So you think the Banks should have zero access to leverage. 1 dollar in equal 1 dollar for lending?

While I think the US banking rules are way to lenient (Canada has a far better approach), I don't think a system or economy can run on banks with no leverage.

Just think about it. If the average citizen has $10k in cash in the bank for every Million lent out for a mortgage you would need to utilize the savings of 100 normal citizens.

The banks would quickly run out of money and thus only lend to the most wealthy applicants even though many below them would be very low risk.

I am not sure exactly what you are asking. In truth I cannot even properly discern if you are summarizing my points correctly.

What I can reply with from what I see is that I do not have the exact answer or formula already calculated for all of Corporate America and the US government. I don't think I have to, to hold my view.

My view is conceptual and if others (in gov't agree) there are lots of people they can appoint to operationalize it.

Here is my view:

- Get rid of all Corporate Income taxes on Profits. This gets rid of all the game playing and loop holes
- tax all outflows that are not re-investments in growth or efficiency aggressively (dividends, stock buy backs)
- tax parked cash beyond a certain amount and time frame again incentivizing cash use for growth
- as outflows and hording are taxed but investing in growth and efficiency is not it then incentivizes those things
- tax all employees


The above is a very fair structure if Society wants to align corporate goals with Society goals. Society wants growing stable employers for their citizen base and this incentivizes that. Corporations want economies where they can take the dollars invested in them and turn it into products or service that produce a bigger return.

Win/win.

Society and Corporate interests do naturally align.

Society wants its citizens to have gainful employment with corporate citizens who are stable and growing.

Corporations want a stable environment where they can take Investment dollars put in and churn out a good or service that pays back that dollar plus some gains (ROI).

Whether it is Sole proprietorship or a giant public company the goal is the same. If $X are put in the front end of the magic widget machine and out the back end comes goods and services that return (ROI) $X+.

Without this 'widget' machine the company served no purpose. It is the be all and end all for both the investor or Society when it comes to For Profit Companies or Financial institutions who only make money on money thru Financial Engineering.


So Hording Cash (beyond reasonable Working Capital) or Dividends or Stock Buy backs are actually antithetical to the Corporations original purpose.

And I am not saying they cannot be profitable for companies as Companies can and do utilize these extra-corporate Financial Engineering techniques (Wall Street techniques) to simply 'make money on money' but what I am saying is that these outcomes (making money on money) was not the intent or purpose either for the corporation or Society. The goal was always to put the cash thru the Widget Machine to produce more cash out benefiting the Owners and employees and society as a result.

So then Society can take the role of ensuring the incentive structure for that Corporations place in society (stable environment to profit) by taxing heavily behaviour that takes them away from that (the Financial Engineering) and rewarding them when the behaviour that is desired by ALL is done (invest for growth).

It is an absurdity when Companies horde cash saying to the Investor out of your bank account and the best thing I can do is horde it in my bank account. Why give the company the ability to 'rake' your dollar instead of just keeping it in your bank account? Well the Financial Engineering aspect, as it exists now is the reason.

It is an absurdity when a Company says give me an Investment dollar so I can pay out a dividend, as no dollar paid out to investors should be as valuable as that same dollar, to that same investor put thru the widget machine that returns more than $1 dollar. I don't want to invest a dollar to get a dollar (dividends). I invest because I believe it spurs equity growth at many times my one dollar in.

But the pay back (short term investor cycle) is quicker on the Financial Engineering aspects and as such the Corporations have lobbied to enable them and the Investors reward them.

This distorts capital markets by creating an incentive for companies to overinvest in their own company relative to the market. A well-run company already has the incentive to invest money into their own company (and US companies definitely have ready access to capital). If the expected return on company investing in itself (eg through expansion, R&D, capital improvements, etc) is greater than the average rate of return on capital, then a company makes more money by investing in itself.

However, if it is lower than the average rate of return, then the company makes a lower ROI by doing so. If such a company has money on hand from profits, it is more efficient for that money to be invested in other companies that can make the average rate of return. This can be done directly by the company investing in other companies or by returning that money to shareholders through dividends or stock buybacks so they can invest it (or spend it on consumption) themselves.

