Robert Reich’s no so innocent fraud

Obama’s Real Budget Plan (and Why It’s a Huge Gamble)

By Robert Reich

Here’s the part of interest to me:

Yet what are the chances of a booming recovery? The economy is now growing at an annualized rate of only 1.5 percent. That’s pitiful. It’s not nearly enough to bring down the rate of unemployment, or remove the danger of a double dip. Real wages continue to drop. Housing prices continue to drop. Food and gas prices are rising. Consumer confidence is still in the basement.

Fair enough, now on to the problem and the remedy:

By focusing the public’s attention on the budget deficit, the President is still playing on the Republican’s field. By advancing his own “twelve year plan” for reducing it – without talking about the economy’s underlying problem – he appears to validate their big lie that reducing the deficit is the key to future prosperity.

Promising rhetoric there- deficit reduction isn’t the answer!

The underlying problem isn’t the budget deficit.

Really getting my hopes up now!

It’s that so much income and wealth are going to the top that most Americans don’t have the purchasing power to sustain a strong recovery.

****sound of a balloon deflating****

Until steps are taken to alter this fundamental imbalance – for example, exempting the first $20K of income from payroll taxes while lifting the cap on income subject to payroll taxes, raising income and capital gains taxes on millionaires and using the revenues to expand the Earned Income Tax Credit up to incomes of $50,000, strengthening labor unions, and so on – a strong recovery may not be possible.

Message to Bob:

I suspect you understand taxes function to regulate aggregate demand, not to fund expenditures per se?

So please don’t blow smoke and instead just state that the tax cut part of your proposal is meant to add to aggregate demand,

And that the tax increase part is to achieve your vision of social equity without subtracting very much from aggregate demand.

Instead, by doing it the way you are doing it, you are implying that the deficit per se is of economic consequence.

This makes you part of the problem, rather than part of the answer, as you are supporting the deficit myths which are preventing any actual solution from being implemented.

Robert B. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President Obama’s transition advisory board. His latest book is Supercapitalism.

This entry was posted in Deficit, GDP, Government Spending. Bookmark the permalink.

279 Responses to Robert Reich’s no so innocent fraud

  1. Pingback: Basiswissen Derivate

  2. KRG says:

    Isn’t one of the effects of higher top end taxes, so long as capital spending (like worker compensation and business expenses) are deductible actually a net increase in aggregate demand? That’s where I think Reich is wrong; the idea behind raising taxes is to deliver a clear message to those sitting on idle cash to, essentially, use it or lose it so that there’s a motivation for those who are otherwise on the far side of the Brewster’s Millions issue to actually need to keep the system liquid for better long term profits.

    Reply

  3. vjk says:

    Ramanan:


    As I understand it, these special banks do not have an option of NOT buying the offered treasuries.

    That is clearly incorrect. A dealer bank may choose to cease being a dealer at any time if staying a dealer is not in the bank’s financial interest. In fact, many did — a dealer bank is not a GOSBANK. The dealer bank may choose not to intermediate a treasury auction which may or may not lead to ceasing to be a dealer bank.

    Did not read the rest as the first phrase was enough. Maybe should have.

    Reply

    Ramanan Reply:

    Vjk,

    Didn’t see that initially, as I was more interested in the my stand on the ease in creating a hyperinflation scenario – which is difficult for the Congress!

    Yeah these bids are competitive bids… even if the banks are “forced” to bid, they can send abnormal bids.

    Reply

    Ramanan Reply:

    “b) YES when Treas does spend (write check on its deposit at Fed) then reserves are returned to banks, which can then buy bonds from Fed or Treas if they do not want the reserves. (Fed targets overnight rate, so bidding it down triggers sale)”

    Vjk,

    Some complicated argument there.

    This creation of the reserves is actually not one like an overdraft spending type, but the Treasury moving funds back to the TGA from the TTL and banks going into a daylight overdraft at the Fed. If there are no funds in the TTL, the reserves could not have been created.

    “d) A “failed Treas auction” just means banks are happy to hold excess reserves; not a problem.”

    Banks wouldn’t get the excess reserves if there is a failed auction.

    “A quadrillion of spending in a year would drive up prices; I don’t see how that could be controversial. Congress would hold the key: it would have to budget the spending and raise the debt limit to allow it to proceed.”

    (Response to my comment)

    New response by me .. (will appear) was something like .. the market can discipline the government.

