DIR Return Create A Forum - Home
---------------------------------------------------------
WebWar
HTML https://webwar.createaforum.com
---------------------------------------------------------
*****************************************************
DIR Return to: Πολιτική &#...
*****************************************************
#Post#: 3926--------------------------------------------------
"πάει" το
κράτος
πρόνοιας,"πιστόλι"
οι ασφαλιστ	
DIR By: bodiroga
Date: December 1, 2012, 2:54 pm
---------------------------------------------------------
The conflict between labor and capital is a long and illustrious
one, and one in which ideology and politics have played a far
greater role than simple economics and math.
And while labor enjoyed a brief period of growth in the the past
100 years first due to the anti-trust and anti-monopoly, and
pro-union laws and regulations taking place in the early 20th
century US, and subsequently due to the era of "Great
Moderation"-driven "trickling down" abnormal growth in the
developed world, it is precisely the unwind of this latest
period of prosperity, loosely known as "The New Normal", and in
which economic growth will persist at well sub-optimal (<2%)
rates for the foreseeable future, that is pushing the precarious
balance between labor and capital costs - in their purest
economic sense, and stripped of all ethics and ideology - to a
point in which labor will likely find itself at a persistent
disadvantage, leading to the same social upheaval that ushered
in pure Marxist ideology in the late 19th century.
Only this time there will be a peculiar twist, because while in
relative terms labor costs as a percentage of all operating
expenses are declining around the world, when accounting for
benefits, and entitlement funding, labor costs are rising in
absolute terms if at uneven rates (a particularly touchy topic
in the Eurozone where lack of labor competitiveness for the
periphery is probably the single thorniest issue for the
European Disunion) and are now at record highs.
Which sets the stage for what may probably be the biggest
push-pull tension of the 21st century for the simple worker:
declining relative wages, which however are increasing in
absolute terms when factoring in the self-funded components paid
into an insolvent welfare system.
But the rub comes when one considers the biggest disequilibrium
creator of all: central bank predicated cost of capital
"planning", whereby Fed policies may be the most insidious and
stealth destroyer of all of labor's hard won gains over the past
century.
First, observe the declining labor costs as a percentage of
total corporate operating expenses...
HTML http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/11-2/labor%20costs.jpg
Which however is cold comfort to firms which report earnings on
a nominal basis, and for which the absolute increase in blended
all in labor compensation is now the highest in history...
HTML http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/11-2/big%20gaps.jpg
... a variable cost "discontinuity" driven by a key fixed cost:
social insurance expenditures and labor-related taxes. In other
words workers are increasingly forced to prefund their own
"entitlements"...
HTML http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/11-2/Insurnace%20Costs.jpg
... Which finally means that increasingly the simplest solution
will likely be the correct one: places in which the cost of
labor is higher than that of capital will increasingly shed
labor until there is once again an equilibrium between labor and
capital. An approximate breakdown between these two primary
drivers is shown in the chart below.
HTML http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/11-2/Capital%20Costs%20vs%20Labor%20Costs.jpg
Before we present some of the startling conclusions from the
above, here are some thoughts on the basis of labor costs as we
enter the New Normal from Goldman Sachs:
"The ability to cut these depends very much on the nature of the
business (labour-intensive versus capital-intensive), the scale
and balance sheet strength of the company, the flexibility to
move operations, domicile regulations and political pressures,
and the clarity of management foresight. One option CEOs have is
to become more efficient through automation, i.e., substituting
labour with capital. We expect to see a lot more of this type of
restructuring in the developing economies, as real wages rise
and the difference in the relative cost of capital versus
developed economies shrinks.
The balance between labour and capital reflects a tension
between maintaining flexibility and achieving efficiency.
Remaining labour-intensive can allow companies to react in a
more agile manner to structural shifts or prolonged cyclical
softness, giving them the option to increase or decrease
headcount (albeit at a price) or re-train personnel in the case
of obsolescence, which is particularly important in fast-moving
industries. On the other hand, automation increases production
efficiency, speed and quality, often at a lower operational
cost, at the expense of having a larger chunk of capital tied to
fixed assets.
Over the last decade, cheap labour was perhaps the primary
motivation for location-based restructuring. But looking
forward, greater EM competition, IP risks, regulation, energy
cost disparity, supply chain complexity and the need to be
closer to the end consumer should also force companies to
reconsider where they are based. But we shouldn’t forget that
prescribing change is not the same as achieving it, especially
for companies that employ a large number of people in domestic
Europe. These companies are likely to encounter greater
political pressure, while the fear of losing skills also make
companies reluctant to cut their headcount. Capital intensity
could also be an exit barrier; e.g., its difficult for physical
retailers to exit real estate quickly. And finally, there is the
zero sum game argument, or at best a fleeting competitive
advantage, which can be observed in the very short periods of
returns leadership in many industries.
