Why Stock Repurchases And Low Interest Rates Are Problematic

We hear a lot of opinions stating how stock repurchases are a problem, yet no detailed explanation of why they are a problem. In tandem with low interest rates, both pose major issues for the US economy leading to the diversion of wealth to the top. In other words, wealth inequality.

One of the biggest reasons stock repurchases are a problem is because when companies spend their liquid assets to buy back their own stock, those funds do not go to infrastructure, capital improvements or employee wages. In fact, much of the time employee wages suffer for the sake of diverting money to buying back stock.

Why do companies focus so much on stock value, when it has little or no correlation to profit margin? Mostly because for many years corporate executives have received stock packages as part of their compensation. Sometimes the stock packages can actually exceed their wages. Stock packages as compensation are not taxed when disbursed to the recipient. They are not taxed until the stock is sold. As a result, corporate executives are more than willing to sacrifice profits, employee wages/benefits, capital maintenance, improvement and repair in order to artificially increase stock value. If the stock value increases, so does their wealth.

Now, you may think that this is fine because they will have to pay taxes on any accumulated wealth when they sell the stock. That’s not exactly true, either. As a general rule, what they are likely to do is buy other investments immediately, once again deferring taxation. Even if they cash out stock entirely, it is taxed at the capital gains rate, which maxes out at 20%.

The damage and denial to employees via denial of wage increases, increasing employee cost of insurance or complete cancellation or raiding of employee benefit programs is something which is never recovered for the many working for a company that engages in such behavior, which has become extremely common. If employees fall short on wages or benefits, the result is often debt to meet an emergency. Debt which can take years to pay off and can set off a chain of debt which they may never escape.

In addition to corporate executives, major stockholders demand making dividends and forced increase of stock values. This often leads to layoffs, wage reductions and loss of employee benefits as well. If they get what they want, this is why CEO’s of failed companies are given massive bonuses voted in by corporate boards, even as the company declares bankruptcy.

Low interest rates have been contentious for many for several years now. This is considered by many, including myself, to be a form of continuous quantitative easing. What it means is that financial institutions can borrow money from central banks at very low rates, all the way down to 0%. In some cases, the financial institutions are the stockholders. In other cases they can then loan money to corporations at extremely low rates to fund stock repurchases.

This leads into a cycle where the corporation borrows money to repurchase stock, increasing stock price. Now they have a debt to pay. Company profits are then used to pay the debt, rather than used for wages, improvements, etc, same as mentioned above. The company may state a certain profit but not mention that that profit is before making payments on outstanding loans. Of course, the loan allows them to maintain a certain level of cash on hand, obscuring the fact that the company may be deep in debt. Long as the stock price looks good and continues to rise.

Just this week, stock prices have been climbing after falling for a month. Not enough to overcome the losses, so the stock market has still lost nearly 1700 pts in only one month. The reason for the rise was the Federal Reserve Bank stating they may decrease interest rates soon.

At the same time that stocks are rising again, so are precious metals. Historically, stocks and precious metals are on a negative feedback mechanism, where if one rises the other falls. This alone is a clear indication that stocks are rising via stock repurchasing. Outside investors are diverting their funds to precious metals, which are far more secure. Generally if investors do not invest in stocks, they move to bonds, which are more mobile than metals. This is an indication that investors are now setting in for a longdecline in the stock market and business climate. They do not see stocks or bonds as safe or profitable.

Until the early 80’s under Ronald Reagan, companies buying back their own stock was illegal for exactly the reasons detailed above. Because allowing them to do so allowed them to manipulate stock price at the expense of the actual business, employees and even outside investors. The thing which limited the practice organically for many years was the balance of using available cash versus taking on debt with loans. Since 2008, the debt from taking on loans and paying interest on those loans has been nearly nonexistent.

If liquidity runs dry, companies have one of two options. Sell off stock, driving stock value down. Of course, the first to sell off the stock while it is at peak will be corporate executives. Any punishments fail to ever equate to the profits made. Or the company can declare bankruptcy. Not because the business is not profitable but because of losses in stock value.

