On March 9, 2015, John Morgan writes on Newsman:
American businesses are borrowing at historic high levels, but the only thing growing as a result is how fast their equity capital is vanishing, according to David Stockman, White House budget chief during the Reagan administration.
Stockman, a reliable critic of Federal Reserve policies, said much of the blame can be laid at the feet of the central bank and the bank’s Wall Street cheerleaders.
He said the Fed’s balance sheet has ballooned by 9 times since 2000, yet real net investment in the business sector has cratered by 33 percent during the same time period.
“Once upon a time businesses borrowed long term money — if they borrowed at all — in order to fund plant, equipment and other long-lived productive assets,” Stockman wrote.
“Today American businesses are borrowing like never before — but the only thing being liquidated is their own equity capital. That’s because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A [mergers and acquisitions] and LBOs [leveraged buyouts], not the acquisition of productive assets that can actually fuel future output and productivity.”
In Stockman’s view, central bank “financial repression” — in the form of artificially low interest rates that have been orchestrated to provide a false prop to the economy — is responsible for fueling stock market bubbles that makes stock repurchases and other short-term financial engineering maneuvers profitable.
For 2015 to date, corporate bond issues total $241 billion — a giant $1.4 trillion annualized run rate, or nearly double the run rate prior to the 2008 financial meltdown, he noted. “Yet virtually all of this massive debt issuance has been cycled into after-burner fuel for the rocketing stock market. During the month of February alone, stock buybacks for the S&P 500 were a record $104 billion,” he added.
“Is it any wonder that Wall Street threatens a hissy fit upon even a hint that the Fed’s rotten regime of ZIRP [zero interest rate policy] might be ended after 80 months?”
Stockman explained that the titanic splurge in corporate debt issuance conceals the fact that real net investment in the U.S. business sector shrank sharply from $400 billion annualized in the fourth quarter of 2007 to only $300 billion annualized in the fourth quarter of 2014.
“This drastic shrinkage is something totally new under the sun, and not in a good way at all,” he declared. “So thanks for the corporate bond bubble, Fed. It’s just one more nail in the coffin of capitalist prosperity in America.
With the European Central Bank expected to start a $1 trillion quantitative easing (QE) program next week, an echo of the Fed’s QE binge, European companies could follow America’s corporate lead, Reuters reported.
“European companies are likely to join a boom in share buybacks as central bank cash floods the economy, risking criticism that they are recycling capital rather than investing to promote growth,” Reuters said.
However, the news source predicted, “Political pressure will probably grow on companies to use ultra-cheap funding for creating jobs rather than simply buying back their own shares.”
David Stockman is correct in his assessment. We are not advancing the productive capacity of the American economy, and instead we are further concentrating OWNERSHIP of productive capital asset wealth among a tiny minority, at the exclusion of the vast majority of Americans.
There is a way by which we can increase the allegiance and responsibility of big American corporations to America as well as lesson, if not eliminate, the dominance of big American corporations over America.
Change is a constant in life and in business, specifically with new business start-ups and business expansion that employs ever advancing physical productive capital assets (structures, tools, machines and robotics, super-automation, computerization, etc.) resulting from technological invention and innovation.
The problem is that economic growth, whether anemic (as today) or robust (what can be the future) is financed such that the tiny minority who already OWN the vast wealth of the major corporations that produce 90 percent of the products and services society consumes, keeps getting richer and richer as they accumulate more and more capital assets––thus widening income and wealth ownership inequality. Their reach, in terms of what they produce (as owners of productive capital assets) is global as they seek to dominate all production of products and services worldwide.
Of course, at some point in the future the present system will shut down resulting in a tremendous loss in value due to an inability to find enough “customers with money” to maintain mass production. Why, because the core function of technological invention and innovation is to create “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive. Thus, effectively tectonic shifts in the technologies of production destroy jobs, enable global production using far cheaper labor, and overall devalue the worth of labor. Productive capital makes many forms of labor unnecessary, and thus eliminates or curtails the income earned through labor contributions.
It is important to understand that fundamentally, economic value is created through human and non-human contributions. NOTE, real physical productive capital isn’t money; it is measured in money (financial capital), but it is really producing power and earning power through ownership of the non-human factor of production. Financial capital, such as stocks and bonds, is just an ownership claim on the productive power of real capital. In the law, property is the bundle of rights that determines one’s relationship to things.
