Company Shares Do Not Finance Investment
Based on research colleagues and I have been doing at Sheffield University and elsewhere, we know that FTSE companies do not rely on or need new share issues to finance their investment activity. In fact, they are repurchasing shares faster in most cases than they ever issue them. What that means is that saving in shares also rarely if ever creates new investment or jobs now. This is as true of property companies as any other quoted company;
For the FTSE? Sure. They tend to be giving back capital to those who made the right bets in the past.
Financial Services Do Not Provide Capital
The conclusion is that as things stand, the whole edifice of the financial services industry has ceased to be an intermediary between savers and investors, which was once its raison d’etre. Instead, it merely provides cheap capital for banks in the case of cash savings or money to be used in endless, but unproductive, speculation in the case of stock exchange-related savings activity, including most of that in property;
And that’s bollocks. Partly because of the banking mistake. Here, with equity, it’s because he seems to think that the FTSE100 is the entire economy. It’s not even the entire investment pool, let alone the entire economy. The new, new, investment, into new companies, new stuff, tends to be done by private equity, VC funds and so on.
But with equity because of this – equity is a perpetual, human lifespans are not. So, if someone invests in something that succeeds there must be a place to cash in on the success. This isn’t like bonds that mature. Equity exists until the company goes bust. So, say my grandfather invested in a company at that real, first day, stage (he did, Vibroplant). That equity still exists somewhere in my Mother’s share portfolio. There isn’t a lot of it but there’s some. Can’t recall what the company is called now but if my Mother wished to cash in on grandad’s perspicacity – or grandad had done so – then there has to be a market that it can be sold upon. And if there isn’t an official one then there will be an unofficial. Otherwise, those Vibroplant shares simply exist in the familial portfolio until death takes us all and the line dies out. But even then the shares still exist, still have a value as they throw off dividends and so on and on and on.
Without such a secondary market – or any kind, official or unofficial – such shares actually have no value. Simply because it’s not possible to buy and or sell them. They might even produce an income via dividends but there will still be no capital value to them because they cannot be sold.
This is where The Smashey bond idea goes wrong too. He refuses to grasp that you must have a secondary market. And once you’ve got one of those then it’ll all end up looking very much like it does today.
Of course, we could say that if there’s no market in any of these things, then also no value to them, then they cannot be subject to capital gains nor inheritance tax. But then I doubt he’ll wear that either.
He’s just missing that very basic point.
Which leads to two subpoints. If you can never, ever, sell an investment then what does the return on the investment have to be to get you to buy into it? 1% isn’t going to do it now, is it? So, if we demand higher returns in return – ahaha – for investing what happens to gross investment across the society? It falls, obviously.
Secondly, if we did all have to invest in 1% bonds for our pensions then what portion of annual income would we have to invest over a 30 year working life in order to fund a 20 year retirement at 50% of working income? Recall, we’ve just defined that we can never eat our capital, we have to live off the 1%. Well, at 50% of working income at 1% then we’d need 50 years income saved then wouldn’t we? Or, lifetimes savings to provide a pension would have to be substantially higher than lifetime income.
That’s not a system that will work.
Which is why we do eat our capital of course. But if we’re to eat our capital then there must be someone we can sell our capital ticket – the share, the bond – to. And in the absence of a secondary market for capital certificates who the fuck is that going to be?
Man’s a moron.
All that secondary markets shit exists so people can cash in winning bets. Without such a system there would be very much less investment at the start. So, he’s insisting we kill secondary markets to increase primary investment.