Morphing equity

  
It has been reported that some large companies are borrowing or using their cash reserves, not to replace worn-out investments, nor to increase production, but to buy back their shares on the stock market. For the borrowers this means transforming shares into bonds. At the other end of the scale, struggling companies and banks (e.g. Monte dei Paschi), weighed down by too much debt, are trying to transform the bonds they have emitted into shares. On the one hand, shares receiving a dividend of around 6% become bonds paying around 2%. On the other hand, bonds paying undisclosed interest become shares receiving no dividend at all until an eventual return of profitability. These inverted processes have different motivations. In the first case, the interest paid on the borrowing reduces profits, but they are divided among fewer shares. An increased dividend per share means the price of those shares will rise until they reach the average dividend. A company that borrows to buy back its shares increases their value, but it has a debt to pay back, or renew at a probably higher rate of interest. The only ones to gain are those who owned shares before the buybacks and CEOs with big stock options. In the second case, the company no longer has the cost of paying interest, which may or may not make it profitable again. The losers are those who lent the company money.

The transformation of bonds into shares and shares into bonds are both signs of a stalling economy. Some companies are unable to manage their debts because of falling profitability, while others are still profitable and have good credit ratings, but they have no new investment strategies. Capital has no more prospects of expansion and can only feed off itself. It is beginning a retreat from the world stage to the protection of its national bases. Competition is always more congenial on an expanding market than on a market that is frozen or shrinking. And it is when competition gets rough that capital claims assistance from state and nation. Transnational corporations, with various headquarters around the planet, will be summoned to show allegiance or withdraw, and tax barriers will spring up along razor-wire walls. All of which can only bring about more belligerence. Capital is in one of those down phases that have been very violent in the past. And, to avoid an escalating blame game, the mechanisms of profit capitalism would have to be exposed and changed. That being unlikely, international tensions will rise even faster than global temperatures.