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07 August, 2017

The clearest explanation of why financial capitalism is already dead

Guess who will pay again for the oncoming chaos ...


Speaking on The Real News, Michael Hudson gave a simple and clear explanation of why the stock market booming, praised by Trump, has nothing to do with the real improvement of the economy. Instead, it shows the real nature of financial capitalism that has reached its limits. And all it could give us from now on, is a repeated sequence of financial bursting bubbles until its ultimate collapse.

As Hudson pointed:

The answer is quite simple. The question is, who is buying these stocks? It's not individuals. It's not even pension funds. It's not the private sector. Almost all the stock purchases are bought back by corporations in share buybacks.

In other words, companies are buying back their own stocks in order to push up the price because that's how executives are paid. They're not paid by increasing output or even increasing profits. They're paid by how much they can push up the stock price, and there are two ways of doing this easily: one is to use earnings simply for share buybacks, buy your own stock and push it up, or you simply pay out the earnings in dividends.

What you don't do if you want to increase the stock price is you don't invest more in research, you don't invest more in capital, you don't hire more labor, and you don't expand the markets. In other words, you give up. You say, 'the economy has reached an end, it's not going to grow from here, we are taking the money and running, we are just going to use the earnings that we have to help the stockholders', so, the stock market is actually the reverse of how the economy is doing.

The price of almost anything is a result of how many people are buying and how many people are selling. What's happened is basically the individuals and the private sector is selling the stocks. Normally this would push down stocks, and the reason it's selling is most investors think that the reason stock prices have gone up is because the Federal Reserve has flooded the economy with low-interest money and people are borrowing at 1% in order to buy stocks that are yielding 5 or 6% and they're pocketing the difference.

But now, everybody thinks that this is going to come to an end. The Federal Reserve says it's going to raise interest rates. Same thing in the European Central Bank and the Bank of England. They expect higher interest rates are going to push down stock prices because it's not going to pay people to borrow to buy stocks anymore. Most investors today are looking for the stock markets to make a big decline. They don't want to hold them.

Who is going to want to buy stocks that are going to go down in price? The answer is the corporations are going to buy it because the stock managers aren't penalized if they make a bad investment. If the stock price goes way down, the company loses because they had a huge loss on its shares that it bought back, but the managers of the company clean up. They're paid the bonus because they're paid according to how much money they can push in to buying up their own stock to support the price. If you say you're going to pay a high price for anything, that's going to raise the price and they're pouring the corporate earnings into their own stocks, not into investment.


Costas Lapavitsas spoke about the roots of this zombie-type transformation of capitalism. As he points, financialization is basically a profound historical transformation of modern capitalism that really began in the 1970s, and it's now been running for about four decades.

One of the major economic changes of this transformation is related to nonfinancial economic activity.

Big business has become increasingly capable of financing investment out of retained earnings. It retains its profits, and on a net basis it finances investment pretty much out of that. Of course, it still uses banks, but it doesn't rely on banks on a net basis to finance investment. That gives it a certain degree of independence from banks.

In addition to that, big business has made so much in retained profits - currently U.S. big business is sitting on piles of cash - that it can use those funds to play financial games, to engage in financial transactions and financial activities on its own account. So big business has financialized. Large enterprises have acquired some of the character of financial institutions, have become bank-like, and they engage in these transactions, and they change the structure of their own organization as they do that.

So, today, the picture given by Michael Hudson is that of a highly saturated system. A financial machine that is broken, temporarily fixed by the state to run for a while until it's broken again, etc. These vain efforts to keep it alive come with a huge price passed on the working class. It appears that the banking/corporate parasites realized that the system is already dead, so, they just want to take as much as possible and run away right before the ultimate collapse.

Well, guess who will pay again for the oncoming chaos ...

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