Ah, youth. How fondly I remember the endless Monopoly games of summer, in which the winner would loan ever greater sums to the loser, thereby averting bankruptcy and continuing the game.
“You landed on Park Place again? What a shame! And me with hotels there. Don’t worry, I’ll loan you the $1,500, and you just keep right on rolling.”
Evidently the scions of our federal government were similarly raised. Lenders going insolvent? No problem, we’ll loan you more, and cheaper, to keep you going. Borrowers feeling strapped? No problem, we’ll simply tear up your mortgage contract and write a new one where you pay less.
Japan tried this in the 1990s, in case you don’t remember.
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]]>Japan headed into its long deflationary spiral with a mostly balanced federal budget, high trade surplus, immense foreign reserves, immense personal savings, low unemployment, and high educational level. This buys an awful lot of flexibility.
The US teeters on a similar precipice, but with no net underneath: gigantic federal budget deficit, large trade deficit, high personal debt, high corporate debt, net debtor status, and uneven educational level.
The stage is thus set more for Argentina than Japan: banking crisis, hyperinflation, currency collapse. I’m not saying it will happen; only that it’s more likely than the Japan scenario.
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]]>So where does the money go? Public company net profits tell an interesting story.
Big health insurance companies, often a bogeyman in these discussions, are actually not hugely profitable, earning a respectable but unexciting 10% on sales.
By contrast, nearly all major drug companies earn more than 25% on sales — almost unheard of among companies with over $10 billion in sales. 25% net margins are more appropos to small niche operations, such as a mugging or petty theft.
So are drug companies the perps? Well, not lately. Their profits have been falling dramatically for the past five years, and sales are pretty flat. Over the same period, health insurers have grown enormously, though they remain relatively unprofitable.
(As an aside, health insurers are probably worth a look for investors, because their rapid growth doesn’t seem to be priced into their stock in all cases.)
The implication is that until about 2001, drug companies were shaking people upside down to make the coins fall out. Then they stopped. (OK, what really happened is that they had high profit margins due to patent exclusivity, but then those patents began expiring.) Around the same time, insurers started taking more of the pie. But they didn’t keep much of it as profit, instead paying most of it through to employees and suppliers.
What suppliers, though? Not drug companies. Not doctors. So we must ask again: where it it all going?
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