing growing as a result is how fast their equity capital is vanishing, according to David Stockman, White House budget chief during the Reagan administration.

Stockman, a reliable critic of Federal Reserve policies, said much of the blame can be laid at the feet of the central bank and the bank's Wall Street cheerleaders.

He said the Fed's balance sheet has ballooned by 9 times since 2000, yet real net investment in the business sector has cratered by 33 percent during the same time period.

"Once upon a time businesses borrowed long term money — if they borrowed at all — in order to fund plant, equipment and other long-lived productive assets," Stockman wrote.

"Today American businesses are borrowing like never before — but the only thing being liquidated is their own equity capital. That's because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A [mergers and acquisitions] and LBOs [leveraged buyouts], not the acquisition of productive assets that can actually fuel future output and productivity."

In Stockman's view, central bank "financial repression" — in the form of artificially low interest rates that have been orchestrated to provide a false prop to the economy — is responsible for fueling stock market bubbles that makes stock repurchases and other short-term financial engineering maneuvers profitable.

More here

[ The corporate version of 'home equity' loans.. --Editor ]