The worst thing I have ever read. It completely lacks an understanding of savings, investment and how the capital markets work. It does include enough facts that it seems plausible but I am still baffled as to how this was printed at The Big Picture at 10:18 AM 10/6/2009.

First, I would like to state that yes shares are traded on the secondary market and that people or corporations buying these shares are not really inserting new capital into a company unless they are buying an IPO or a seasoned offering. The reason this is done is to buy portions of current and future earnings that will be ultimately be returned to the shareholders through dividends, stock repurchases by the company or selling it to another entity who wishes to diversify their holdings and have a claim on the company’s earnings.

The “quelle horror” of total return versus dividends is because there is a tax benefit for shareholders in that dividends are taxed as ordinary income in the year received. However, when the corporation buys backs it shares and thus concentrates the earnings to the surviving shareholders; the shareholder can either choose to sell some of his holdings back to the company for income or hold on and be taxed later on. The taxation all depends on the shareholder’s preference. This is why total return is a better mark than dividends.

The argument that companies can create money is ridiculous. The Federal Reserve is the only entity that can create money using the banking system multiplier and open market purchases. There are newer tools but I won’t bore you with them now. This bold statement is made but then later on in the essay the author then decides that it isn’t really creating money it is shifting money from savers to investors, which is exactly the raison d’etre of the financial system. I would liken this to being angry with the sun because it basks us with sunlight every morning.

The paper fortune that you describe Bill Gates has is because each of those shares he has includes a claim of the near monopoly pricing and therefore earnings of Microsoft. If everyone traded in their laptop for an iPhone than guess what; those shares would drop in value not because they were worthless to begin with but because the future earnings of Microsoft would be in peril. Thus, the incendiary remark that it is a legal form of counterfeiting is placed in there only to excite the automatons. The whole piece reeks of this economic populism. For instance, “Despite Wall Street claims, retirement plans invest little in companies. Instead, the plans buy stock that insiders sell, thus transferring middle class savings to the richest people in the country and increasing the wealth gap.” While it may be true that entrepreneurs are benefiting by selling shares in their enterprises to the common man, they are not doing so without giving the common man a claim against any and all future income that the corporation may receive.

I cannot even fathom how the author comes up with the idea, let alone the evidence, that “These LBO outfits acquire a company with strong assets including cash but low stock prices; sell some of the assets; close down operations and eliminate jobs to cut costs; extract the cash with dividends; borrow large amounts to pay for the process; and sell the companies back on the market in a weakened condition.” If the “hulk” of the company was in such a “weakened” position than who would purchase it? This assumes that the i-bankers underwriting the IPOs are snake oil salesman and that this is done with the tacit agreement from the SEC. Both of these statements may still be true, however, at the end of the day the buyer of these IPO shares has to have done due diligence and expects to earn a return not a bankruptcy.

Here is a report by a Harvard and Chicago professor about the job loss at private equity firms. http://www.google.com/url?sa=t&source=web&ct=res&cd=3&url=http%3A%2F%2Fwww.scribd.com%2Fdoc%2F6310387%2FThe-Global-Economic-Impact-of-Private-Equity-Report-2008&ei=IMTLSvmnH4HJlAeJpZ3NBQ&usg=AFQjCNGSVZJhpNyCtj3hqJV7eh2-9aT8WA&sig2=pY8dkmJL8mhJ1Yb_gGLXEg

If no time read the article by Andrew Sorkin of the Times describing that paper and its results here. http://www.nytimes.com/2008/01/25/business/worldbusiness/25davos.html

Both find little evidence that private equity firms do more firings than is necessary to clear dead wood than any other firm. “[Portfolio companies] compared with those public companies with similar junk debt ratings, buyout [portfolio] companies defaulted at half the rate.” Tends to show that PE firms are more adept at managing a fiscal crisis than their public counter-parties. I will agree that the behemoth pe firms can have their incentive structured skewed to earn management fees and transaction advisory fees, ahem KKR, but the majority of funds and the GPs only make money once it has been all returned to the LPs. (indeed the carried interest doesn’t start until the principal and the management fees are returned.)