The problem that results as less human productive input is necessary, as labor workers are replaced by non-human “things” that more efficiently produce products and services, is income is no longer earned by those workers who are displaced, thus reducing the population of “customers with money” to purchase the products and services that can be produced. Eventually, there will not be enough “customers with money” and the system will implode.
How do we prevent this economic disaster, abate concentrated capital ownership (the root cause), and finance economic growth simultaneously with creating new capital owners who would earn income from the earnings of their capital asset wealth?
The solutions are embodied in the proposed Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/).
The Capital Homestead Act takes its lead from the Homestead Act of 1862. In Lincoln’s America of 153 years ago, the problem confronting the vast majority of the citizens of our nation was that most people owned no land that they could work to sustain their livelihood. The Homestead Act offered the landless white citizens of America part-ownership of the country by giving them 160 acres of frontier land, free, if they produced on it income for themselves and their families for a period of five years. Today, the major problem for the vast majority of the people of our nation and of our world, for that matter, is that 99 percent of the people own no or insufficient capital in a high-tech, capital-intensive economy. The Capital Homestead Act would make it possible for EVERY citizen to become a viable owner of productive capital and not just for the tiny elite who now own our corporations.
Under the proposed Capital Homestead Act, EVERY citizen would have a Capital Homestead Account (CHA). The CHA is primarily a tax-sheltered vehicle for the democratization of capital credit through local banks. It would enable every child, woman, and man to accumulate wealth and receive dividend incomes from newly issued shares in new and growing companies, without being taxed on the accumulations (including property and shares gained through inheritance, savings, and other capital credit mechanisms entailing employees of corporations and others [non-corporate employees such as such as school teachers, civil servants, military personnel, police, and health workers, and for individuals who have no remunerative employment, such as the disabled, the unemployed homemakers and children] access to stock ownership in future capital formation growth, and, as well, through for-profit, professionally-managed, citizen-owned-and-governed community land planning and development enterprises, designed to enable every citizen of a community of any size to acquire a direct ownership stake in local land, natural resources and basic infrastructure.
The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today––management and banks––that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The first layer of risk would be taken by the commercial credit insurers, backed by a new government corporation, the Capital Diffusion Reinsurance Corporation, through which the loans could be guaranteed. This entity would fulfill the government’s responsibility for the health and prosperity of the American economy.
Thus, EVERY corporation, including start-ups, would be eligible to issue and sell new stock to be purchased by citizens using insured, interest-free capital credit on the basis that the proposed capital formation project passes the “litmus test” for self-financing. The risk insurance premiums would be graduated with financing for higher risk ventures costing more in insurance risk premiums.
Capital acquisition takes place on the logic of self-financing and asset-backed credit for productive uses. People invest in capital ownership on the basis that the investment will pay for itself. The basis for the commitment of loan guarantees is the fact that nobody who knows what he or she is doing buys a physical capital asset or an interest in one unless he or she is first assured, on the basis of the best advice one can get, that the asset in operation will pay for itself within a reasonable period of time––5 to 7 or, in a worst case scenario, 10 years (given the current depressive state of the economy). And after it pays for itself within a reasonable capital cost recovery period, it is expected to go on producing income indefinitely with proper maintenance and with restoration in the technical sense through research and development.
The result of simultaneously financing new capital formation (as well as employee buy-outs and the restoration of and profitable employment of unused productive capacity) while creating new capital owners who have access to self-liquidating insured, capital credit loans, is that we would be able to correct the imbalance between production and consumption at its source, and broaden ownership of productive capital in conformance with private property free market principles.
The goal should be to enable every child, woman, and man to become an owner of ever-advancing labor-displacing technologies, new and sustainable energy systems, new rentable space, new enterprises, new infrastructure assets, and productive land and natural resources as a growing and independent source of their future incomes. Accomplishing such individual empowerment will enable us, as a nation, to achieve economic democracy, which will finally make political democracy a meaningful reality, and put us on the path of inclusive prosperity, inclusive opportunity, and inclusive economic justice.
The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.