However, on your policy, the relative price of internal investment to dividends/buybacks is lower because of their different tax posture, meaning that even if the expected ROI on internal investment is below the average rate of return, given its tax-free status it should do so anyway instead of giving it back to shareholders (where it would be taxed). Thus, we should expect to see your policy actually lower the efficiency of capital investment.

Disagree. I think it rebalances an already distorted market by creating an incentive for companies to invest in themselves instead of using Financial Engineering.

Lets go back to brass tacks.

Can we agree that all newly founded for profit companies are basically Widget Machines that by their design are created to take in Investor Capital (Founder or Investors) at an initial loss (sunk capital) to run it thru the Widget (Good or Service) to generate a return greater than the sunk Capital?

That is the simplified basics of the deal the Company is proposing to Society when they incorporate. More simply...

'Our widget can take in dollars and in so doing will create these others benefits for society (jobs, etc) and on the other end more dollars will come out.'

If we agree on that why then would it be wrong to incentivize that thru a tax structure that supports it?

I am not saying that outflows cannot happen but just that those end up taxed as they represent a giving up upon of the original mission or intent. Once a company gets to Cash Hording or Dividends or Stock Buybacks that is is fine, if they are ADMITTING that the Widget can no longer provide the return that these Financial Engineering tactics do, but then tax it.

If that tax is sufficient that it tips it back such that Investing in Growth again becomes the superior ROI, great. If not then they go forward and pay the tax.

Right now it is the opposite. The incentives make it more lucrative often to utilize the Financial Engineering. They make Dividend taxation less taxable than Income taxes, etc. Why? We don't have to accept that side of the ledger Incentivization as the standard and tipping it the other way the distortion.

I maintain my suggestion, which is more true to the original compact of why the Business was started in the first place, and given a license to operate by gov't in the second place, is the more default position and less distorted. The distortions have come after via corporate lobbying for these Financial Engineered quick returns which skip the much longer historical cycle that required Investment, R&D, Deployment and then Return.

The short term investors goals are misaligned with Societies generally and even the Corporations generally but they can boost short term earnings and fo many 'Traders' that is all they care about.

If I borrow money to buy a house, the money is inconsequential since money is merely a medium of exchange. What's consequential is what's being exchanged, which in this case is the present value of all the ~labor that went into producing the materials and building the house in exchange for the future value of what I produce with my labor. In other words, the time value of money is really the time value of labor. So if the present value of the house is $250K (in monetary terms), my offer of giving them $250K in 20 years will get laughed at. Instead, they'll want $1M or whatever in 20 years, i.e., a whole lot more of my future labor value than is reflected in the asking price.

So what's getting discounted in the equation isn't the future value of the house but rather the future value of my labor. But the equation is the same, with the difference being a flip-flopping the constants and variables. The difference is you're looking at the equation in the sense that the future value of my labor is a constant over time and seeing a decline in the future value of the house compared to its present value, whereas I'm keeping the value of the house as a constant and discounting the value of future labor. But again, substantively both views are saying the same thing, just saying it differently. And my reason for saying it differently is to show that we don't really need to increase the money supply to facilitate the same outcomes. The only thing that increasing the money supply actually does is to create the illusion that our future labor is worth just as much as our present labor to somewhat disguise the fact that I'm not really buying a $250K house but rather $1M one.

It's not that I totally disagree with what you're getting at. I just think what you're getting at is a relatively minor component when it comes to improving living standards or increasing real wages. For example, look at the (ballpark) CAGR over the last 50 years for the following:

Monetary base: 8%
Median home prices: 7%
Median (nominal) wages: 4%

Basically I'm arguing that wage exploitation isn't much of an issue in terms of why people can't afford to buy more, not that it's a complete non factor. I think the issue of stagnant real wages is largely do to increases in prices resulting almost entirely from increases in the money supply.

This misunderstands how taxes distorts incentives. Taxing derivatives doesn't make company spending more profitable, rather it makes the transaction costs of moving capital from that company to another company with a higher expected return high enough to not be worth it. In the long run this lowers overall investment and return for the economy.

