Why Stock Repurchases And Low Interest Rates Are Problematic

We hear a lot of opinions stating how stock repurchases are a problem, yet no detailed explanation of why they are a problem. In tandem with low interest rates, both pose major issues for the US economy leading to the diversion of wealth to the top. In other words, wealth inequality.

One of the biggest reasons stock repurchases are a problem is because when companies spend their liquid assets to buy back their own stock, those funds do not go to infrastructure, capital improvements or employee wages. In fact, much of the time employee wages suffer for the sake of diverting money to buying back stock.

Why do companies focus so much on stock value, when it has little or no correlation to profit margin? Mostly because for many years corporate executives have received stock packages as part of their compensation. Sometimes the stock packages can actually exceed their wages. Stock packages as compensation are not taxed when disbursed to the recipient. They are not taxed until the stock is sold. As a result, corporate executives are more than willing to sacrifice profits, employee wages/benefits, capital maintenance, improvement and repair in order to artificially increase stock value. If the stock value increases, so does their wealth.

Now, you may think that this is fine because they will have to pay taxes on any accumulated wealth when they sell the stock. That’s not exactly true, either. As a general rule, what they are likely to do is buy other investments…