After that section though I have no quips with the analysis. The boomers turning from buyers to sellers is a valid argument, especially in the face of the liquidity crisis cum solvency crisis of the past few years. If on a whole investor’s risk appetites switch to shorter duration investments for income generation or just in cash or cash-like equivalents than yes the stock market could tank as there would be more supply than demand. But markets have a funny way of clearing. So if investors preferences do change to more income producing investments, I believe stock buybacks might be accelerated to decrease the supply of stock shares outstanding. Alternatively, the government may change its rules, as it is want do when a large portion of voters now need dividends, having capital gains and dividends receive the same tax treatment. This in turn would shift CFOs to go back to offering dividends with its excess cash instead of share buybacks, which would make the author happy?

Finally, I should think in concurrence with the author that baby boomers who planned on having twenty plus years of retirement may instead be more realistic and work later on into life, thus, decreasing the amount of time in which they have to live off of their investments.

I apologize for being so shrill to begin with, but there is some good analysis in this piece, it’s just that there is a ton of rhetoric contained in this piece that has been refuted.

I am the author of What If Boomers Can’t Retire? How to Build Real Security, Not Phantom Wealth, which was published about nine years ago. Wall Street and most economists avoid discussing the flaws in baby boomers’ stock-based retirement plans. But the flaws will become obvious as boomers age, and coming after the present troubles, they could lead to a true depression. If you Google “Thornton Parker” the first four items are about me.

You are welcome to publish the attached “How Economists Are Missing Another One.” It will probably stir up the natives.

Note to self: Do NOT entrust ANY of my money to this fool.

In addition to not citing data, we see the usual creation of straw men by exaggerating someone else’s position. So we see references to “always good” and “always the solution”, plus “infinite deficits,” which I’ve neither said nor believe. It’s as fair as if I were to tell a someone “you always think infinite taxes and zero government spending always works.”

If you truly want to know how much deficit I feel is safe — at least safe from the currency debasing you fear — go to http://rodgermmitchell.wordpress.com/2009/09/09/46/.

After you read that, please show me your data calculation for what you believe the deficit or surplus should be.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

The public was right to be concerned in 1979 considering the massive inflation we had in the 70s. The only reason things turned around was because Volcker jacked up rates so high that it squashed inflation, and Reagan’s policies spurred economic growth again. I disagree that oil was or is the cause of inflation. The rise in oil in the 70s and early 80s was a symptom of inflation, not the cause of it. If the US Gov’t was not debasing the dollar, the rise in oil would not have occurred. If you don’t believe me, read the “Invisible Crash” by James Dines. The book documents the inflation in the 70s via a series of newsletters Dines wrote after he was fired from Merrill Lynch after predicting the fall of the dollar and the rise of gold. Similarly the rise in oil to $140 per barrel last year was a symptom of the massive credit inflation, not the cause of it. The latest rise in oil did not cause a universal rise in the cost of goods and services to the degree that one would have expected (although I acknowledge that the CPI does not measure the true cost of living). That’s because the increase in oil was a sign of excess credit flowing into speculative assets as opposed to being a cause of traditional inflation.

I agree with the notion that sometimes surpluses are bad and increases in gov’t debt are good. However, this cannot be analyzed in a vacuum. It depends on where you are in the cycle and what the relationships are between public and private sector debt levels. For instance, the US government was running surpluses and its debt level was not alarming at the beginning of the decade, but private sector leverage was at a high level historically. It spun out of control after Greenspan held the Fed Funds rate at 1% for a year and a half after the economy was growing again, and the private sector levered up at a staggering rate. I agree with earlier comments that the private sector bears blame for this, but when the Fed and Treasury continually bailout speculators who make bad investment decisions, it encourages more and more speculation and penalizes conservative savers and investors.

Now that the private sector is deleveraging, the trade off between public and private debt will again come into play. If the level of US government debt gets too high, at some point it will crowd out private investment. Interest costs will also become a burden, especially if rates rise significantly above the artificial levels currently being maintained by the Fed. Unless economic activity increases significantly to offset the debt burden, which is a valid concern given that the US is a mature, service-driven economy, the debt will be have to be inflated away. Alternatively, we will have another deflationary episode like the one we just experienced, only this one will be caused by excesses in the public sector as opposed to the private sector. Who will bail out the US Gov’t if it’s debt load gets too large? China?