If you want companies to invest more in R&D, expansion, etc., it makes more sense to lower capital gains tax, not increase it. This would also make cash hoarding by companies less common because it would also cause the cost of capital to increase. You are trying to evaluate these policies at the firm level, but you should be looking at them at the level of the economy as a whole.

Capital gains taxes are lower than income taxes so people will have an incentive to put their money into investment rather than consumption. Of course, income taxes are also create an incentive to not work, which is why consumption taxes are more efficient than either.

Nah, short term investors make capital markets more efficient by more quickly shifting capital to profitable companies, which is good for the economy overall. Also, since people live longer now than they used to, the lifecycle of investment is actually longer now than in the past.

It makes no sense , higher prices would mean higher nominal profits -> hence higher wages to counter the effect , like in the 1970s .
It’s very simple when look at charts .
The percent of profits among workers , shareholders and tax to the governments were much more evenly shared decades ago .

Today The money isn’t reinvest into real the economy through higher wages or increase in production (on US soil) because corporations could offshore jobs overseas to lower the cost, so no increase in wages .

But increase profits do occur , distributed solely among management bonuses and shareholders which as we see , just end up creating bigger bubble into the stock markets , real estate and offshoring cash in fiscal heaven .

Meanwhile , they get bailout by the government (FED put) and the common people picked up the tab through inflation .
Since governments print money to cover excessive debts they can’t manage anymore since not enough tax revenue to cover their expenses .
That is what really going on .
The real economy isn’t profitable anymore except for those who owns financials assets.
And as people know , financial assets do not produce anything , it just produce more paper money , not good and services .
Wouldn’t surprise me a Japan 1989 crash event occur .

In the end central banks and financial economy cannot print goods and services .
All they can do is create paper money .
Paper money is not an economy .

Responded 3 parts from 3 bolded parts .

Simple question .
Do you think diminishing return law in economics exist ?
Or you think it’s all linear ?
Do you really think corporations are lacking liquidity and profits in today’s economy ?



When we look at the present economy I see :
- corporations lacking millions of workers ,
- never had been so many huge bubble ( 3 compare to 1 in 2008 ) in the stock markets ,
- 85% of the stock market owned by top 10% of the people,
- Velocity of money at all time low by a huge margin
https://fred.stlouisfed.org/series/M2V

- corporates tax at the lowest since ww2
- gdp keeps falling since 1980 ( obv. Not in total dollars but in percent changes) .
https://fred.stlouisfed.org/series/GDP#0

Do you really think by lowering even more capital gain tax those problems will disappears instead of increasing like they did in the past few decades ?
Seem to me the problems isn’t capital gains tax , it’s the disproportionate benefits of capital gains vs the lack of gain from regular jobs being tax too high compare to capital gains ….
The real economy is suffering and can’t meet up the expectation of the financial economy .
It only achieve it by printing money through debts for obv. Past years and many years before .
It’s clear to me when financial economy do not reflect the status of the real economy
( example 2020 the stock markets reached ATH by a huge margin while the real economy was at an historical bottom )!,
problems aren’t related at all to cash availability ….regardless if it’s high capital gain tax or w.e else of that nature .
It’s the lack of profitability of the real economy perpetrate by a weak labour market .
The financial economy as a become more a burden than a positive for the real economy .
If it was not a burden , government would not spend trillions of dollars to prevent a collapse of those bubbles right by playing non stop with interest rates right , QE , etc right ?



You do not think short term traders just increases speculation ?
You really believe a company usually end up being profitable or unprofitable in matters of days , weeks , that is dictated by the stock market ?

Yes, I believe that spending by a company generally has diminishing returns. Part of my claim here rests on the assumption that more spending by any particular company can have a diminishing return, so tax incentives for them to spend more have a distorting effect on efficient capital allocation.

Not sure how to answer this as this seems like a relative question. Basically, compared to what? America has deep capital markets and a relatively business-friendly political and legal environment, and so American companies are generally profitable. This is less true in many other countries, where they are either shorter on capital or their companies are not very profitable. Capital allocation today is more efficient than in the past, but there is still room for improvement imo.

