Imagine that you are an esteemed captain of industry and you decide to go to Small Town, Kansas to bequeath the little people with your beneficence, sort of like young Lex Luthor in Smallville. Shortly after arriving, you discern that the town’s entire economy revolves around a refrigerator factory, and you laugh out loud: “Don’t these yokels know that manufacturing is for idiots? Don’t they know that they have to move up the value chain to raise their standard of living by inventing the next Facebook, or curing cancer?”
The idea that mere factory workers are getting paid $25 per hour in this day and age is ludicrous. So, you set out to put things straight, to bring Small Town into the modern age by purchasing the factory. You immediately set the workers to dismantling the machine tools, packing them into crates, and loading them into boxcars. When the job is done, an engine comes to fetch the boxcars and hauls them down to Mexico where the factory is reassembled, and staffed with $2 per-hour workers.
With your modern sweatshop factory churning out huge profits, you decide to put the money to work by making loans to Small Town residents at 5%. But to your dismay, none of the applicants qualify because they are all unemployed. So, you decide to lower your prices and cut the rate to 4%. Still no takers. And so on. Turns out, it’s not only the factory workers that are bad-credit risks. All the mom & pops who ran the shops and restaurants frequented by the factory workers have also gone belly-up. Even at 1%, there are still only a few qualifying borrowers. You make a loan for a pickup truck to a guy who scavenges copper from abandoned buildings and sells it to the Chinese. And another loan for a bulldozer to a guy who demolishes dilapidated houses. But that’s about it.
What has happened is very simple: before you came to town, everybody was working and prosperous, and the local bankers did good business making mortgages, car loans, etc. But after your glorious arrival, nobody was working.
Then a light bulb goes off over your head: “Forget these lazy loser Americans. I’ll go south of the border and make loans to the hardworking Mexican people.” But then you are crestfallen when you remember that you are only paying them $2 an hour and they can’t afford to buy anything either.
So, congratulations, you outsmarted everybody and got all the money, putting an end to civilization in the process.
The above scenario is not a thought experiment; it’s something that has been going on for decades. Those 45 million people on food stamps didn’t just fall from the skies. We as a society decided that instead of having everybody working, we would instead allow a handful of people to amass a vast trove of capital in the Cayman Islands. It is literally an economic policy for creating mass poverty.
However, if you ever see a concerted effort being made to rollback globalization and bring the factories home, that would likely be an excellent time to bet the farm on bank stocks. Don’t hold your breath though; low interest rates will likely be with us for a very long time to come.