The bottom line is this : 1) Past experiences in the emerging markets and in the US prove that excessive debt and deficits do matter at certain points in the cycle, particularly if you take into account the impact of inflation; 2) The impact of inflation is devastating on economies, penalizes savers and investors, and hits the lower and middle class the hardest.

I am not familiar with the sarcasm, derision and insults used by debt hawks that you refer too. I have noticed that a number of astute economists and investors have made valid arguments that the US debt burden will become a problem in the long run. I have also noticed, and I say this with all due respect, that those who argue against the expansion of government are accused of being uncivil regardless of what the say. However, I acknowledge that uncivil behavior by some people has unfortunately obscured many valid arguments by good people.

You said, “As James Galbraith, L. Randall Wray and Warren Mosler have argued, there is no legitimate analogy to be drawn about the budgets of the government, which issues the currency, and the budgets of the non-government sector (households, firms etc) which uses that currency. ” Randy, Warren and I often have lamented this pervasive reluctance to see the difference between federal debt and all other debt (even including state and local government debt).

Back in 1979, the public expressed concern that the debt would be unsustainable and would cause recessions, depressions, huge tax increases and federal bankruptcy — just like today. At the time, the gross federal debt was $800 billion. In the next 30 years the gross debt grew an astounding 1,400%, to $12 trillion, and the same voices continue to bleat the same message, predicting the same apocalypse.

I am reminded of the guru who repeatedly predicts the end of the world, and repeatedly marches his followers up the mountain to await judgment day. The world doesn’t end, but that doesn’t concern the guru, who continues preaching the same old nonsense.

You think surpluses are prudent? Did you know that every depression in U.S. history (there have been 6) was preceded by several consecutive years of federal surpluses? Did you know that every recession in the past 60 years (there have been 9) was preceded by years of reduced federal deficit growth?

One other question: Have you ever noticed that the debt hawks use derision, sarcasm and insults to make their case but never, that is *never*, use facts? For those few who want facts, you can see them at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

Glass-Steagall was a creature of the government wasn’t it?
The Federal Reserve is a consortium of PRIVATE banks, isn’t it?

Capitalism *per se* has not been blamed…it is crony capitalism that is at the root of a lots of evils were facing right now. (Read “Free Lunch” and “Perfectly Legal”)

“the skids were greased to allow lending to subprime borrowers.”
Of course, the private sector couldn’t possibly has ANY role in lending to subprime borrowers, right?

“free markets will allocate capital more efficiently than corrupt politicians if they are allowed to operate free of manipulation by the government.”

I sincerely hope your use of the word “manipulation” means that you make a clear distinction between this and “regulation”.

As for the corrupt politicians, you got my vote on that one. As long as we, the ordinary people, refuse to be the only ones financing elections, politicians will work for those who pay. How’s that for free market behavior?

“Frank is such an evil blablabla”

Sure! he’s the fav whipping boy of pretty much everyone on the left of Lyndon Larouche, it seems.
Now, where were ALL the regulators who HAD a say in financial matters?
Did Barney Frank used the Vulcan strike against all of them? (Imagine Barney, in his Star Trek uniform, phaser on the hip…ROFLMAO!!!!)

Or was it a more systemic problem?

Capitalism has been falsely blamed for the most recent crisis. I totally agree with readers who blame the government. The Federal Reserve under Greenspan blew up bubble after bubble with his faulty policies, and along with Robert Rubin created a moral hazard by bailing out LTCM, Russia, etc. The Glass Steagal Act was abolished, allowing banks to take more risk, Fannie and Freddie were allowed to grow out of control, the Dems refused to investigate accounting irregularities at Fan & Fred (see Barney Frank on youtube), and the skids were greased to allow lending to subprime borrowers. There is a lot more I could say, but the point is, huge mistakes were made by the government regardless of what party was in control. So Auerback wants to trust these idiots to make things right by spending more money? Give me a break! Most of them are weasles who have never had real jobs and didn’t get rich until they got involved in government. Anyone who understands basic economics knows that free markets will allocate capital more efficiently than corrupt politicians if they are allowed to operate free of manipulation by the government. That means we need to have market cycles that clean excesses out of the system instead of constantly bailing out idiots who make bad decisions with their money. Apparently these concepts are foreign to Auerback.