I also don't think the stock market isn't the same thing as the US economy as a whole, although it is a major part of it. But I do think the US economy for the last 6-7 years has been pretty good, both in terms of GDP growth and broad-based income growth, so I don't agree that the economy is struggling.

How are you defining speculation? I don't have a problem with people making short-term bets if they are +EV. I'm also not sure what you mean by "short term traders"? Do you mean day traders? Because I don't view institutional investors or index funds as short-term.

If allocation of capital were efficient more than ever, how can huge bubble being created and thrive and been forced to be saved from collapse ?
My point was every factor ( well mostly anyway) have diminishing return at some point.
inflation, interest rates, tax, debts etc.
When i see whats going on today in the market it is clear too much capital is floating around and so thinking reducing even more capital gain tax would be a mistake.
That too can suffer diminishing return and i think we see it today .
All it does is too add more money where it is not needed-> in stock market .




So all the points i enumerated you think it is good indicators for an economy thriving ?

https://fred.stlouisfed.org/series/GFDEGDQ188S

Fwiw, last 10 years debts to GDP ratio as more than double.
To me having higher debts do not rhyme with profitable, maybe u do ?
you got 20% zombies corporations in the states.
interest rates cant be raised without unleashing massive defaults.
the whole reason inflation is ahead is due to a lack of power from governments to pay their debts, so they print money.

Do not sound a good economy to me.
Let any country being able to print debts (having the reserve currency helps..) to props valuation will as well seem to be profitable and in good shape like the US.




Speculation to me equal higher prices without any changes of an assets in its value.
Like you said, making small bets do not equal investing right ?
So it props price higher.
And on top of that they use leverage.
Is leverage should equal real growth ?
If someone buy my house 100k a year after i bough it because he could borrow more money, does that makes my house really more valuable or its more a massive mistake by the borrowers to buy an overpriced asset ?
Today everything is incredibly higher to any historical sustainable metrics due to leverage and debts.
That speculation, like 2008 crisis or the 1989 japan crash.
Its all about more debts used for speculative purpose and not for real economic growth.
Borrowing money to buyback shares for example to just props up prices do not equal economic growth .
What is happening is the currency going down in value, propping up valuation.

https://en.wikipedia.org/wiki/Day_trading
"Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy and hold and value investing strategies. ?


obv. i do not really cared or against about day traders or any of that stuff but i do care if people think they do not have potential damaging consequences for an economy....

Might be time try sometime different .

I don't agree that there is a huge bubble. Anyway, even if there was, that wouldn't indicate that capital is not allocated efficiently. Efficient allocation is about whether investments are going towards companies/projects that will give the highest expected return, not about the actual size of that return. If we are in a period of secular stagnation, that doesn't mean that capital can't be efficiently allocated.

I think most of your points are irrelevant or side issues. You downplay the most important measure of the strength of an economy: how fast is GDP growing. America still has good GDP growth relative to other developed countries. It is still the richest country in the world. It still has one of the highest GDP p/capita of any country.

This confuses the strength of the economy with the solvency of the US government. The economy is still growing, which is the most important thing. The US government has increased spending under COVID and because of its low tax rate has also increased public debt. This doesn't mean that the US economy is in the red. Anyway, given that interest rates are so low, I am not that worried about the US government defaulting on its debt.

I can't quite figure out where the problem is here. The US dollar is the reserve currency. Governments can print money. And again, you continue to confuse the state of US government finances with the state of the US economy.

I can't parse this. I don't see how the existence of day traders means the US economy is somehow unsound. As I said, it is plausible to me that the US stock market is somewhat overvalued. This doesn't mean that US GDP growth is not real.

You seem to equate debts with profits .

If you think governments debts as no bearing in the economy I just don’t now what to say .
Will see what will develop in the next 6-12 months I suppose.

Definitely not.

But it shows you misunderstand how opposing opinions work on a theoretical level.

You keep arguing against one side of the ledger while ignoring the other.