    ” Contrary to what “anon” says, it is not MMT that blurs anything. We try to make all operations as clear as possible. LRWray”

    Anon has been quite rightly persistent on this.

    Reply

    Ramanan Reply:

    I said :

    “This creation of the reserves is actually not one like an overdraft spending type, but the Treasury moving funds back to the TGA from the TTL and banks going into a daylight overdraft at the Fed. If there are no funds in the TTL, the reserves could not have been created.”

    Should have been clearer. The funds move from TTL to TGA before the Treasury wants to spend. Reserves drain but daylight overdraft brings it back to initial level. Government spends, and daylight overdrafts are extinguished. Reserves don’t change due to spending.

    Reply

    anon Reply:

    Ramanan,

    Have a look at this:

    http://neweconomicperspectives.blogspot.com/2011/04/s-downgrade-much-ado-about-nothing.html?showComment=1303836457354#c4284619028567406640

    Caught in the blur!

    Reply

    Matt Franko Reply:

    Anon,
    It reads to me like Prof Wray is providing a review of the current methods of operation within the context of the way the conventional wisdom is confused/deceived into a false belief as to what is really going on. ‘Operationally’, this of course is not what is going on:

    “The treasury current medical practioner writes checks on its demand deposit places leeches on the patient at the central bank barber shop and moves removes tax receipts the bad blood from its accounts the bloodstream at private banks of the patient to the central bank bucket on the floor when it he wants to spend cure the patient.”

    It doesnt mean (to me) that Prof Wray agrees with the conventional wisdom.

    anon Reply:

    its not about agreeing, Matt

    its about describing

    (with options on reality, apparently)

    Matt Franko Reply:

    Anon,
    It must be the word “operationally” you are having a problem with:

    Operationally:
    1. Of or relating to an operation or a series of operations.
    2. Of, intended for, or involved in military operations.
    3. Fit for proper functioning; ready for use: an operational aircraft.
    4. Being in effect or operation.

    Definition 4, the part “being in effect” looks like it may be the correct usage here within the context of MMT writings like “not operationally constrained” no? IOW the true ‘effect’ is not that taxes provide money for the govt to spend… Resp,

    anon Reply:

    I’m not having a problem, Matt

    being in effect in this case means actual accounting entries according to actual operations and transactions

    Ramanan Reply:

    Yes saw that comment Anon.

    Its how one presents – what you have been emphasizing.

    While its true that saying taxes fund government expenditures gives one the incorrect impression that spending is dependent on taxes, hence the stand is taken by MMTers that “taxes don’t fund anything” which is incorrect. Not only that, they rush to show this by “operational realities”.

    “Taxes don’t fund government expenditures” is precisely wrong because taxes fund government expenditures.

    It helps to directly state the overdraft constraint upfront.

    The gold-standard/pre-1971 anti-analogy doesn’t work as well .. Pre 1971, the US Treasury had an overdraft facility at the Fed and taxes would “destroy money” – the government would use tax receipts to reduce its indebtedness to the central bank and spend by taking a direct overdraft.

    But the claim is that pre-1971 taxes fund expenditures and post-1971 they don’t. Opposite in this way of describing it isn’t it ?

    Matt Franko Reply:

    Maybe it’s like if you knew that attaching leeches to a human body actually hurt rather than helped, you have to make a decision: Do you try to convince the morons to not attach leeches at all? Or do you decide it may be easier to recommend the morons attach leeches but only to the surfaces of the fingernails and toenails?

    anon Reply:

    “The gold-standard/pre-1971 anti-analogy doesn’t work as well”

    yes, you’re right on that, as you’ve noted before – and it’s a fundamental point to emphasize

    relativities in the overall explanation need to be realigned quite signficantly

    pebird Reply:

    If a primary dealer did not purchase Treasuries over the long-term, they would lose their relationship with the Fed. Certainly, on any given auction day, different primary dealers have different balances, but the whole idea of being a primary dealer is that you intermediate between large pools of cash and low risk securities for large depositors.

    Now, if a primary dealer did not buy government bonds, what would they do with all the excess dollars accumulated? They would either move them into riskier, less liquid investments – and would eventually be unable to meet their clients’ need for capital preservation and liquidity.

    Or, they would hold cash at 0% and their clients would move their holding to someone who did buy Treasuries – and that entity would eventually become a primary dealer. How do you think PIMCO became a primary dealer?

