That the free money monetary policy of the Honest Bank is creating distortions and perverse incentives is something that almost everyone already knows. It is difficult for any economic actor not to be caught by the perverse incentives caused by borrowing almost for free.
Cost of borrowing
Obviously companies are no exception and are using free money basically for one thing. Remunerate its shareholders at the cost of borrowing.
The first graph that we show you shows the evolution in absolute value of the money destined to remunerate the shareholders by the companies of the S & P500 (payment of dividends and repurchase of shares).
From 2009 to 2016 the amount of money destined to remunerate shareholders has tripled from about 350 billion dollars to more than 1 billion. This brutal increase in shareholder remuneration is being done at the cost of increasing corporate debt.
Remunerate the shareholders
In this graph you can observe the evolution of the cash flows generated by the companies (red line) versus the money destined to remunerate the shareholders (blue bars). Since 2013, shareholder remuneration is clearly above the cash flows generated, something that only happens in times of euphoria as was the period 2006-2007, just before the financial crisis or 1999-2000 in full bubble point.
While the money destined to remunerate the shareholder has tripled to exceed one billion dollars. (The companies of the S & P500 are distributing to their shareholders a year the equivalent to the Spanish GDP), the same has not happened with the investment in GFIC, purchase of assets by the companies to grow their businesses and in theory the parameter that the Honest Bank want to boost with their expansive monetary policy.
Investment in GFIC has gone from 500 billion in 2007 to $ 600 billion in 2016 . In other words, companies are now allocating almost twice as much money to remunerate their shareholders as they have to invest in the company’s future.
Debt ratio of companies is skyrocketing
All this has a consequence. The debt ratio of companies is skyrocketing. Look at the evolution of the red line in the following graph, which measures the level of net debt over EDITHA and that has already clearly exceeded the levels of indebtedness of the S&P500 companies in 2007-2008.
Then, when in a while the bubble that is being created disappears I hope that our beloved leaders do not make faces of wonder wondering how it could happen again.