There is no default position that 'dividend laws/regulations SHOULD exist and should exist exactly as they do'.

Someone lobbied for 'Dividend' laws/regulations ('Stock Buy Back' ' 'Parked cash').

So you can argue in a bubble, as you do, about certain challenges with laws that would incentivize putting cash into GROWTH, but the actual argument, you are ignoring, is 'it better than the CURRENT incentives that see companies put it into 'dividends', 'Stock Buy Backs' and 'Parked Cash'.

Each and everyone of them is incentivised by policy/law so you need to argue why only the ones you seem to prefer are the GOOD ones to incentivize and not just look for holes against the one you do not. As we can both poke holes easily in any of them. This is an 'On Balance' argument.


Not following this equation you are creating.

'Realizing' your Capital Gain equals taking your money out of the market (putting it back in your bank account) or a reduction of Capital available in the Markets.

That money taken as a Capital Gain does not make it not available for Consumption. In fact it makes it more available for Consumption. 100% of that money is now available for consumption where prior if on Capital Gain was realized (the money was still locked in the stock) only the leverage on it would be available for consumption.

Anyway all of that seems to be missing my point.

The gov't enticing the 'Capital Gains' taking or 'Stock Buy back' or 'Parking of Cash' via favorable tax treatment and other incentives which tilts how the capital use is rewarded is worse option than instead incentivizing it being re-invested in the Original Premise which is Growing the Company.




I agree. I would prefer scrapping all forms of Income tax, personal and corporate and just move 100% to a Consumption Tax model with relief for people (credits back) on the lower earnings end.

They can but that is neither their goal nor intent.

They solely care about the short term impact of their trade and even if they knew they were moving their capital to a less profitable company or zero profit company they would be happy to do it as long as they felt they could flip it to someone else the next day for a trading profit.

When it happens to align with what you say that is fine, but if you think that is some philosophical requirement for them you are simply wrong.

Give them a meme stock they KNOW they are just buying to flip and the belief they can flip it and you will see them go 100% against what you seem to think is their M.O.

OP do you agree with this statement by me prior ...

"...Can we agree that all newly founded for profit companies are basically Widget Machines that by their design are created to take in Investor Capital (Founder or Investors) at an initial loss (sunk capital) to run it thru the Widget (Good or Service) to generate a return greater than the sunk Capital ..." to then grow the company so this process can be repeated over and over?

Do you agree the above is the value proposition inherent in the proposal of why an Investor should consider taking dollars from their bank account and putting them into a new corporation? DO you agree that value proposition is inherent in the considerations between societies and corporations when they set up a structure to license them?

And don't get to too nitpicky as I am not trying to create a perfect encapsulation of a complex premise. Just a good summary one. Something that would fit on a Pitch Deck or Executive Summary for the Sector as a whole (new Start up for Profit Widget (goods or services) type companies) as to why Investors should give them cash and why Societies should want them to set up shop in their districts.

I want to start just there at the Founding of the company for now to see if we have agreement. We can move on to what society incentivizes and how ('Growth', 'Capital Gains', 'Stock Buy Backs', etc) once that company is successful, profitable and has excess cash (Profits) after we see if we can at least agree on an 'Originating Premise'.

The price of stocks is always a projection about what is going to happen. A year later in 2021 SP 500 earnings are at all time highs. It seems the people buying up stocks in 2020 were justified.

Money was spent on bailouts to prevent a long period of high unemployment. Because they were successful in avoiding that, the stock market rebounded from 09 lows. You can call US stocks or real estate or the dollar bubbles. But they’ll be around and valuable long after we’re all dead.

Not necessarily disagreeing here but will point out the 'conclusion' presented here is not necessarily true.

the 2020 and 2009 stock market recoveries are not necessarily proof those buying prior (projections) got it right as the gov't keeps swooping in and taking all sorts of value from other areas of society and piling it in to Market support to lessen the crash and help the recovery.

The logic being presented in this post would be akin to an individual over leveraging and over committing to a big Real Estate investment. It is crashing and they are losing on that bet. Outside parties (gov't, your parents, etc) comes in with 'other money' (tax payer money) and provides all kinds of support that now make your investment profitable over the long term and you point at that and say it is proof your initial buy was always a good one.