    Government bonds have two functions, one is a reserve drain and interest setting function, the other is a provision for low risk, interest bearing, liquid savings vehicle. This is an intersection of vertical and horizontal transactions. The primary dealers are basically pooling points of liquidity seeking low risk options.

    If savings accounts were insured to infinite dollar limit, then the 2nd function would be fulfilled via banks and the two functions would merge.

    Reply

    vjk Reply:

    “If a primary dealer did not purchase Treasuries over the long-term, they would lose their relationship with the Fed. ”

    Perhaps it would, perhaps not.

    In the US, as far as I remember, the PD does not have a contractual obligation to bid at every Treasury auction, much less an obligation to buy a certain volume of issues, as in some other countries, like Portugal.

    Besides, again as I recall, about half of the current issues bypass PDs and are bought by direct buyers, so the business is not as lucrative as it used to be.

    I believe Cantor Fitzgerald reported loss on the operations. Maybe wrong though.

    As I said, the Feds are not GOSPLAN (yet) and PDs are not its branches, however much one presumably wanted it to be this way.

    Reply

  4. Ramanan says:

    Anon,

    If you are around have you seen this ?

    http://neweconomicperspectives.blogspot.com/2011/04/s-downgrade-much-ado-about-nothing.html?showComment=1303756713272#c8834648294040978036

    Reply

    anon Reply:

    mais, oui

    the only blur is due to “anon”

    :(

    :)

    Reply

  5. Andrew says:

    I don’t see how Reich is talking about the deficit here. He is saying, I think, that redistribution of wealth (through taxation and government spending) will lead to a better economy for more people.

    I think he has it right. Given the popular perception of the current deficit situation, whether it is correct or not, just spending to increase demand isn’t feasible. Increased spending along with a tax increas on the rich can work together.

    Wealth is relative – it’s not an absolute based on some number of dollars or what one owns – it’s about what one person can afford relative to what another can afford.

    Reply

    WARREN MOSLER Reply:

    different point

    Reply

  6. Mario says:

    Randy Wray article explaining the S&P downgrade in real terms just came out on creditwritedowns.com. I started reading and was getting excited and then I looked up at the name of the author and understood why!! LOL

    check it out here: http://www.creditwritedowns.com/2011/04/sovereign-government-cannot-go-bankrupt.html

    Reply

    Ramanan Reply:

    The original is here:

    http://neweconomicperspectives.blogspot.com/2011/04/s-downgrade-much-ado-about-nothing.html

    I have commented there on the difficulty the Congress can face in achieving a Zimbabwe like situation.

    Reply

  7. Ramanan says:

    Mammoth,

    Its very easily stated as a flow identity. Take a closed economy for simplicity. The flow equivalent of NFA is NAFA (Net Accumulation of Financial Assets). Actually in modern terminology NAFA is used a bit differently – Net Lending is used but lets not go into the terminologies and use NAFA instead.

    So the way one can state what you are interested in is by saying that the only way the private sector can have a positive NAFA is by the public sector running a deficit. Or the only way the private sector can acquire net financial assets is via positive net spending by the government sector.

    Reply

  8. ESM says:

    @Warren:

    “in 1. nfa remains unchanged as corporate liabilities rise by the same increase in the stock price. There has been much debate about the ‘wealth effect’ of rising stocks on GDP, but at most the proponents of the wealth effect show it to be a small fraction of that increase. The price increase values the transfer of ‘profits’ from the economy in general to shareholders of the company.”

    Ok, well, I know I’ve been around the block on this with other people, but this is the first time you’ve said that the value of a stock is a corporate liability. I just think that makes no sense.
    My reason for NFA remaining unchanged by a rise in the stock market is that stocks are not financial assets. Sounds ridiculous right? Well, I have always thought of financial assets under MMT as those assets which have value entirely derivative of TWINTOPT (using Randall Wray’s terminology for the fundamental government IOU — “that which is necessary to pay taxes”).

    A house or an airplane or a factory is not a financial asset because it is something that has value regardless of the existence or value of the dollar. A bond is different. Its value is entirely dependent upon the value of the dollar, and if the dollar goes to zero value, so does the bond.

    A stock, which represents fractional ownership in a value-producing enterprise, has a value independent of TWINTOPT.