The result for outside investors, employees, contractors and debtors is the same- they lose. Mass layoffs and loss of benefits. While executives walk away richer than ever.

GDP Is A Scam

Gross Domestic Product is a scam. Okay, not really GDP itself. What I mean is the expectation of GDP always growing is a scam, like much of capitalism.

According to Britannica, GDP is “Gross domestic product (GDP), total market value of the goods and services produced by a country’s economy during a specified period of time. It includes all final goods and services — that is, those that are produced by the economic agents located in that country regardless of their ownership and that are not resold in any form.”

Notice the words, “all goods and services”. The problem with this is that we are producing fewer and fewer goods. Most of our economy is based on services. Services fewer and fewer Americans can afford to purchase.

Services. Part of those services include financial services. Such as stock trading. In my opinion, this should not be included in the GDP at all. Stock trading produces nothing of value. While it is claimed that GDP does not include anything for resale, a stock trade is considered a new product with each trade. It is counted as one product when you purchase a stock and a new product when you sell that same stock. Which artificially inflates GDP.

Gas and oil. Oil is one of America’s top 3 exports. That counts toward GDP. Oil is also one of our top 3 imports. That does not subtract from GDP.Instead, it inflates the GDP of the country selling us the oil we import. I’ve pointed this out before and ask the question again. Do you feel like you’re getting played? That’s because you are.

It’s all in the wording. Notice another term used in the definition. “Total market value of the goods and services..” What this means is the value of goods or services if they are sold. It’s supply-side economics, which is a completely false representation.

Supply side economics. Supply side economics is an economic view which states the value of a good or service (product) is based on the existence of that product. Simply put, if you produce a product, it has an estimated value. So you make widgets. You fill a warehouse with your widgets and they have an estimated value. You just added to GDP. Problem is, you pay your employees so little that they cannot afford to buy your product. Neither does the company next door. Your product stays on the shelf in the warehouse because nobody is buying it. It does not take long before you do not need warehouse workers or truck drivers, so you lay people off. Now your suppliers have lost business, so they need fewer employees and they lay off workers. On down the chain.

Production/consumption cycle. All economies are based on production and consumption. For the consumer, that means having the means to purchase goods that are consumed. Food, furniture, clothing, housing, transportation all count. Yet this cycle is limited. Even if we all had unlimited resources, consumption is limited. You can only eat so many meals a day, live in just so many homes. Most of us don’t really want multiple vehicles or homes. We don’t want clothes we wear once and throw away. If you do want 12 homes, 85 cars and clothes you only wear once, I advise therapy. You have issues we cannot address here and will not try.

I’ll even skip the environmental aspect of this discussion and save it for another day.

Unlimited growth? The capitalist model relies on the concept of not stability but continued growth. Yet we have already gone beyond the growth capacity of capitalism in this country. We have entered the future envisioned by Marx wherein capitalism feeds on itself in an Ouroboros manner. There are many claims that large companies like Walmart create jobs. That’s not true at all. Walmart merely consumes competitors and absorbs them. Like a large fish eating a smaller fish. When they drive a competitor out of business, the jobs of the competitor cease to exist. Walmart hires those employees or, more likely, a small fraction of them. What that means is that Walmart has actually eliminated jobs. Gibson’s, Woolworth’s, JC Penney, Montgomery-Ward and on and on no longer exist, while they were fixtures in communities for many decades.

Downstream effects. Walmart has a limited number of suppliers for each product. That makes their suppliers much larger. However, their competitors used different suppliers in many cases. Once the smaller suppliers no longer had market access, those suppliers also went out of business. The larger suppliers may buy out or merge with smaller suppliers but the effect remains the same. More jobs lost, fewer choices available to consumers.

Market and stock market effects. The growth of Walmart and their suppliers causes a false image of growth. Notice that the stock market indexes such as S&P 500 only list the top 500 stocks. That represents only a fraction of the actual stock market. While the value of stocks for large corporations reach historically high numbers, it ignores the fact that the majority of stocks have decreased in value and the number of stocks available for purchase has narrowed in recent decades.

