Secular Stagnation: monetary policy and SMB

Secular Stagnation: monetary policy and SMB

Cyclically in different crisis and depressions,  it has been raised the fear of secular stagnation –under different names-, more recently by a group of economist leaded by Larry Summers in ‘The Age of Secular Stagnation: What It Is and What to Do About It’ (2016), also co-author of the Hysteresis theory as a description for permanent high levels of unemployment, inflation and GDP output gap.

The actual hypothesis of secular stagnation remarks that western economies seemingly need negative real interest rates in order to growth and the ‘creation’ of economic bubbles to keep up the pace with historical rates of growth and low levels of unemployment.

In this paper we use the actual behavior of financial markets and assume that the shift in employment creation to large corporations and governments in the post WWII scenario lead to fast growth, and what we considered a ‘normal’ behavior of monetary policy and trends in macroeconomics variables.

Nonetheless in recent decades that shift has been reverted by a mix of public policies, innovation and specialization, backing a larger participation of SMB in GDP (50% to 85% in OCDE countries). This has been magnified by changes in management culture in the large Corporations ecosystem, like outsourcing, contractors and subcontractors -as ways of sinking costs and red tape- and reengineering practices of production processes, all of them leading to a growing SMB sector.

The problem with this situation, arises as the real ir payed by each sector is really different. For example: in a normal scenario for a OCDE economy, government pays for bonds 2-4%, Big Corporations 4-6%, while a small contractor working on capital provided by its credit card pays between 12% to 20%. In that conditions, and using the K=L equivalence, salaries and job creation payed up for the difference.

As almost all of Small business relay on a mix of different financial products, essentially not targeted for businesses or job creation, among them consumer credit, credit cards, working capital used as a source of capital to finance fixed assets, car loans, consumer loans, etc., the observed main consequence is that Medium businesses rely on bank loans designed to penalize individual overindebt, and as a behavioral significance, this heavily penalize the business growth and job creation, with demands of collateral and a ‘zero’ confidence attitude in the SMB capacity or character. Also banks considerer over indebt a MB at levels that big corporations would be barely indebt at all with a ir ‘normal’ of 9-15% .

A first conclusion is that for at least half of private businesses the ‘transmission chain’ of monetary policy is formally broken. Merging overcosts, financial burdens and the lack of specific financial products, translates into a higher variance o risk induced by the financial ecosystem in which SMB products; this leads to lower wages, higher uncertainty for the SMB and higher investment costs.

As can be interpreted, job creation for SMB  (50% to 90% of total) pay greatly ir non correlated with real risk, this in a recession can lead to a situation in which ir is at the ZLB –Zero Lower Bound- on average, but with several tranches, really segregated –or with a high variance-, making SMB the biggest losers of any recession.

As a recommendation, SMB need a new designed financial set of products: a simple proposition is the use of CDO / CDS for the aggregate pool of SMB loans. Also the segmentation of ir trenches as a cost for business becomes a possible explanation for at least part of the Hysteresis phenomena. We would explore more of this concept in future posts.

Black Papers Economy

This  is a Blog about behavioral identities and economy; we would use acccounting identities also, but the primary focus is on what people really do and how it aggregates. Sometimes de-agreggating, sometimes building new ways to identify the key drivers in economic variables -and solutions- but always from a positive economics point of view.

Behavioral macro & micro and a larger view of how to apply economic tools to solve non-monetary issues would be part of this experiment.

This is why is called Black Papers, in opposition to the classic view of White Paper.

Also from time in time I will write about management, just for fun ;)

Joel SDF