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The point wasn't to moralise or to ponder about the purpose of companies. Nothing wrong with returning money to shareholders. However doing it with debt, rathe

The point wasn't to moralise or to ponder about the purpose of companies. Nothing wrong with returning money to shareholders. However doing it with debt, rather than with profits, sounds like financial engineering taking advantage of tax breaks and unnaturally low interest rates (a gift from central banks to those with investments and access to low rates) - with potentially poor outcomes to many participants in the economy later on, especially when the ratio of debt to profit gets out of whack and there are tremors in the global economy. What happens when the economy tanks, and many of these loans go sour? Over leveraged companies go under, jobs are lost, domino effect on the real economy. If a company takes on debt it should be used for investing in real growth (and future profits), not for financial engineering to prop up the share price with low interest (for now) borrowed money. The only thing that kind of behaviour leads to is a debt-fuelled bubble.

roenxi 7y ago
If everyone is being completely honest then using debt to return money to the shareholders is fine. It is equivalent to using profits to buy back shares and borrowing to finance new investment. The issue is more likely to be that if the company is misjudging how much debt is wise or what the return is likely to be, the people who are responsible for picking up on that (shareholders, senior management) are probably selling their stake in the company. Eg, if I owned a company like WeWork I have incentive to make the company borrow large amounts of money, use that money to create artificial demand for shares, then sell my shares. Effectively a wealth transfer from lender -> me and an obligation transfer for the remaining shareholders to pay back the initial lender. That way I benefit even if the company makes no actual money and has massive debts. That sort of bad faith can't be proven until there are major scandals though; if people are operating in good faith and the lender is canny it is fine.
- ptah 7y ago
  there is a vast difference between using profits to buy back shares and using debt to buy back shares
  - frockington1 7y ago
    With interest rates so low you might as well use debt. With high corporate tax rates, repatriating cash is expensive. Might as well use cheap debt while you can
  - aguyfromnb 7y ago
    >there is a vast difference between using profits to buy back shares and using debt to buy back shares There is zero difference. It's all money in a pool of corporate capital that is either growing (or shrinking some if you're paying interest). If you can do borrow money at negative rates and buy back shares, why wouldn't you?
aguyfromnb 7y ago
>unnaturally low interest rates (a gift from central banks to those with investments and access to low rates) Can you explain what an "unnaturally low" interest rate is? The Fed sets the overnight rate at which banks lend reserves to each other. While it is a benchmark for many other interest rates, anyone, anywhere can lend and/or borrow at any rate of their choosing. If rates are unnaturally low, why aren't people charging more? Why are they leaving money on the table? Side note: it's a funny thing to me, that the vast majority of American citizens are net debtors, yet we complain about low rates and inflation. Most people don't understand what's good for them.
- ummonk 7y ago
  The Fed also controls treasury yields via quantitative easing.
- dharma1 7y ago
  Sure, interest rates set by most major central banks have been at historical lows, between 0% and 2% for the last 10 years, since the last crisis. And it doesn’t look like it’s possible to raise them much in the next few years - the economy has become accustomed to low rates and can’t take a rate hike. Nor will it be possible to lower them much (since they already close to zero) in case there is another downturn and the central banks need to stimulate. I don’t think we have ever seen such a long period of low rates before, so this is relatively uncharted waters. Inflation of consumer goods, which central banks have a mandate to track, is still relatively low, mostly thanks to low oil prices. But if you look at the prices of financial assets, you’ll see a lot of “inflation” hiding there thanks to money printing and low rates of the past 10 years.
  - eru 7y ago
    Actually, real interest rates on eg American government bonds haven't been that low by 20th century standards. We saw much more negative real interest rates before. Especially after taxes. https://www.minneapolisfed.org/article/2016/real-interest-rates-over-the-long-run https://www.minneapolisfed.org/article/2016/real-interest-ra... Nominal interest rates however are very low, because nominal GDP growth is low.
eru 7y ago
I am not quite sure what you mean by debt-fueled bubble? Your perception might be coloured by the miscategorization of the time before the Great Recession as a bubble. It wasn't. (See eg Kevin Erdmann's detective work on this at https://economicsdetective.com/2019/03/re-thinking-the-so-called-housing-bubble-with-kevin-erdmann/ https://economicsdetective.com/2019/03/re-thinking-the-so-ca... ) Btw, loans going sour is a problem for the creditor, but ain't a problem for the economy, as long as total nominal spending is kept stable. See eg https://www.cato.org/cato-journal/springsummer-2019/financial-stability-case-nominal-gdp-target https://www.cato.org/cato-journal/springsummer-2019/financia... In any case, I'm glad that my central bank doesn't mess with interest rates. So no funny business going on around 0% interest. See https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-P...

