It’s annoying when I hear people say, “I don’t mind that there are billionaires. If a person works hard, he deserves to be rewarded.” Yes, it’s true that everybody deserves to be rewarded for their work commensurate to their contribution. However, if this were the case, there wouldn’t be any billionaires.
It’s also annoying when I hear a billionaire say, “I worked hard my whole life. Nobody ever gave me anything. I’m not going to apologize for being successful.”
What this is really saying is that I earned all of my billions, which is completely untrue. If you’re the CEO of a major corporation, somebody did give you something: Stock options. This is the path that ultra-rich business people like Jeff Bezos, Bill Gates, Tim Cook, and Howard Schultz took to becoming filthy rich.
And it’s not just them. Once upon a time, the executives of a company were rewarded just like anybody else, with a salary. But that changed during the Reagan era, as did so many things. Now, the senior management of most corporations are largely rewarded with stock options, which have several advantages over a salary. First, the income is deferred and you don’t have to pay taxes until you actually cash them in. Even then the tax rate is much lower than it would be for ordinary income. Third, if the company’s stock price increases, the value of the stock options increase as well, which creates the incentive for management to focus on elevating the company’s stock price through dubious financial engineering practices rather than actually growing the business.
The average worker might pay as much as forty percent in taxes on income that he earns but the tax rate for the capital gains on stock options is capped at a maximum of twenty percent, which would be the rate applied to an income of between 40,000 and 90.000 dollars. So you can rake in tens of millions of dollars and you’ll pay the same tax rate as a truck driver. This is what billionaires mean by “fair.”
Why is it like this? The reason is that the rich effectively bribe lawmakers to create tax laws that ensure they pay as little in taxes as possible. Even then they’re not satisfied and always yammering for a tax cut because no matter how rich they are, they’re never satisfied.
But here’s another insidious technique the rich use to maximize their wealth. When companies issue a large amount of stock options, this would ordinarily dilute the share price because it leads to an increase in the supply of the company’s stock. In order to counter this, companies will launch stock buybacks. Reducing the supply of stock outstanding artificially raises the earnings per share and consequently the stock price.
Some people like to argue that buying back stock is better than paying a dividend because dividends are taxed and stock buybacks aren’t. There are two problems with this view. First, stock buybacks provide a perverse incentive. Because upper management owns so many stock options, they profit from buybacks, a clear conflict of interest. Ever since Apple began buying back huge amounts of its own stock, Tim Cook’s compensation has gone through the roof and now he’s a billionaire. Ten years as CEO and he’s already raked in over a billion dollars. Meanwhile, almost all of Apple’s excess cash has been spent on stock buybacks.
Of course he deserves all that money, right?
Second, dividends are a tangible way of letting shareholders participate in a company’s success. When profits go up, dividends increase, and shareholders are rewarded. This acts as an incentive particularly to small shareholders to invest in companies that pay dividends. The dividends protect them against fluctuations in the stock price and supplement their income.
On the other hand, hedge funds and senior management don’t like dividends because they have to pay taxes on the income. This is why they prefer buybacks. And it’s true that dividends are doubly taxed, once at the corporate level and again at the shareholder level. Clearly, this shouldn’t be the case. The solution is to eliminate the double taxation but Congress has no incentive to do this because the rich don’t like dividends anyway.
Stock buybacks, on the other hand, often turn out to be an unproductive use of capital. The reason is that they usually occur when the company’s stock price is overvalued, since this is when the companies are most flush with cash. So they end up overpaying for their stock and losing money when the price falls.
However, since most investors today are short-term oriented, they don’t care about the long-term effect on enterprise value. They only care about the share price today. The investor lobbying for buybacks are the ones most likely to sell once the price goes up.
These days up to 90 percent of corporate profits are being funneled into buybacks. That’s money that is not being reinvested in the company obviously. It’s only being used to give a short-term boost to the share price and make the stock options of senior management more valuable. Even worse, a lot of companies actually take on debt to buy back stock, which even at zero percent interest rates makes no sense at all from a corporate governance perspective. But it makes a lot of sense if you have a boatload of stock options that you’re planning on unloading.
In fact, at one time, Warren Buffet, the idol of the investment community, declared that companies that were buying back stock at inflated prices were eroding shareholder value. He insisted that Berkshire would only buy back stock if the share price were clearly undervalued.
However, he has since changed his tune. As a major shareholder in Apple, he has been giddy that Tim Cook continues to buy back stock despite Apple’s outrageous overvaluation. And that’s because it makes money for him. Buffet’s number one rule in investing is supposed to be: Don’t lose money. But in actual fact this isn’t correct. His real number one rule is: Always make money, no matter how you do it.
Now even though Berkshire’s stock is not undervalued, Buffet has decided to use the company’s huge cash hoard to buy back stock despite what he had previously said. After all, why waste money paying your employees more when you can reward your shareholders instead (like himself). Yep, that’s right, Buffet’s a hypocrite too.
In order to fund these buybacks, companies have to suppress the wages and benefits of their employees. Where else is the excess cash going to come from? So the rank-and-file see their wages stagnate and their standard of living deteriorate while their bosses are raking in more money than they could spend in a hundred lifetimes. Today, CEO compensation is over 400 times greater than the pay of the average employee. Do you really think they deserve that?
