Theory of the razor’s edge deficit

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good morning. Yesterday, the World Bank’s latest economic outlook down further global growth this year to 2.3%. This was the weakest performance of 17 years, and pain was felt most keenly in developing countries. Major causes: trade disruptions, particularly Donald Trump’s tariffs. Don’t agree? Email: Unedged@ft.com.

Razor Edge Deflection

In 2021, I wrote some parts about the link between world savings and slow growth, low interest rates, and entrenched inequality. Many of my comments were based on the arguments of economists Atif Mian, Ludwig Straub and Amir Sufi.

The story of Mian-Strub-Sufi looks like this. Global rich people have become much richer in recent decades, leaving behind a mountain of savings that they have to go somewhere. For unclear reasons, surplus has not been converted into productive investments, but instead is being loaned out to support consumption by rich people. This lendable capital supply keeps interest rates low, making assets more valuation, leaving you with more savings to enrich and lending rich people. However, there is demand for an increase in interest burden.

It’s a compelling paper. However, I think that the discussion has been supported since 2022, when interest rates have taken a major step recently and remained there. So I called Mian and asked if he had changed. An important addition to his view turned out to be about the role of government in absorbing and propagating the glut of savings.

At the macro level, the important thing to understand about an economy dominated by savings overload is that the growth rate (G) of consumer income (called G) must exceed the borrowed rate (called R). Otherwise, the consumer will be bust. However, in recent years, Mian said:

The rate at which consumers borrow is certainly above income growth. . . As there is no sustainable economy with permanent defaults, the economy tends to adjust to prevent defaults. If R exceeds G, the rate will be pushed down. The reason people borrowed is because there is excessive savings in the financial system. Therefore, the system looks for people to rent at new, lower rates.

However, when the rate approaches zero, this adjustment will no longer work. You can’t further reduce the rate and maintain the lender’s profits. At this point, the debt-addicted economy is struggling to create enough demand to move away from the recession. The economy lies in the trap of liquidity. However, there is one borrower who can borrow at a rate that is growth, or government. As such, the US major deficit as a percentage of GDP had to grow steadily and exploded after 2008. Mian’s chart:

However, there is a problem. The government must increase the deficit to prevent the economy from stagnating, but if the deficit increases too much, interest costs will rise and growth will slow down. Mian and his co-authors call this the Goldilocks theory of fiscal deficits.

The private sector cannot borrow any more and will fall into a permanent recession unless the government has an R below g. The government can get out of liquidity traps by running a permanent deficit, but it requires a fully designed government that runs a deficit large enough to avoid liquidity traps, but not as big as R creeps up.

We recommend suggesting the term “Razor’s Edge Defict.” Because it gives a sense of market interest, which is Hedged’s area of ​​interest. If the economy’s Mian-Straub-Sufi model is correct, you need to plan for more volatility in the debt and stock market. As the government walks along the edge of the razor, which separates inadequate financial impulses from higher inflation and rates, they often glide to one side.

Persistent reorganization machine for legacy media

Legacy media companies are struggling. Cable networks, which were once cash flow machines, are declining. With Streaming Business (cable replacement), it’s difficult to compete with Netflix to make a profit. Stocks of Warner Bros Discovery and Paramount have lost about half the value in the past five years. Comcast has dropped by around 10%, with Disney at less than 3% during the period.

Therefore, it is no surprise that Warner Bros Discovery and Comcast are planning to offload the cable network. Companies say this allows them to focus on their strengths. And for decades, the media industry’s preference solution, or lack of problems, for any problem, is to make a deal. WBD is separating the streaming and studio business (“Streamco”) from its cable network (“Global Network”) and is revoking the expensive 2022 merger. Similarly, Comcast’s Spinco, Bersant splits almost everything in the cable network from the rest of NBCuniversal, which maintains theme parks, broadcast television and film studios.

However, separation does not solve the underlying problem. It is difficult to achieve strong profitability and cable network decline in streaming. Volatility in the streaming business means that even high-growth potential streaming companies may not achieve very high ratings, noting Kannan Venkateshwar of Barclays. High debt levels are added only to volatility. Warner Bros Discovery has approximately $37 billion in total debt. According to Venkateshwar, “Neither entity has enough EBITDA to absorb this on a standalone basis without significantly increasing leverage.”

So what’s the next move?

Private Equity allows you to make cable spinoffs private and milk them with cash. But Bernstein’s Laurent Yoon said many media companies have been conducting cost-cutting exercises in recent years, accusing them of losing PE savings. But when new standalone network companies are combined, more savings will be reduced, he said. So when global networks are combined with Bersant, they become juicy PE targets. Additionally, if Warner and Comcast streaming operations merge, they can have more content to compete with Netflix.

The transition from distribution of old cables to streaming will always be a grind. This is reminiscent of the painful transition from newspapers to online in print media. Reorganization can then remove some of the pain. But not that much.

(Kim)

One good read

Enlightenment.

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