Two obvious bits of economic reality worth emphasizing:
- Trump and the stock market
Stock prices are directly related to earnings. Cuts to corporate taxes translate directly to earnings. Stock prices rose with the expectation of Trump’s corporate tax cuts, and he delivered.
At this point nothing else has happened (other than the uncertainty of the trade wars). The recent rise in corporate earnings is not a reflection of new business activity, it’s just the reality of the money we’ve all given them. That’s a matter of profits and the next item to be mentioned ….
- How those tax cuts have been spent
Imagine you’re a corporate CEO who has just put together a new business plan. The cost of capital is extremely low, so money alone cannot be viewed as a serious brake on new opportunities. You have submitted your business plan to your board, and it has been approved. Somebody now gives you a bunch of money. Does that invalidate your business plan? Were you wrong about the opportunities?
Next you’re an investor in that business. You’ve watched the tax cuts coming from the beginning, so you know there’s a bunch of new money that just came in. The CEO has already told you that his business plan is taking advantage of the opportunities worth pursuing. Whose money is that—it’s mine!
Unsurprisingly, that’s exactly what happened. “Stock buybacks to boost investor share value.”
In other words, the best thing companies have found to do with taxpayer money is to pass it straight through to their investors!
3 thoughts on “Small Bits of Reality”
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