5 ms·

Should the world worry about America’s corporate-debt mountain?

19 points by indigodaddy 8y ago

rmrfrmrf 8y ago
Probably. The only thing that's driven the economy since 2009 is the suppression of wages, technology-based productivity boosts, and the hindsight to know that the US Government is ready and willing to bail out any sufficiently large industry.
- illvm 8y ago
  How does wage suppression drive the economy? If less people have money to spend wouldn't there be less economic activity?
  - rmrfrmrf 8y ago
    When the cost of labor stays the same while productivity increases due to technological advances (e.g. moving from an in-house server farm to the cloud), profit increases.
    - abakker 8y ago
      Not necessarily. I know it is slightly pedantic to point this out, but technical advances does not imply "free technical advances". e.g. you may increase productivity without increases in wages but not increase profits if the technical progress is driven by paid improvements in technology (which tends to me a multiplier on capital). So, for example, if you get a new versions of excel, which improves your productivity $100/year, but excel costs $100 this year to upgrade, you haven't gained anything in year 1. That will be a multiplier, but, if the upgrades cost a lot up front (e.g changing technology stack causes initial decrease in productivity and obsolescence of some internal IP + change costs, training, etc) and the productivity increase will be small then it may not be obvious that there is an economic benefit for quite some time. Of course, a lot of companies think this way and failure to just ditch a lot of old tech years ago, ends up massively holding back productivity relative to peers that did make the upgrades. As a result the company sees low per capita productivity and decides not to raise wages. Note: this is theory I do not have actual academic studies in practice that can demonstrate this explicitly in a controlled environment, but anecdotal experience certainly makes me suspect that this is what is going on. edit: grammar
      - rmrfrmrf 8y ago
        > So, for example, if you get a new versions of excel, which improves your productivity $100/year, but excel costs $100 this year to upgrade, you haven't gained anything in year 1. Yes, but this is a tautology (it will always be true that making a capital expenditure of $x/employee/year to augment surplus value $x/employee/year will break even). Productivity itself is scalar (units produced/time), so to arrive at a dollar amount of $100 additional revenue generated per employee would suggest an incredibly small increase in units produced over 1 year.
  - neilwilson 8y ago
    That’s where the finance industry steps in. If you suppress wages and push a private debt bubble then you get the profit and the government bails out the banks when the bubble bursts.
- snomad 8y ago
  > technology-based productivity boosts Productivity increase is the underlying force behind all non-government-spending economic growth
ThrustVectoring 8y ago
Corporate debt is fundamentally just a piece of capital structure and tax arbitrage. It's not really something that is that concerning. Fundamentally, the overall value of a company is independent of how it is financed. You can sell some standard bonds, issue some of those senior to other ones, issue common and/or preferred stock, convertible bonds, whatever. End of the day there's assets and expected cash flows, and all the various tranches add up to the whole thing. So, why do companies like debt instead of equity? It has advantageous treatment in the tax code. If your company is financed entirely by equity and it earns $100M in profits, you get taxed on the full $100M. If you sell bonds that pay out $20M in interest each year, your taxable profits are now $80M instead of $100M. The people buying these corporate bonds are all fully aware that they behave like equity. Capital structure arbitrage firms will actually hedge their long or short corporate bond positions by taking offsetting equity positions - buy the bond, short the stock, and collect the excess yield. So it's not really any sort of moral thing with having lots of corporate debt out there, mostly just an anomaly in how claims on corporate assets are divvied up in order to end up paying less in taxes.
- rmrfrmrf 8y ago
  Wait... but bonds these days are usually issued to fund stock buybacks, which inflates the stock price. Why would you short the stock in that case?
  - ThrustVectoring 8y ago
    You short the stock because it has price moves in the opposite direction of the bonds, so you can afford to buy more bonds without undue risk of losses. Like, the trade has several pieces: 1. Buy the corporate bond, getting the credit spread over equivalent treasuries 2. Short the same face value of stock, which gives you back the price of the bonds in case of bankruptcy. 3. Buy call options on the stock to close out your short position, costing you the option premium to go into the trade. Also, stock buybacks don't (or at least shouldn't) increase stock prices.
    - xbmcuser 8y ago
betteridges 8y ago
A rare inversion of Betteridge's law of headlines. Although the spirit of the law remains untouched. The reader, being prodded to anticipate one binary response, should parse the question mark as the antithesis of the author's intended manner of persuasion.