roenxi 7y ago

If everyone is being completely honest then using debt to return money to the shareholders is fine. It is equivalent to using profits to buy back shares and borrowing to finance new investment. The issue is more likely to be that if the company is misjudging how much debt is wise or what the return is likely to be, the people who are responsible for picking up on that (shareholders, senior management) are probably selling their stake in the company. Eg, if I owned a company like WeWork I have incentive to make the company borrow large amounts of money, use that money to create artificial demand for shares, then sell my shares. Effectively a wealth transfer from lender -> me and an obligation transfer for the remaining shareholders to pay back the initial lender. That way I benefit even if the company makes no actual money and has massive debts. That sort of bad faith can't be proven until there are major scandals though; if people are operating in good faith and the lender is canny it is fine.

ptah 7y ago
there is a vast difference between using profits to buy back shares and using debt to buy back shares
- frockington1 7y ago
  With interest rates so low you might as well use debt. With high corporate tax rates, repatriating cash is expensive. Might as well use cheap debt while you can
- aguyfromnb 7y ago
  >there is a vast difference between using profits to buy back shares and using debt to buy back shares There is zero difference. It's all money in a pool of corporate capital that is either growing (or shrinking some if you're paying interest). If you can do borrow money at negative rates and buy back shares, why wouldn't you?

aguyfromnb 7y ago

>unnaturally low interest rates (a gift from central banks to those with investments and access to low rates) Can you explain what an "unnaturally low" interest rate is? The Fed sets the overnight rate at which banks lend reserves to each other. While it is a benchmark for many other interest rates, anyone, anywhere can lend and/or borrow at any rate of their choosing. If rates are unnaturally low, why aren't people charging more? Why are they leaving money on the table? Side note: it's a funny thing to me, that the vast majority of American citizens are net debtors, yet we complain about low rates and inflation. Most people don't understand what's good for them.

ummonk 7y ago
The Fed also controls treasury yields via quantitative easing.
dharma1 7y ago
Sure, interest rates set by most major central banks have been at historical lows, between 0% and 2% for the last 10 years, since the last crisis. And it doesn’t look like it’s possible to raise them much in the next few years - the economy has become accustomed to low rates and can’t take a rate hike. Nor will it be possible to lower them much (since they already close to zero) in case there is another downturn and the central banks need to stimulate. I don’t think we have ever seen such a long period of low rates before, so this is relatively uncharted waters. Inflation of consumer goods, which central banks have a mandate to track, is still relatively low, mostly thanks to low oil prices. But if you look at the prices of financial assets, you’ll see a lot of “inflation” hiding there thanks to money printing and low rates of the past 10 years.
- eru 7y ago
  Actually, real interest rates on eg American government bonds haven't been that low by 20th century standards. We saw much more negative real interest rates before. Especially after taxes. https://www.minneapolisfed.org/article/2016/real-interest-rates-over-the-long-run https://www.minneapolisfed.org/article/2016/real-interest-ra... Nominal interest rates however are very low, because nominal GDP growth is low.

eru 7y ago

I am not quite sure what you mean by debt-fueled bubble? Your perception might be coloured by the miscategorization of the time before the Great Recession as a bubble. It wasn't. (See eg Kevin Erdmann's detective work on this at https://economicsdetective.com/2019/03/re-thinking-the-so-called-housing-bubble-with-kevin-erdmann/ https://economicsdetective.com/2019/03/re-thinking-the-so-ca... ) Btw, loans going sour is a problem for the creditor, but ain't a problem for the economy, as long as total nominal spending is kept stable. See eg https://www.cato.org/cato-journal/springsummer-2019/financial-stability-case-nominal-gdp-target https://www.cato.org/cato-journal/springsummer-2019/financia... In any case, I'm glad that my central bank doesn't mess with interest rates. So no funny business going on around 0% interest. See https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-P...