market-ticker.org / By Karl Denninger / February 4, 2013, 07:55
We got a problem here folks, and it’s going to lead to the next crash — and sooner than you think.
First, let’s talk about the impact of QE on companies. The common mantra is that it makes it “easier” for firms to borrow money. The problem is that borrowing, in general, is a destructive act as you must pay back said borrowing with interest — no matter how small. The bigger problem, however, is that long-established businesses have obligations that were all contracted with the expectation of lending other people money and earning a spread on it, such as their pensions.
“The continued decline in the pension discount rates, driven by the unprecedented low interest rate environment, has caused a significant noncash increase in our pension expense,” said Greg Smith, Boeing’s CFO.
No, really? You just noticed this now when I’ve been pointing it out in this column and in fact called out to union members that they were being systematically destroyed by these policies in The Ticker – since 2008?
The problem with this impact is that it doesn’t disappear when QE ends. It’s cumulative and permanent. This is the nature of all compound functions and is why it’s so destructive across the board to implement so-called “emergency” policies — but nowhere is the impact going to be worse from a financial markets perspective than in companies who are now stuck with the pension impacts.
What’s worse is that when these plans fail to be able to deliver in a decade or so the impact is going to come right up the chute of those around 50ish now, at the same time their earnings have been destroyed on their retirement funds.