    If a stock rises in price, it’s because the market consensus is that the value of the underlying enterprise has just increased in dollar terms. It could be the stock price rose because of things only to do with the dollar (e.g. the dollar goes down in real value, or the dollar interest rate has gone down, both of which make the PV of the enterprise’s output look better in dollar terms). Or it could be that the risk premium has contracted, which makes ownership of stocks look more attractive. Or it could be that the enterprise has had some positive news which means that its ability to create value going forward has increased in real terms. Perhaps its new process for spinning straw into gold or making silk purses from sows’ ears has been shown to be effective, for example.

    In any case, the effect of a stock market rise of $3T is important to understand and for MMT people to wrap their heads around. I think the effect on aggregate demand is comparable to a rise in the market value of the housing stock of $3T, but perhaps the effect on inflation will be lower because some of that $3T is due to an unexpected increase in the aggregate productivity of the underlying enterprises. With housing, market value changes have nothing to do with a house’s future value creation prospects.

    Along the same lines, what happens to aggregate demand if the US government discovers $3T of easily accessible oil in the middle of Death Valley National Park? (Probably nothing because the Democrats will immediately declare it off-limits to drilling. :^))

    What happens to aggregate demand if cold fusion is invented in a government laboratory and the royalties are distributed to US citizens per capita? What happens if Al Gore invents the internet (oops, already happened)?

    Reply

    MamMoTh Reply:

    Neither an increase in the stock or the housing market of 3T corresponds to an increase in NFAs of 3T.

    Any increase in aggregate demand due to this fiction must come from increased borrowing within the private sector which is unsustainable, as the financial crisis in the US has shown.

    Reply

    Mario Reply:

    unless they cash out of their stock positions then it would be an increase in nfa. Regardless it’s all fiction anyway. I still fail to see the larger significance with this.

    I do second ESM’s question to Warren though about how is a company’s stock a liability to the company? That is interesting but I don’t see the connection since the company doesn’t take the other side of the stock (the exchange does it anything but really it’s just investors in the market). Unless the company buys shares in its company, in which case it would not be a liability but an asset (assuming positive returns). If the stock paid dividends then those would be an expense for the company (call it a liability but it’s really not in accounting terms but that’s neither here nor there). But how is the existence of stock a company’s liability, b/c ownership transfer is not the responsibility of the company…it is the responsibility of the investor hence the exchanges for public companies and just private investors for private companies. Where is the liability?

    Reply

    WARREN MOSLER Reply:

    :)

    Reply

    WARREN MOSLER Reply:

    A stock, which represents fractional ownership in a value-producing enterprise, has a value independent of TWINTOPT.

    THE ONLY THING A SHAREHOLDER GETS FOR OWNING STOCK IS DOLLARS FROM THE COMPANY. THE VALUE OF THE STOCK IS THE PV OF THOSE FUTURE PAYMENTS.

    If a stock rises in price, it’s because the market consensus is that the value of the underlying enterprise has just increased in dollar terms.
    THE HIGHER PRICE REFLECT A HIGHER DOLLAR PV OF FUTURE PAYMENTS

    Reply

    ESM Reply:

    “THE ONLY THING A SHAREHOLDER GETS FOR OWNING STOCK IS DOLLARS FROM THE COMPANY. THE VALUE OF THE STOCK IS THE PV OF THOSE FUTURE PAYMENTS.”

    That’s not true. If you own enough stock, you can get a seat on the board of directors and eat as much shrimp as you want during meetings.

    Also, companies can dividend out anything they want to. Shares in other stock, warrants, bonds, other currencies, gold, or Krispy Kreme donuts. There’s no rule or law that says they have to pay shareholders dollars, or even anything at all.

    Reply

    WARREN MOSLER Reply:

    the stock price reflects the pv of all that as well

    ESM Reply:

    I’ll take that as a tacit admission that a stock is not a financial instrument.

    After all, the same could be said of a piece of machinery or a factory.

    In fact, the price of a car or a house is just the PV of all of the expected utility the marginal buyer can derive from it, added to the PV of any resale value. The same is true for a work of art.

    WARREN MOSLER Reply:

    a financial asset is a dollar denominated liability

    ESM Reply:

    “a financial asset is a dollar denominated liability”

    I agree, although to be clear, it must be a liability whose entire value derives from the value of the dollar. If I give you an IOU that says I will pay you the value of 100 barrels of oil in dollars, that is not a dollar financial asset.

    It would probably be helpful to define this rigorously in mathematical terms.

    MamMoTh Reply:

    a financial asset is a dollar denominated liability

    What is a net financial asset then?

    I would say a dollar denominated liability where the liability lies outside of the sector considered, e.g. the private sector.