19 points by indigodaddy 8y ago

Probably. The only thing that's driven the economy since 2009 is the suppression of wages, technology-based productivity boosts, and the hindsight to know that the US Government is ready and willing to bail out any sufficiently large industry.

illvm 8y ago
How does wage suppression drive the economy? If less people have money to spend wouldn't there be less economic activity?
- rmrfrmrf 8y ago
  When the cost of labor stays the same while productivity increases due to technological advances (e.g. moving from an in-house server farm to the cloud), profit increases.
  - abakker 8y ago
    Not necessarily. I know it is slightly pedantic to point this out, but technical advances does not imply "free technical advances". e.g. you may increase productivity without increases in wages but not increase profits if the technical progress is driven by paid improvements in technology (which tends to me a multiplier on capital). So, for example, if you get a new versions of excel, which improves your productivity $100/year, but excel costs $100 this year to upgrade, you haven't gained anything in year 1. That will be a multiplier, but, if the upgrades cost a lot up front (e.g changing technology stack causes initial decrease in productivity and obsolescence of some internal IP + change costs, training, etc) and the productivity increase will be small then it may not be obvious that there is an economic benefit for quite some time. Of course, a lot of companies think this way and failure to just ditch a lot of old tech years ago, ends up massively holding back productivity relative to peers that did make the upgrades. As a result the company sees low per capita productivity and decides not to raise wages. Note: this is theory I do not have actual academic studies in practice that can demonstrate this explicitly in a controlled environment, but anecdotal experience certainly makes me suspect that this is what is going on. edit: grammar
    - rmrfrmrf 8y ago
      > So, for example, if you get a new versions of excel, which improves your productivity $100/year, but excel costs $100 this year to upgrade, you haven't gained anything in year 1. Yes, but this is a tautology (it will always be true that making a capital expenditure of $x/employee/year to augment surplus value $x/employee/year will break even). Productivity itself is scalar (units produced/time), so to arrive at a dollar amount of $100 additional revenue generated per employee would suggest an incredibly small increase in units produced over 1 year.
- neilwilson 8y ago
  That’s where the finance industry steps in. If you suppress wages and push a private debt bubble then you get the profit and the government bails out the banks when the bubble bursts.
snomad 8y ago
> technology-based productivity boosts Productivity increase is the underlying force behind all non-government-spending economic growth

ThrustVectoring 8y ago

Corporate debt is fundamentally just a piece of capital structure and tax arbitrage. It's not really something that is that concerning. Fundamentally, the overall value of a company is independent of how it is financed. You can sell some standard bonds, issue some of those senior to other ones, issue common and/or preferred stock, convertible bonds, whatever. End of the day there's assets and expected cash flows, and all the various tranches add up to the whole thing. So, why do companies like debt instead of equity? It has advantageous treatment in the tax code. If your company is financed entirely by equity and it earns $100M in profits, you get taxed on the full $100M. If you sell bonds that pay out $20M in interest each year, your taxable profits are now $80M instead of $100M. The people buying these corporate bonds are all fully aware that they behave like equity. Capital structure arbitrage firms will actually hedge their long or short corporate bond positions by taking offsetting equity positions - buy the bond, short the stock, and collect the excess yield. So it's not really any sort of moral thing with having lots of corporate debt out there, mostly just an anomaly in how claims on corporate assets are divvied up in order to end up paying less in taxes.

rmrfrmrf 8y ago
Wait... but bonds these days are usually issued to fund stock buybacks, which inflates the stock price. Why would you short the stock in that case?
- ThrustVectoring 8y ago
  You short the stock because it has price moves in the opposite direction of the bonds, so you can afford to buy more bonds without undue risk of losses. Like, the trade has several pieces: 1. Buy the corporate bond, getting the credit spread over equivalent treasuries 2. Short the same face value of stock, which gives you back the price of the bonds in case of bankruptcy. 3. Buy call options on the stock to close out your short position, costing you the option premium to go into the trade. Also, stock buybacks don't (or at least shouldn't) increase stock prices.
  - xbmcuser 8y ago

betteridges 8y ago

A rare inversion of Betteridge's law of headlines. Although the spirit of the law remains untouched. The reader, being prodded to anticipate one binary response, should parse the question mark as the antithesis of the author's intended manner of persuasion.