Too much money

American companies are trying to spend a massive two trillion dollars of accumulated profits. Handing them out to their employees is not an option, as these profits have been extracted from labour in the first place. And increasing productivity and production is not a priority in a saturated world market. So companies are using some of this cash to buy back their own shares. This practice is not new (1982, SEC rule 10b-18), but it has reached unprecedented proportions, $5B in the 1980s, $350B in 2006, $530B in 2017, and an estimated $650B this year. Buying back shares and taking them off the market may push up the price of the remaining shares, by increasing demand and reducing supply, but it does not change the overall value of the company. It only reduces the number of shares that represent that value.

Stock buybacks are a symptom, froth on the surface of something more fundamental. They signify that company profits have outstripped their investments in more production. Producing more by increasing capacity or productivity depends on demand, and growth in demand has been nil or very slow for the past ten years. Profits have been coming in as usual, and some have even increased thanks to falling or stagnant wages and tax cuts, but productive investment opportunities have been rare, hence the recourse to mergers, acquisitions and buybacks. Too much money is a sign that demand is not growing fast enough. But demand only increases when wages, debts or employment are growing. At present, wages have apparently regressed to where they were in the 1970s, debts seem to have reached a summit, and jobs are growing at a sluggish pace. Slow growth in demand with no change in sight does not encourage growth in productive investments.

Capital has squeezed all it can out of labour and public services, and is straining to get the last drops. Wages and taxes have been replaced by debts that cannot be repaid and just pile up year after year. Imagine a government that has cut taxes and must borrow to continue functioning. To get out of debt it would have to increase taxes once to continue funding itself and, again, to pay back its past debts. No government would envisage such a thing. In the past strong inflation and growth helped keep debts in a reasonable proportion to incomes and GDP. However, over the last ten years both have been very weak. So debts have grown that much faster, and are spurred on by artificially low rates of interest. These bulging debts are a reflection of the bulging profits that are inflating a stock market bubble. It is reasonable to think that both have limits, and if one crashes so does the other. But, as with other complex structures such as the world’s ecosystem, predicting the timetable of a future collapse is hazardous. Pumping money into the economy by debt creation and pumping carbon dioxide into the atmosphere by burning forests and fossil fuels are similar, because at some stage the organised systems they participate in are suddenly modified. In both cases, more and more, and even more, leads to a tipping point and an abrupt succession of failures. However, a devastated economy will be easier to reconstruct than a devastated planet.