    How could then a stock be an NFA? Or a corportate bond?

    WARREN MOSLER Reply:

    one person’s dollar denominated liability is another’s dollar denominated asset

    net the two and you have nfa

    MamMoTh Reply:

    net the two and you have nfa

    the two always net to 0 when they lie within the same sector.
    hence my definition.

    Mario Reply:

    right that’s true about the price of stock except this one line, “THE ONLY THING A SHAREHOLDER GETS FOR OWNING STOCK IS DOLLARS FROM THE COMPANY.” Those dollars don’t come “from the company” however.

    The company itself is not paying shareholders any money…except if there are dividends through earnings. When a shareholder exits a position (sells stock previously owned) the company has nothing to do with that exchange of assets for that individual. It is not listed on their books anywhere, it is not their liability or concern. That exchange of assets is between that individual investor who is selling their stock and some other investor who is buying stock at that price (hence the bid/ask and market makers, etc.) that is handled all through the exchange. That’s what exchanges are for.

    If it was a private (or public) company and there was a shareholder of stock in the company that wanted to liquidate his position the corporation has NO OBLIGATION to satisfy that request. No obligation. If that investor wants to sell their shares then they need to find someone else (a buddy, neighbor, enemy, etc. LOL) to buy their shares from them. The company itself has nothing to do with that transaction.

    This is why I say I don’t see how the stock of a company is a liability for them or their books. Of course the stock price is important to a company and they do watch that and want to please their investors etc. but that’s different than it being a directly related liability like an accounts payable or something. As far as I know that is how that works…am I wrong there?

    Reply

    pebird Reply:

    Equity is a special kind of liability for a company. It is equivalent to base money for a government. Companies can generally create as much stock as they wish. From that liability they receive an asset (capital) which they leverage to build up the firm and run the business.

    If the company goes belly up, the stockholders are the last in line to receive anything left over from the liquidation. Whereas other creditors such as vendors or employees have different standing depending on whether they are secured, etc.

    Equity represents a “loan” from stockholders – we call it an investment from the perspective of the stockholder – dividends are kind on an interest payment on that “loan” There is a much higher risk being a stockholder than a trade creditor or a bank lender, but the potential rewards are higher.

    ESM Reply:

    I completely disagree with this characterization. Perhaps under some accounting conventions, equity is considered a liability of the company (although to be honest, I don’t remember any), but it is not a useful way of looking at things. I also don’t think it is helpful to look as stock as money. There are some similarities, but you’re still trying to put a square peg in a round hole.

    A company is an enterprise run as a joint venture. Shares represent fractional ownership of that enterprise, nothing more.

    Ramanan Reply:

    “Perhaps under some accounting conventions, equity is considered a liability of the company (although to be honest, I don’t remember any), but it is not a useful way of looking at things.”

    Did you honestly go into how national accountants do this ?

    Table 1.7.9 of Britain’s Blue Book Page 91 of the PDF, Page 82 of the document. Line AF.5 you see:

    Total Shares and Other Equity

    of the various sectors.

    This intuition of “not debt” appears at various places and especially when foreigners are involved. For example, the White House thinks equities held by foreigners shouldn’t count as liabilities.

    Ramanan Reply:

    http://www.statistics.gov.uk/downloads/theme_economy/bluebook2010.pdf

    The link mentioned in Ramanan Reply: April 24th, 2011 at 1:00 pm

    Ramanan Reply:

    Should mention … AF.5 in Liabilities …

    WARREN MOSLER Reply:

    if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?

    ESM Reply:

    “Did you honestly go into how national accountants do this ?”

    LOL. No, I can’t say – honestly – that I have delved into the details of the British government summary of accounts. It all looks very interesting, but I don’t have time right now to try to understand what the heck they’re doing. However, I’ll point out that, dating back to Luca Pacioli in 1494, accountants have used double-entry bookkeeping in order to isolate certain items and to provide a check against double counting the same item.

    I am not interested in whether some accountant decided to call equity a liability in a particular context so as to ease his computational burden. I am interested in common sense.

    Ramanan Reply:

    “if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?”

    Would assume that the reply was to ESM… who is saying that equities should not be looked at as liabilities.

    WARREN MOSLER Reply:

    it was in reply to something like ‘equities are worth more than just the dollars they may get from the company’

    ESM Reply:

    “if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?”