"
And while superficially all of the above is correct, the one
increasingly dominant factor is that of pure cost of capital,
from a simple ROE basis, when corporate executives make a
decision whether to invest in wages and workers or efficiency
improvements, i.e., capital. It is here that one needs to
appreciate that cost of capital is increasingly synonymous with
simple cost of borrowing as shown on the last chart above.
What needs no explanation is that in "the New Normal", the cost
of borrowing is declining progressively and in more and more
parts of the world is approaching zero: a standard byproduct of
ZIRP, or a paradigm in which virtually all credit risk (and soon
- equity risk as well as the Japan Model is adopted by all) is
borne by the money printers themselves, or in the case of the
US: the Federal Reserve.
And with cost of debt and thus capital virtually non-existent,
the decision of where to allocated increasingly scarcer cash
flows will become a very simple one, and the outcome will be one
which will infuriate more and more workers around the world.
What does all of the above mean practically? Two things:
The ever more insolvent "welfare state" world is seeing
increasingly more of the fixed cost contribution to pre-funding
entitlements fall on the shoulders of the same workers whose
wages are increasingly declining on a relative basis (best seen
when looking at the year over year change in average hourly
earnings, which just posted the smallest nominal rise on record.
HTML http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/11-2/Change%20Average%20Hourly%20Earnings.jpg
τhe problem with this is that laborer intuitively realize
that the "welfare state" model no longer works, and is broken:
there are simply too many unfunded liabilities that current and
future generations of workers have to fund concurrently for
there to be anything left over in the sinking fund to prepay
their own pension, retirement and welfare benefits. As a result
more and more workers will demand instant gratification in the
form of upfront cash now, and will no longer accept the excuse
that their employers are making up the difference in declining
earnings by funding future welfare costs, as extracted in turn
by ever more insolvent governments.
The Fed, in its attempts to rekindle the credit bubble with its
ZIRP policy, which will last at least through the end of 2015
(but likely, in perpetuity, or at least until hyperinflation
force Bernanke to prove if his bluff that he can end any
inflationary episode in 15 minutes or less), has stumbled upon
yet another unintended consequence- it is making the balance
between labor and capital progressively more distressing for
current workers, as the Fed is effectively funding - thanks to
no cost borrowings - corporate improvements in productivity and
capital replacement, which in turn make layoffs and wage cuts
the default decision by most corporate treasurers and CFOs.
These two bullet points will garner increasingly more attention
in the coming months as more and more people are laid off, if
for no reason of the underlying economy which may or may not be
getting stronger (or certainly weaker), but simply as as the
cost of corporate debt, especially for Investment Grade quality
corporations, plummets to zero when used to fund capital
improvements, and thus increased profitability when coupled with
labor "efficiency."
Because what few appreciate is that Marxism in the New Normal
will not be a carbon copy of that from 150 years ago: instead
the primary driver paradoxically of the next labor movement will
be in response to the destructive policies (at least for
workers, if not for corporate profitability and shareholders) of
the central planners. That, and the fact that the entire Welfare
state ponzi, now pervasive to all developed world countries, is
on its last breath: a conclusion which even the simple workers
of the world can appreciate.
Or not: because as the recent example of the outright Hostess
liquidation demonstrated, when negotiating labor equivalency
outcomes from a Game Theoretical perspective in the New Normal,
labor no longer has the upper hand, especially when the
opportunity cost of wiping out future (fully or partially)
prepaid entitlement benefits are to be considered - a lesson
which the Twinkie baking union learned the very hard way.
It also means that as more instances of labor unions vs
corporations come to the fore in bankruptcy court, and as labor
losses mount, it will once again be the evil corporations that
are scapegoated by virtually everyone involved.
Yet the truth is far more complicated, and as the above shows,
while workers of the world may, indeed, soon be uniting once
more, don't forget to reserve some of that righteous indignation
not only for executive corner office dwellers, but for those in
charge of government and of various central banks, whose actions
over the past century (now that we are just 31 days away from
the 100 year anniversary of the Fed) have led to a world in
which there are hundreds of trillions in unfunded, insolvent
entitlements, as well as a central planner policy response aimed
squarely at obliterating any residual negotiating position labor
may have had.
To summarize: as fury at corporate CEOs rises, don't forget to
save some where it also most certainly belongs: the Federal
Government and the Chairman.
*****************************************************
Page 1 of 1