Worker effects. That narrowing represents a smaller choice for both consumers and employees. It represents smaller warehouses and factories which sit empty in diverse locations while vast warehouses and megafactories in a centralized few locations have taken their place. Jobs are lost in smaller communities while large cities host employees struggling to pay for housing as rent and housing costs skyrocket in overcrowded cities and wages do not keep up with rising costs. Grocery costs, transportation, medical services all increase in price in these centralized locations. While wages stagnate.

What GDP does not measure. I’ve mentioned the debt to GDP index before. As it sounds, this is the amount of debt a nation owes in relationship to it’s GDP. The estimated (but not yet official) debt to GDP of the US for 2018 is 108%. Meaning we owe 8% more as a nation than it is stated that we make.

GDP does not measure quality of life. GDP does not measure how many citizens are homeless, that go without medical or dental care, that cannot afford life saving medications, that declare bankruptcy or are food insecure. It does not measure how many citizens work multiple jobs with no benefits. It does not measure how many are under water from debt. How many struggle with student loan payments for decades or how many decline higher education due to the expense. How many are on anti-depressant medications or suffer health effects of stress. It does not measure suicide rates.

Very real danger. Stating the GDP as a measure of the economic health of a nation is erroneous, as is evident. Many things can affect GDP and especially debt to GDP. As we look at how many jobs are eliminated in rapid succession by corporate failure, centralization, merger, export and automation, it paints a bleak picture of a very real danger. GDP states the profit margin primarily of the rich while the national debt falls primarily on the shoulders of the middle class and the poor.

As of right now, the interest on the national debt stands at $371 billion and rising. One report states that is an increase of 20% but does not state in what time frame. When we speak of job loss, that has an effect on consumption and that has an effect on production, as explained above. Yes, this all ties together, I wasn’t being schizoid here. All of this, in turn, has an effect on GDP. So, if consumers cannot afford to consume, producers have no need to produce.

Another thing which can affect the GDP is the stock market. Again, as mentioned above. If the stock market declines then at this point it directly affects GDP because stock trade profits are reflected as part of the GDP. In December alone, we saw a drop in the stock market of over 2000 points. I expect a much greater drop is coming because the stock market itself is riding on thin air. I recently wrote that there is no consumer market logic regarding the rise of the stock market this month.

Runaway debt. As the debt rises, so does the interest. At some point, we run the very real danger of the interest on the national debt exceeding GDP. At that point, we will no longer be paying on the debt at all and it will continue to climb indefinitely. Should that happen, the entire US will fall under austerity measures, which will include inflation of double and triple digits. In some countries that have undergone the same problem (often because of US sanctions), inflation rates of greater than 1000% have been seen. See Greece and Venezuela. Yes, it can happen here.

The danger does not end there. If austerity measures come to this country, banks will close their doors and not allow you to withdraw your money for days, weeks, possibly months. If you owe the bank debts and possibly even if you do not, the banks may seize your deposits and even your hard assets to save themselves and their major investors. Look up the process called “bail in” (not bail out). It has been used in other countries, most notably Cyprus a few years ago. In addition, social support programs will be frozen indefinitely. Meaning Social Security, Medicare, Medicaid, welfare and food stamps. Schools will close. States will halt any operations aside from administrative. Cities will declare bankruptcy. Manufacturing plants will close, corporations will shut their doors.

Obviously, this is a worst case scenario. However, the danger of all the above is quite real and not far off.

The true measure of a nation’s success and prosperity lies in a clear assessment of the health, generalized wealth, well-being, satisfaction and freedom of it’s citizens. Without these things, a nation is a failed state. It cannot be measured by the status of it’s corporations and privileged elite.

So, stop believing what corporate media and WAR Street “experts” are telling you. You’re not going to hear these things from them. You can question or challenge what I have to say but I encourage you to look the information up for yourself. Don’t take my word for it but don’t call me dishonest without looking further for yourself.