Re: Doug Henwood on SS and equity shares

[JSAlbus@xxxxxxx]

 Doug Henwood writes:
Spend some time with the flow of funds accounts and you'll see that 1)
nonfinancial corporations are 90% self-financing, and 2) equity
finance is insignificant as a source of outside funding. Point 2)
holds for almost all of US history, with the exception of a brief
period in the 1920s, holds for all OECD countries now, and holds in
"emerging" markets today.

Albus replies:
What is the cause and what is the effect?  Are you saying that the markets
are awash in equity financing that no one wants?  Is it true that
corporations prefer to borrow money at 8% rather than take equity at zero?
 To what do you attribute this strange preference?

I would suspect that the reason equity financing is insignificant is that
equity capital on reasonable terms is in extremely short supply.

 Doug Henwood writes:
Dividend yields today are 2-3%, and T-bond yields are 6.5%. That looks
like two times to me.

Albus replies:
If this were the whole story, then why would anyone ever invest in stocks?

 Doug Henwood writes:
I don't think most US firms are finance-constrained; they don't invest
more because anticipated profitability doesn't match their absurd real
hurdle rate of around 11%.

Albus replies:
And why do they set the hurdle at 11%?  Could it be that they cannot afford
to invest at a lower rate of return because of the risk and cost of borrowing
at 8%?

>Fourth, re: who would manage the funds.  There exist successful
>methods for managing mutual funds today.

 Doug Henwood writes:
Oh yes, and they do such a wonderful job almost matching the S&P 500.

Albus replies:
The S&P 500 is doing pretty well.  Maybe that would be ok.

Fifth, how would the shares be voted?  How about giving voting rights
>to the people whose money it is?

 Doug Henwood writes:
Then it ain't capitalism anymore, comrade - unless those are sham
elections.

Albus replies:
Are you saying that all corporate stockholder voting is a  sham?  Is some
principle of capitalism violated by shareholders voting stock?

And even if it is, so what?  What is wrong with that?  Allow for the
consideration of something new here.  We don't have to be limited by Karl
Marx's vision of capitalism.

Jim Albus