The looming financial and social storm – Part 2

Global debt, financial and social problems are about to get worse thanks to the usual suspects – governments’ corporate welfare policies and corporate welfare rorts – and dramatically increase inequality.

The growth of private sector debt comes at the expense of ordinary taxpayers as companies exploit new ways to use the tax deductibility of interest costs for tax avoidance purposes reducing the capacity to spend on urgent social and environmental priorities.

This problem is made worse by the number of private equity buyouts (see Part 1) and is compounded by a recent PE wrinkle, such as the ThyssenKrupp lift LBO, which have left significant wriggle room on whether they have to pay everything back if things go belly up.

The junk bonds they issue for these takeovers are also at risk. S&P told The Economist (11 July 2020) that it expects the default rate for junk bonds to rise to 12.5% in the US. The Economist also reports (27 June 2020) that institutional investors (like readers’ super fund) have “piled $US 235 billion into specialist property-debt funds since 2008” and some funds are struggling to pay short-term debts.

In the US, where businesses took on more than $US 3 trillion in new debt in the first three months of 2020, companies tend to prefer tax efficient share buy-backs. In 2019 big American companies paid out an average of 41% of profits as dividends compared with European firms which paid out 66%. The respective shares for buy-backs were 59% and 23%.

The global airline industry has taken on huge amounts of debt to fund cut-price competition,  fund share buybacks  and executive remuneration and dividends after, in the post 9/11 2001-2005 period, collectively losing $US 40 billion. In Australia Virgin has gone under and the Qantas $2 billion loss means they won’t be bringing back the old TAA slogan up, up and away any time soon.

Meanwhile the Australian Governments is topping up some already deeply-cashed fill pockets while the lowest paid struggle.

Ben Butler in The Guardian (12 August 2020) says “We are seeing a transfer of millions of dollars from taxpayers – the community at large – to shareholders, some of whom are already quite rich” through what he calls a ‘dividendkeeper shuffle’.

“To get Jobkeeper, the first version announced back in March, businesses had to show a reduction in turnover of at least 30% for the three months to the end of June (50% for really big businesses). However, due to the crisis, they were allowed to estimate the fall.

“The government paid companies $1,500 a fortnight for each eligible full-time worker, and the companies were required to pass the lot on to their workforce. So where’s the benefit for the company? Well, by paying the wages of employees, the government was freeing up money elsewhere in the company.

“So far, that’s helped Adairs pay a whopping $11.3m to its shareholders (including more than $400,000 to managing director Mark Ronan) and Nick Scali pay out $3.9m, the lion’s share of which – $2.5m – goes to the founding Scali family.”

He said the dentist chain 1300 Smiles paid out $2.9m to shareholders after getting $1.8m in JobKeeper while founder, Daryl Holmes, received about the same amount in his dividend as the company did in JobKeeper support.

Solomon Lew, according to Elizabeth Knight (The Age 14 August 2020) worked out how to benefit three ways so that he converted a second half 18% drop in sales into an 11.7% increase in earnings to a record-breaking $59.7 million. He enacted a rent moratorium; he used the JobKeeper payments subsidies to pay his staff; he decided not to pay his suppliers for six months; cancelled some orders with them; and, by shifting to online sales upped his EBIT margins.

This approach, if extended widely, has implications for the commercial properties in Australia and around the world as well, according to PIMCO CIO Dan Ivascyn,  who says there are $US 1.2 trillion in bonds backing the commercial properties’ mortgages.

Another wrinkle for Australians worried about losing their dividend imputation credits is that lots of companies restrict retail investors’ participation (which often come with big discounts) in share purchase plans. Moreover, the benefits they reap from the negative gearing regime which helps price many would-be owners out of the market, will also be at risk.

Australian inequality, despite the best efforts of successive LNP Governments to transfer wealth from the young and the poor to the wealthy and the old, is not yet as bad as the US.

Between March 18 and August 5, 2020, the total wealth of US billionaires went up $US 685 billion (including those that have lost funds), based on Forbes data.

The top five billionaires—Jeff Bezos, Bill Gates, Mark Zuckerberg, Warren Buffett and Larry Ellison—saw their wealth grow by a total of $US 101.7 billion, or 26%. They captured 17.4% of the total wealth growth of all 600-plus billionaires in the last three months.

The fortunes of Bezos and Zuckerberg together grew by nearly $US 76 billion, or 13% of the $US 584 billion total. Mike Bloomberg increased by $US 12 billion between March and June while poor old Rupert had to be content with a $US 2.4 billion increase in the same time. At least Bloomberg will devote some of it to getting rid of Trump.

The Institute of Policy Studies provides some context to this as, between March 18 and April 10, 2020, over 22 million people in the US lost their jobs as the unemployment rate surged toward 15 percent.

Over the same three weeks, US billionaire wealth increased by $US 282 billion, an almost 10 percent gain. Between 2010 and 2020, US billionaire wealth increased 80.6 percent, more than five times the median wealth increase for US households; between 1990 and 2020, billionaire wealth soared 1,130 percent — an increase more than 200 times greater than the 5.37 percent growth of U.S. median wealth; and, measured as a percentage of their wealth, the tax obligations of America’s billionaires decreased 79 percent between 1980 and 2018.

And if you start thinking – well at least some of them are philanthropists? Brad Widdle (American Economic Review) says: “Major corporations appear to fund their charitable foundations in part to cater to politicians who are important to the firm’s profitability. Integrating corporate tax returns, lobbying data, and data on U.S. congressional committee assignments…show(s) that donations from a given corporate-funded foundation to charities in a particular congressional representative’s district, or for which a congressional representative is a board member, ebb and flow according to whether the representative sits on a committee that is of interest to the corporation.”