    The company isn’t giving the shareholders something. The shareholders are giving it to themselves. Selling a company for cash is like selling your stock for cash, except that all the shareholders are doing it together.

    When you sell your house, your house isn’t giving you money. The title to the house is not a liability of the house.

    Ramanan Reply:

    “I am not interested in whether some accountant decided to call equity a liability in a particular context so as to ease his computational burden. I am interested in common sense.”

    I think I know what you mean, believe me. You are saying that items such as “Shares and other Equities” in liabilities are purely technical and is just an item so that the balance sheet balances. I believe it is not. The Blue Book lines I quoted takes the market value of equities and then calculates the net worth of firms at a national level.

    However, to take such a viewpoint, one has to assume the extreme that in general, firms have full volition to pay zero dividends to shareholders. It also assumes that if I need to buy back shares (“rational” buyback price =0) OR to say that it doesn’t make sense for companies to buy back shares at the market value. In the real world, they do that because other sources of funds are cheaper.

    ESM Reply:

    Ramanan,

    My fundamental point is that even though a corporation has a legal existence independent of its shareholders, it is in fact not independent of its shareholders. It exists at the pleasure of the shareholders. It exists to serve them, and it is completely controlled by them. The shareholders are owners and beneficiaries. The management and directors of a company are simply agents of the shareholders, and if the management and directors choose not to pay a dividend, that is simply a cash allocation decision made for the benefit (in theory) of the shareholders.

    From a lawyer’s perspective, a liability is something that is undertaken by contract. The obligation to satisfy that liability according to its terms is a contractual one, and it is enforced by applying the letter of the law within the four corners of the contract. A default leads to a breach of contract claim.

    For equity, it is a different legal relationship. The agents of the shareholders owe a fiduciary duty to the shareholders as beneficiaries. The company does not owe the shareholders anything, any more than your car owes you a ride or your house owes you shelter.
    And the managers and directors owe you only their best efforts as fiduciaries.

    Ramanan Reply:

    A car or a house is a real asset and has not liability and hence different from financial assets.

    A car cannot speak but Jamie Dimon can.

    If Jamie Dimon comes and says that he does not owe anything to the shareholders, investors will dump the JPM stocks before the conference call ends and find other dividend paying companies making it difficult of JPM to raise capital and it will be so devastating to the business that CDS will start rising and all sources of funds will stop.

    Mario Reply:

    “if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?”

    Public companies do give to shareholders. They give them the opportunity to own part of the company and profit on that ownership as the company profits. The basic assumption is that as the company does better so will the stock do better and hence be a more valuable stock. However there is no liability for the company in this scenario that is directly related to the shareholders of the stock. No direct relation. Of course indirectly the company wants the stock to do well so the company looks good and more money is put into the stock…more money available to the company if they wish to sell their own stock positions, do buybacks, a split, pay dividends, etc. Companies own their own stock as does management usually so this creates a built interest in the value of the stock and the company. Shareholders like that, etc., etc. However there is still NO DIRECT liability for the company with its shareholders. In other words, if the stock drops and shareholders lose money, the company isn’t responsible for those losses at all (assuming no fraud of course), so why and how would the company be liable for any shareholder gains? They just aren’t as far as I can tell at least.

    At the sale of the company (assuming that happens in the lifespan of any of the current shareholders anyway) it depends upon the nature of the dissolution. MA’s don’t destroy a stock they are just merged and that is a sale of the company but I am assuming you are not referring to that. More than likely the sale of a corporation (other than an MA) will only happen b/c of bankruptcy since corporations by function can exist forever since ownership can change hands anytime without effect. And at bankruptcy shareholders are usually not paid then either simply b/c companies are just not obligated to pay them back. If they were obligated then shareholders would be compensated for their losses at a corporate bankruptcy and we all know that is just not the case at all. Corporate bondholders do get paid back at bankruptcy though b/c those are real liabilities for the company that are legally backed through legal contract, and sometimes even then bond holders get stiffed as we all also know.

    WARREN MOSLER Reply:

    there is a direct liability to shareholders. at a minimum, in the event of a sale, they get what’s left over after everyone else has been paid.

    ESM Reply:

    Mario,

    You’re still speaking as if a company is a living, breathing being, with wants and incentives of its own. It is not. The company is run by human beings called managers, but those managers work for the shareholders.

    Ramanan is theoretically wrong when he says that if Jamie Dimon does not act in the best interests of the shareholders, shareholders will dump the stock. In theory, the shareholders will dump Jamie Dimon instead.

