So far, I have not been wrong. Live with that. After the Ethiopian Airlines 737 Max 8 crashed on Sunday, March 10, I suspected that the accident might have something to do with the decade-long transference of the corporation's capital to executives and share holders. This transition to the value extraction, over value creation (terms I borrow from the Britain-based economist Mariana Mazzucato), took two forms. One, wage elimination (layoffs) and wage repression (directly or indirectly); and bewilderingly massive share buybacks that, by pumping up the value of the corporation's shares, effectively redirected billions from production and product development to a class of men and women who, to use the words of the father of academic economics, Adam Smith, "love to reap where they never sowed"—we call them "investors" when in actual fact they are simply speculators.
My point in that post: If you think that this kind of activity (aggressive wage depression; rampant value extraction) has had no effect on the corporation's products, then you must come from Planet Claire. And sure enough, we on Earth are now learning from the New York Times about "shoddy production" and "safety lapses" and "manufacturing mishaps" and workers filing "whistle-blower claims" at Boeing’s North Charleston plant.
Next, I warned that Boeing's decade-long buyback binge would, one, come to an end, and, two, have a huge impact on its financial position if a solution to the 737 could not be found quickly. One thing is for sure now: there is no quick way out of this mess. And sure enough, Reuters reports that Boeing "abandoned its 2019 financial outlook" and "halted share buybacks." So far, the grounding of 737 planes has cost the company "at least $1 billion." This unexpected hemorrhaging of cash will not stop until those planes are back in the air. But Boeing has not had any good news since that crash in the Dark Continent. What all of this means is that problems within the company that were once isolated and did not correlate, are now correlating.
After 2 Boeing 737 Max jets crashed, regulators and lawmakers are scrutinizing the company. Meanwhile, Boeing has increased the pace of 787 production and is said to be pushing to shrink its quality control staff by about 100 jobs in North Charleston. https://t.co/0IN0YkcM6Z
— The New York Times (@nytimes) April 20, 2019
Recall that Boeing bought back its stock right after a 737 Max 8 owned by Indonesia's Lion Air killed 181 people. It could do this because the problem (the crash in the Java Sea) was isolated. The second crash was not. It almost immediately linked back to the Lion Air crash and, consequently, both began to make links with more and more of Boeing's internal problems: the shoddy production, the repression and discontent of workers, the whistle blowing. All of this is now correlated with the costly grounding of all the planes. And as the mess spreads, we can expect all of these troubles to finally correlate with the heart of the matter: Over $50 billion in buybacks. And here we have the potential explosive at the tip of this torpedo that could sink the markets and send the US plunging into what will certainly be a depression that only a world war or the New Green Deal could resolve.
Many think that Boeing will be bailed out, if its finances are in complete disorder, but that is not the issue. What instead matters is how its disorder might change the way the other huge companies in the blue chip family are perceived by speculators. How stable are they? If Boeing is in trouble, then what about the rest? This will be the moment of danger. Suddenly, effective money (financial assets) which, during the boom, was seen as almost the same as strict money, will begin to lose its appearance as any kind of money. As in ancient Japanese ghost stories, the gold will turn to straw fast, if the damage done by buybacks is exposed by one blue chip firm. That is how it will all go down, and there is now a much longer way down than in 2008.
Martin Hutchinson of MarketWatch:
...no bubble is as overblown and as unjustified as share buybacks, which have totaled $350 billion in the first 10 months of 2018 alone. These have run at far more than double the level of any previous economic upsurge, at a time when stock prices are more overvalued than they have ever been before — 1929 was a model of sound valuation and caution by comparison — with the favorite tech stock, Radio Corporation of America, trading at only 28 times trailing earnings. [Share buybacks] have de-capitalized blue-chip companies, leaving many of them with negative equity... [I]t need hardly be said that another year of frantic buyback activity has left the balance sheets of most of those companies in even worse shape.
In 2018, corporations—some even running losses, or not growing at all, or in decline—repurchased their own shares to the stunning tune of $1 trillion. That is where most of the 2017 tax cuts went. And, with the current composition of the government, there are no new tax cuts in the near future, and no way of getting at all of that public cash locked up in Social Security (Bush tried that back in the day and failed). Cuts on social spending (the GOP's delight) will not be enough to keep this buyback bubble afloat. What will? The cash transferred to shareholders is gone, and the government is presently in no fiscal position to keep the vastly overpriced markets solvent. Also, Wall Street essentially dumped its losses into the Federal Reserve balance sheet—this is called “quantitative easing” or “QE”; it cost $3.5 trillion—and so this market-inflating option is severely enervated.
Now, please, dear reader, consider this. Call me a Marxist or whatever. But, for real, cash from the public purse went directly to the inflation of values in stock markets that are, in a true business sense, insolvent. And it has been so since 2008. There is no way out of this fact: Wall Street would not be breaking records today if the government hadn't pumped it with the tax-cut cash (Trump) and $3.5 trillion in liquidity in the form of quantitative easing (Obama) and mention $700 billion in hard money (Bush). Mainstream economists and bankers actually have the nerve to call this capitalism: government rewarding all manner of bad business decisions. But, of course, it's not capitalism. It's simply privatized socialism.
And so in the US, we have weaponized Keynesianism, on one hand; and privatized socialism, on the other. And yet the masses are subjected to lecturers from bankers like Jamie Dimon, J.P. Morgan Chase's CEO, about the awfulness of socialism: "[It] inevitably produces stagnation, corruption and often worse." (I will have more to say about Dimon, the most dangerous man in the US economy—and the king of the present decade—in another post.) But if you are going to be a capitalist, then be a bloody capitalist.