Wall Street now knows for certain they are too big too fail and that there is no amount the gov't will not re-allocate from typical citizen taxes paid to prop up the market that only really the Top 10% get the benefit from.

It is full of moral hazard as it allows Wall Street to go for the ultimate upside knowing their down side is limited and it is gutting the wealth of middle class and below in favour of the Top 10%.

It is the exact opposite of the dynamic the gov't should attempt to incentivize.

In the aggregate, businesses can't raise prices on the goods they sell beyond what the employees who ultimately purchase those goods can afford to pay through their wages.

https://en.wikipedia.org/wiki/Malinvestment

Sure but society is not optimized by skewing such that nearly 100% of the middle class earnings are going to merely sustenance goods purchases.

Increasingly the saving power of the MC is being eroded, so while technically you are correct their buying power may still support those necessary purchases, their entire wage should not be consumed by it as if a stop point is only hit when they can no longer afford the purchases thru wages.



Not coincidentally I think the chart above coincides perfectly with when the GOP switched on their Minimum wage position from near universal support to continually raise minimum wage along with inflation prior ...to universal opposition to all minimum wage increases post the 70's.

Post WW2 the path to prosperity used to look like this.


Increase MC Home Ownership



Increase MC Wages



Increase MC Other Savings




EQUALS

Increase in Corporate Profits short and long term



Benefit to Society short and long term




Make no mistake as what we are seeing now is :

Erosion of MC home ownership



Erosion of MC wage



Support for Minimum wage increases parallel inflation




ALL are currently equaling a massive spike in the Wealth Gap between the richest percent and every one else.

So what happened?

Why did the US move from a strategy of raising all ships and one that provided long term prosperity for all (one China is following now btw) to one I would call more the Russia Oligarch model, which guts MW wealth and pushes it up to the top percenters causing big short term gains but long term problems for all?


That answer is tied heavily to the fact that as these Investment Banks gained strength and leverage in gov't and the economy they looked to more engineered financial returns over much slower growth based returns that were becoming harder to come by in the US markets via International trade and competition.

These Investment Bankers looked instead as the massive significant growing (and mostly TRAPPED) wealth of the MC as something to target and engineer for quicker profits.

So with the MC building up massive Housing Wealth (equity) that was mostly parked and trapped in those homes, the Investment bankers saw they could game it (create derivative products) and trade them and capture huge gains while transferring most of the risk to the MC Home owners.

Even in a crash of their poorly designed products it only accelerated the win of the Top percentile as the rich then switched to scooping up those MC assets (homes) at bargain prices and then renting them back to the prior owners. Win/win.


That same group has their eyes firmly set on US Social Security trapped funds. They have wanted at it for a long time now and got as close to getting it as ever with Trump.

What happens is when MC wealth pools grow and since there are no advocates to protect them, the Financial Engineers (Wall Street) lobby for ways to chip away at them. They are just too fat and juicy sitting there just being so safe and compounding.

It is just easier that chasing profits the old way which was to invest in long term growth for corporations (for all) and to WAIT.

Where am I doing this?

Not what I said. Of course they have a bearing on the economy. You seem to be suggesting that US economic growth is just the US printing money. That is false.

Do you want to make a prediction? What do you think this all portends?

No, I don't agree with this. I don't see why a newly founded company can't be immediately profitable, nor do I think that companies necessarily need to grow. I also don't view most investment as directed towards newly founded companies. I also am suspicious of the "widget" terminology. I also don't think the value proposition you describe is inherent in business licensure.

My view is that if you buy a share in a company you are buying a legal claim on the capital and future profits of that company. People have many different reasons for wanting to purchase this legal claim - lowering risk, as a savings vehicle, as a source of future revenue, because they like the company, etc. Governments also set up business licensing systems for different reasons as well.

I'm not interested in following along where you try to come up with your own economic terminology. If you want to use standard definitions for these terms from an economics textbook or investopedia/wiki I'm okay with that. Economics is already complicated enough.