    There is actually an analogy to the federal government here. The federal government is not a living breathing being either. It has been created to serve the citizenry, and federal bureaucrats and politicians act as agents of the citizenry. When the politicians do a bad job, they can be voted out of power, just like the directors and managers of a company. Citizenship and the right to vote is like company stock (although each person gets only 1 share, and that share is given back upon death — except in Chicago). Money and Treasuries are like corporate bonds.

    The key point, though, is neither the government nor a company should be trying to enrich itself (whatever that means) or its managers, or grow for growth’s sake. It should be maximizing value for its shareholders. That is all.

    Mario Reply:

    “there is a direct liability to shareholders. at a minimum, in the event of a sale, they get what’s left over after everyone else has been paid.”

    that’s true but it is still based on “what’s left over,” which makes it not a very strong liability at all. It’s like the dogs that gets the scraps from the table…calling them a liability is basically meaningless.

    ESM–“The company is run by human beings called managers, but those managers work for the shareholders.”

    no one is arguing companies aren’t run by human beings, this actually proves that a company is a living, breathing entity, and for tax purposes (hence liabilities as well) it is considered a separate entity. The board of directors rules over the managers and the owners/shareholders rule over the board. It’s also very important to note that the “owners” of the company through purchasing public stock holdings are of two types…the original owners before it went public (aka preferred stock) and the “owners” after it goes public and is based on typical stock purchases (aka common stock). The original owners since before the IPO are really the strong suits in ownership b/c they have the largest share, if not all of the share, of the preferred stock and that is a liability for the company b/c it is valued at a liquidation. Regardless this stock is also not a liability in regards to the company’s stock either b/c it operates in the same fashion as common stock in that regard. The holder of preferred stock can liquidate his holdings by converting it to common stock and selling it through the exchange. The corporation then has less preferred stock ownership (less of a liability since less dividends to pay).

    In short common shareholder ownership is very different than preferred shareholder ownership in corporations. But both are still not direct liabilities to the company in terms of stock. They are in terms of dividends.

    WARREN MOSLER Reply:

    it’s a dollar liability
    and yes, it’s the bottom of the credit stack
    but a financial liability none the less

    ESM Reply:

    “it’s a dollar liability”

    Look, if you want to continue to assert, without any explanation or justification whatsoever, that a share of stock is somebody’s liability, it’s not terribly important since it can be made to come out in the wash accounting-wise.

    But if you say it’s a dollar liability, that’s just plain wrong. If the US government declared that it would no longer accept dollars as payment for taxes or anything else, would dollar liabilities be worthless? Of course. Would stocks be worthless? Of course not.

    WARREN MOSLER Reply:

    ok, how about I broaden it to it’s a financial liability?

    anon Reply:

    shareholders have rights

    the liability is legal

    the value of the liability is the same as its value as a financial asset

    ESM Reply:

    Anon=Warren ???

    It all makes sense now :^)

    Sergei Reply:

    lol, isn’t equity considered from legal point of view as limited liability these days?

    pebird Reply:

    The corporate is independent of its shareholders. You can’t assume that all shareholders have the identical interest (which is not just profit, but also time horizon of holding, and also how the company should be operated).

    It is true that the company owes shareholders nothing, except that if they act that way, the management would be replaced very quickly by a majority of stockholder ownership.

    Just do the accounting relationships on a spreadsheet – you start a company and invest it in – as an individual you have decreased an asset (cash) and increased an asset (equity holding) – basically changed your asset composition. On the company side, they have received an asset (cash) and have issued stock which is what? A negative asset? A liability? Something different altogether – lets call it equity.

    Now, equity is a special kind of liability – in fact it is called equity for a reason; its relative value changes using different rules than other “liabilities”.

    Also, the way in which this special “currency” is exchanged has different rules than plain old liabilities, and also whether it is a public or private corporation.

    There is no doubt that companies are “on the hook” for that number of their balance sheet.

    RSJ Reply:

    That’s wishful thinking. Given that the average hold time for stocks is around 22 seconds, a rise in the price of stocks could reflect expectations that the price will rise in the future.

    Companies can live forever whereas investors do not. Investors do take re-sale value into account, or changing capital goods prices into account.

    If you want, you can think of this as adjusting the discount rate of the PV of earnings downward, meaning that the price of the stock increases. But let’s not kid ourselves as to what is driving prices.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>