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What shareholders can teach voters

By Anthony Element OAM

One accusation that is guaranteed to earn a company board a good smacking from shareholders, especially institutional shareholders, is to be accused of having a, “Lazy Balance Sheet”.

This is when a company has plenty of equity but isn’t borrowing enough. That’s right, when it isn’t borrowing as much as it should be.

This is because companies grow by borrowing to invest; maybe a takeover, a new product development, a new factory or launching into another market. Shareholders expect that their board will invest the borrowed money wisely, i.e. in ways that will enable the company to repay the debt with extra profit left over for dividends and even more growth.

A debt equal to 40% to 50% of equity, (assets), is considered healthy.

But imagine if a company decided to borrow a big lump of money and simply give the money to shareholders in the hope that it will stimulate said shareholders to buy more of the company’s products.

The board would be sacked before you could say, “Where’s my bonus?”

And yet, this is exactly what Right Wing governments do all the time. The current Turnbull government during a time when our government debt is rising, want to give tax cuts to the wealthy and corporations instead of investing borrowings wisely.

You may well ask why. Treasurer Scott Morrison would tell you that such tax cuts stimulate the economy.

That would be, oh, what’s the word I’m looking for? Oh, right, that would be a lie.

How do I know it’s a lie? Because all the evidence, not just some of it, all of it, tells us clearly that Trickle Down is what’s technically know as Bullshit, and corporate tax cuts do ZERO to stimulate the economy; they merely stimulate corporate profits.

But let’s look at what happens when a government increases debt, (always accepting that it remains within that healthy debt range), and instead of making a gift of it to corporate government sponsors, it does what companies – and btw, what you and I would do – use the money to invest in projects that will increase our country’s wealthy down the track.

If a government, especially during a time of economic challenge, instead of madly rushing to surplus or giving tax cuts to the rich, borrows for infrastructure projects:

Jobs are created. This immediately reduces the government’s welfare bill. See? We’re making money already. Wheeee!!!

Creates profits for the (Construction, Engineering, Fitting Out, Equipment Supply), companies that win the projects, on profits from which the government gains company tax, making more money already. Double Whhheeeee!! And the projects haven’t actually started to earn the nation anything from their functions yet already the government, (and we), are benefiting:

  • The Infrastructure projects perhaps create new industries, e.g. building a technology park, which leads to new inventions and production output for us to sell to the world;
  • The infrastructure projects perhaps make Australia more competitive internationally, e.g. a high speed rail to get agriculture output to shipping terminals more quickly and cost effectively.

And so it goes on.

And, just as an aside, as long as it stays within prudent inflation levels, a country can print money, thereby offsetting some of the debt. And if you think a country can’t create money out of thin air, then ask yourself how the US government has funded Quantitative Easing for a decade while paying off trillions in wasted wars.

So, bottom line? We should stop banging on about debt and demand that the government borrow and invest wisely. (Yeah, I know using the words, “government” and “wisely” in the same sentence is always problematic).

Now Morrison and his economically illiterate cronies will tell us that, “Governments shouldn’t be in the business of picking winners.”

To which I reply, Why not? Companies do it all the time. They pick winning strategies, borrow and invest in them.

And insisting on that being done, boys and girls, is what Shareholders can teach Voters.

This article was originally published on ‘Observation Point’.

Also by Anthony:

Guarding against the Monster

 

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6 comments

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  1. John Kelly

    Great explanation of something so simple, it causes people to look for the hidden catch. Except, there isn’t one. When people realise that surplus budgets threaten consumers’ savings, they might begin to take more notice of non-orthodox economists and less of politicians.

  2. totaram

    Brilliant! Well-explained, what more could one ask? However, there is this persistent myth that “the private sector is more efficient and governments are always wasteful”. It’s another lie. There is no evidence that proves that this is always the case, but this lie has been trotted out so often that by Goebbel’s Law it has become imbedded as “truth”. Neil of Sydney uses this as a standard excuse.

    Once again we have another lie that “printing money causes inflation” (creating money out of thin air) which has the same status. Actually ANY expenditure has the potential to cause inflation, and we just need to see what the rest of the economy is doing before we make these judgements. As correctly pointed out in the post, it all depends. Just give an example by looking at BHP’s finances in detail if anyone has doubts.

    As for picking winners: indeed they do it all the time. Just look at what happened to Woolworths which tried to get into the same market as Bunnings and lost. It happens. Sorry, “shit happens” as a famous ex-PM said once.

    And finally, to get back onto my hobby horse: if the private sector is drowning in debt ( which it is) and is not willing to take on more debt, then the govt. has to step in and borrow and spend. The sectoral balance identity will ensure that the private sector cannot save if there is an external trade deficit, and the govt. is not running a sufficiently large deficit.

    Well done over all!

  3. Mark Whellum

    Why does the government have to borrow money, when it as a sovereign nation can print its own money and lend it at no interest to build infrastructure projects. Its cause they gave up the right to issue currency to private banks

  4. Anthony Element

    That’s a really good question, Mark.
    There are two parts to the answer.
    It’s easier for the US to print money as they are the international standard, so although cross rate values are quoted, technically the only meaningful assessment of the USD is the floating gold price. All other currencies are bench marked against the USD.
    Mind you, China has some ideas about that.
    Nevertheless, Australia can and does print money as required, and you’re right, we can use our own currency up to a point.
    That point is when inflation starts to rise out of the Reserve Bank comfort zone, (say, much above 3%).
    We can think about it this way. Australia has a certain amount of inherent worth, (the value of all the goods and services we produce or do). That is balanced against the amount of AUD in circulation. If we print too much, then the number of AUD in circulation for a given amount of goods and services goes up – thus the value of each AUD goes down, (it’s equal to a smaller share of the total pie of goods and services), and thus, prices rise becasue it takes more AUD to buy a given piece of the total goods and services = inflation.
    If we print less AUD for the same gross amount of goods and services,, then the inherent value of each AUD rises, (There are fewer AUD = to the same amount of goods and services), so prices fall = deflation.
    The other main way that countries raise money is by issuing bonds and Australia could certainly issue more than we do..
    Yes, we must pay interest on the bonds, but if the money is invested in the right kinds of revenue and competitiveness generating projects that I mentioned, then the positive impact on the economy is greater than the cost of servicing the debt and the virtuous circle commences.
    This is exactly what we should be doing.
    I think you’re suggesting that the Reserve Bank is a bit too cautious when it comes to injecting printed money into the economy, in which case, I would agree.

  5. bobrafto

    I may have posted this before

    Lorna: The Federal Government’s Budget is just like a family budget!
    A progressive: Really? Your family prints its own currency?
    Lorna: Well, no.
    A progressive: Can your family sell its own super low interest bonds to raise money?
    Lorna: No! But when I do my family budget, I can’t spend more than I earn.
    A progressive: How will anyone in your family ever own a home? Or go to College?
    Lorna: My point is the government has to cut back! Starting with Social Security!
    A progressive: Whaaaat! Your family saves money by robbing grandma?

  6. Anthony Element

    I wish there was a like button, Bob.
    I love it – succinct, funny and right on the money.

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