This article was originally published by Charles Hugh Smith at Of Two Minds Blog.
The Fed’s nearly-free money for financiers policies in support of the Super-Rich do not exist in a vacuum–the disastrous consequences are already baked in.
As Gordon T. Long and I discuss in our latest half-hour video program, What’s Holding the Market Up? (34 minutes), the primary prop under stock valuations are corporate buybacks, which total in the trillions of dollars since the 2008-09 Global Financial Meltdown and the Fed’s “rescue of the rich,” which continues to this day. What’s holding up the U.S. stock market? The facile answer is the Federal Reserve (“the Fed has our back,” “don’t fight the Fed,” etc.) but this doesn’t actually describe the mechanisms in play or the consequences of a market that levitates ever higher on the promise of more Fed money-for-nothing injected into the diseased veins of the financial system.
Rather than risk capital in productive investments, U.S. corporations have borrowed trillions of dollars and used the cash to buy back their own shares. The Fed’s suppression of interest rates has incentivized stock buybacks in several ways:
1. When it’s cheap to borrow billions, the biggest bang for the buck is to use the borrowed bucks to buy back shares, which creates an illusion of growth as per-share sales and earnings both rise as shares are withdrawn from the public market.
Let’s say a company has a million shares outstanding and earns a net profit of $1 million. The per-share net profit is thus $1 per share. If the company borrows money and buys back 500,000 shares of its own stock, the per-share net earnings double to $2 per share.
Presto-magico, the company appears to be more profitable, and so its valuation based on its price-to-earnings ratio (P-E) adjusts higher, even though revenues and earnings have remained stagnant.
2. If a corporation piles up cash, it becomes an attractive target for acquisition. The way to avoid being taken over is to pile up debt (borrow money or sell corporate bonds, swapping debt for equity) and use the funds to buy back shares. As the corporation’s remaining shares soar in value, the company can use its own shares to acquire rivals.
These perverse incentives are the heart of the Federal Reserve’s policies, as depicted here: as real economic growth has slowed, the Fed’s largesse of cheap money has flowed into corporate buybacks because that’s what’s incentivized.
The Fed’s nearly-free money for financiers policies in support of the Super-Rich do not exist in a vacuum–the disastrous consequences are already baked in. As Gordon’s chart shows, Fed policies effectively replace capitalism (investing capital productively and accepting risk) with creditism, a debt-dependent speculative system that transfers risk to the Fed and the taxpayers (i.e. profits are private, losses are socialized).
Needless to say, this doesn’t end well, as expanding credit and borrowing to fund speculation and consumption inevitably ends in a currency crisis that devalues the currency for everyone, rich and poor alike.
There’s much more in our video discussion:
if trump holds back aid to ukraine for re election help id say that is asking for election interference on his behalf for aid. how can anyone say trump hasnt done anything wrong.
Great article. Watching the video now. On the banker side, they can borrow money at a negative rate, so they get paid for borrowing money. They don’t even need customers. Think about that the next time you are delivered a lending or debt instrument solicitation. If you’d care to get fleeced, go ahead and sign up. It’s all so complicated with big corporations. If we have a choice as consumers, we try to purchase from companies whom are not publicly traded. Also employee owned companies will hopefully get a better position as consumer awareness grows. Many people including employees of these companies have a difficult time grasping that everything they see read or hear about a company is just an illusion. The real bottom line is the mandate to deliver an increase and a profit return to the investors. They come first so don’t kid yourself about value of the product. Publicly traded companies are in other terms, all hype and create more problems then they are worth.
What’s real? Money is divorced from value. Equities have no price discovery. The economy is predicated on the use of debt disconnected from value. The official inflation calculation doesn’t include food and fuel. On the social front men become women and women men with legal standing. Children have two moms or two dads or a mom who isn’t genetically female nor dad male. The term “War On” is anything but when bankers launder hundreds of billions of dope money with minimal fine and no human being criminally charged and Afghanistan produces multiple amounts of opium under US control than before. The “War on Terrorism” is especially inappropriate when ISIS was armed by the US in Syria. It’s all one big lie.