Stock Buy-backs - Poison for the Economy?

There were times and places where companies were not allowed to buy their own shares. This was principally meant to prevent share price manipulation. But 'Modern' Financial Theory has induced company managements, investors and their hired guns in banks to make buy-backs an enormous (and largely unsupervised) activity. One is even left with the impression that share price manipulation has become the main focus of the top echelon of company managements. This should be no surprise as this narrow 'elite' benefits directly from a rising share price. Compensation schemes are also designed to make share speculation a one-way bet for these executives. Any drop in share prices is quickly 'compensated' by a fresh shower of (free) share options and re-priced 'long-term' incentive plans (strictly to the few at the top of course). No wonder that economic commentators wonder why companies do not invest and contribute to economic growth (let alone benefit the other 99.9 percent of the population). Apart from the economic and societal negative effect of unchecked share price manipulation these buy-backs not-too-rarely lead to outright value destruction as many transactions are conducted at price levels that later turn out to have been much too expensive (maybe even due to the fact that the market was expecting managements to perform the role of the 'greater fool', the sucker who buys at the top of the market).

Can we borrow from the Future?

When respected commentators (Satyajit Das, Marketwatch) claim that "Debt allows society to borrow from the future" one has to wonder about the standard of economic discourse. There is no way that 'society' can borrow from the future. All borrowing is a transfer of purchasing power from one person to another. That is true even if no money changes hands. If, for example, a carpenter agrees to help someone building a house and be paid for his efforts on a future date this does not mean that anything is 'borrowed from the future'. All that has happened is that the recipient has now to service a debt that he incurred vis-a-vis the carpenter. Rising debt levels - on a national or international basis - therefore mean that some people (or countries) do have rising debts which correspond to rising assets (claims) that other groups of the population have. Some individuals therefore have a claim on others that will have to be serviced in the future (or written off). Rising debt levels always lead to rising inequality - an aspect that gets more and more attention as a consequence of the credit crisis. 

Inflation: Chicken or Egg?

The argument that "there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency" (J M Keynes, 1921) may well be true. But it still makes one wonder what comes first: the dysfunction of society or the destruction of money. These days one could argue that in a lot of countries it is a mal-functioning political system that leads to desperate measures like Quantitative Easing as cooked up by the Frankenstein economists running the Fed, Bank of England, ECB and Bank of Japan. See also Dylan Grice

Nominal GDP Targeting - Witches Brew

The absurdity of this 'policy' that is the latest mantra propagated by the political and economic policy establishment should be clear at first sight: if an economy is dead in the water all that will happen if any nominal level of GDP is targeted is that the level of inflation is pumped up. No one seems to be interested in explaining why this should have any meaningful - or permanent - influence on real economic activity

Bernanke & Co: Hero or Villain?

It is absurd that a professor of economics - who should know better - has no other solution to offer for the lack of growth in the world's major economy. Apart from the question whether or not eternal growth is really feasible - or desirable - he would only have to look a closer look at the relevant textbooks and he would find that pumping freshly printed dollar bills into the financial system is not the only (temporary and superficial) answer to what is in essence a question of fiscal indiscipline and wrong micro-economic measures.

More Micro and less Macro please!

Gavyn Davies provides another 'analysis' (Financial Times) that is based on observing just a few datapoints, not even close enough to the data one would need to have a reasonable basis to draw conclusions that should be the basis for policy decisions. The problem is that other factors are never equal. We all would love to have a multiplier larger than 1 on a sustained basis. Life would be easy, just let the government spend and spend. But in the case of the UK for example this simplistic view leaves out the fact that at some stage the policy would hit the buffers - when foreigners no longer support this policy. The Greeks can tell a story. A bit of deflation in the UK would be more than welcome, some factors of production would have to find better uses, people who are paid to sit at home or are surplus in certain sectors (some MP's?) would have to lower their wage demands, this would increase the buying power of the rest of the population and a virtuous circle of wealth creation would start. Less 'Macro' and more 'Micro' in policy making! Unfortunately the media, think tanks and the commentariat in the financial industry love the former and spend little or no time on the latter.

IMF: Expensive Plagiarism

A complicit media again gives headlines to the latest insights concocted by the bureaucrats of the IMF. With the best of intentions these cannot be called original research. Any first-year economics student could put together the reports as nothing more than a diligent reading of the economic research produced by the national agencies and research institutes is required. The sad thing is that the electorates in all member states are forced to pay for generous terms of employment while the belt tightening in many countries is accelerated. We would also love to hear if any staff member ever has been fired - apart from the hapless Dominique Strauss-Kahn (who fell victim to the weakness of his flesh and the bloodhounds in the NYPD and his political enemies in France).