It’s insidious. Why did Jaime Dimon, the CEO of JP Morgan, take home 84 million in compensation in 2021? Tim Cook received almost 100 million in total. When shareholders finally began complaining, these two took a “cut” in pay, all the way down to 40 million. That’s what they call sacrifice.
It’s not just stock buybacks and stock options, though. The policies of the Federal Reserve also favor the stock market. Over the past 40 years, every time the stock market has crashed, the Federal Reserve has stepped in to prop up prices. Naturally, the rich benefit the most from this intervention. In fact, the Fed ends up pouring so much liquidity into the economy, that stock prices inevitably end up in a bubble (along with house prices). Eventually this leads to another crash, so the Fed drops interest rates to zero thus crushing savers and people on pensions. It also forces people into stocks and makes the stock market go up, which is exactly what they want.
Of course, the stock market itself is rigged. Theoretically, stocks are supposed to be priced in relation to the company earning power. In other words, the price you pay for a stock should reflect the long-term return you expect to earn. If the companies grows its profits at 10 percent a year, say, and pays a 2 percent dividend, you would expect to earn 12 percent a year over time.
However, for literally decades stocks have had almost no relation to any sensible valuation criteria. They rise and fall based on external events, such as how much liquidity the Fed is pumping into the economy through all of its financial engineering shenanigans and how much stock corporate America is buying back.
At one time, the mandate of the Federal Reserve was to maintain price stability. That means they were supposed to keep inflation low and make sure no financial excesses built up in the economy. But that changed under Alan Greenspan. Under the maestro, as the media termed him, the implicit mandate of the Fed became to keep the stock market rising.
The Fed has always denied that it targets the stock market but every time the market crashes, the Fed steps in to add liquidity to prop it back up. Ben Bernanke admitted as much. He said the Fed targets the stock market in order to foster “the wealth effect.” The theory is that when the stock market goes up, everybody feels wealthier and therefore they’ll spend more, thus propelling economic growth,
The problem with this theory is that most people aren’t invested in the stock market. The wealthiest 1 percent own over half the stocks. The bottom 50 percent own less than 1 percent. And those in the middle have an average of $40,000 invested.
So you can see that by targeting the stock market, the Fed is effectively exacerbating the wealth disparity in the country. The wealth effect is mainly concentrated in people who are already rich and they aren’t likely to spend more. Rather, they will invest their excess wealth in the stock or real estate markets, thus further driving up prices and inflating the bubble.
Of course, when the stock market is rising there is euphoria in the media because this is supposed to mean that the economy is doing well. But the truth is that the modern stock market has little to do with the real economy. So even though the S&P has jumped 4000 percent since 1985, most people haven’t benefited. In fact, ordinary Americans are arguably worse off. Wages have stagnated, housing prices have risen drastically, and life in general has become less affordable. It’s hard to imagine but if you go back to the 1960’s, you could not just live on a salary you made from pumping gas or working at Sears but buy a house and a car and raise a family. With the money you make at Amazon today, you can barely afford to put a roof over your head.
So when you’re living from paycheck to paycheck, the vagaries of the stock market don’t matter very much. All the hoopla about the Dow Jones and the S&P is just noise as far as you’re concerned because, as the old saying goes, you have to have money in order to make money.
Then when the crash comes, as it inevitably does, the small shareholders get wiped out and ordinary Americans lose their houses but banks, hedge funds, the rich, in other words, get bailed out and end up getting even richer.
So all of these rich people, who huff and puff and declare that they have “earned” their wealth have actually benefited from a system that is designed to make the wealthy even wealthier. The corporate governance system, the policies of the Federal Reserve Bank, and the tax laws all favor the rich and exacerbate wealth inequality. This has nothing to do with how productive a person is, how much he has contributed to society or what a brilliant business person he might be but is the result of a rigged system that favors the rich thus creating a class of the most horrible people the world has ever known: The modern billionaires.
Every time a Republican becomes president, we see taxes cut for the rich again. The promise is that these tax cuts will spur investment and get the economy humming, which never happens. Instead, it just increases the Federal debt exponentially, which is equivalent to the government paying the rich. At one time, the Republicans were the party that argued for fiscal responsibility. Since Reagan, however, they are perfectly happy with huge fiscal deficits so long as the money is going to the rich. Suggest, however, that the poor might do with a helping hand and they begin shrieking about the importance of personal responsibility and a free market.
Any attempt to raise the minimum wage is resisted by those free market capitalists who argue that if you give people more money it’s just going to hurt them in the end. Even Warren Buffet the richest man in the world argues that instead of raising the minimum wage, the government should give the poor a tax credit. Why? Because then the costs of running his companies won’t go up even if the Federal deficit does.
Most billionaires are hypocrites and psychopaths. A lot of them are probably autistic: Bill Gates, Warren Buffet, and Elon Musk for instance. They lack empathy, compassion, and at root they only care about what is good for them. Even if they’re engaged in so-called philanthropic activities, such as Bill Gates with his Gates Foundation, what they are really trying to do is remake the world in their image, which, believe me, is a world you don’t want to live in.
So the next time you hear a billionaires declare that he’s earned his wealth, be aware that he’s actually a parasite who’s taken advantage of a corrupt system to steal the wealth the rightfully belonged to the people who produced it: the workers. This isn’t communism, this isn’t socialism, this is true democracy. True democracy is when the fruits of your labor go to you and not some hedge fund manager with a 10 inch dildo he uses to goose his staff.
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