Abstract
A survey of the reasons for holding securities and the ways they are put together in portfolios will show that in normal conditions all securities issued will be held voluntarily.
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is different when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
—John Maynard Keynes
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Notes
- 1.
And what about government bonds? Should they be counted among the claims against private capital? Taxes on the output and income of the private sector pay the government’s debt servicing. Government output consists of public goods and services, for which we have no adequate measures. But as Henry George pointed out, government and goods services are necessary for growth (and its externalities may account for the equity premium). In any case, for our purposes here, it doesn’t matter which way we draw the accounts, so long as we draw them consistently: there will be a “normal” ratio of total claims to total real assets, and our analysis will describe the unstable and erratic fluctuations of Q around that normal ratio.
- 2.
George examines this kind of self-reinforcing expectation cycle with respect to land values in book 4, chap. 4, of Progress and Poverty.
- 3.
Modigliani and Miller in a famous series of papers claim that capital structure does not matter and that an optimal debt-equity ratio does not exist. But their alleged “proof” of this assumes that, although there is uncertainty, markets are “perfect,” and all investors have the same full information and form the same expectations, including the shared expectation that all current profit streams will continue indefinitely, unchanged, that is, no defaults. In fact, markets fluctuate all the time, in waves of optimism and pessimism, and default risk is serious. Moreover, equity is ownership, and the question of “diluting ownership” is important in deciding to issue stocks. M-M is divorced from reality.
- 4.
Under some circumstances interest rate differentials could lead firms to issue more debt in relation to equity. Suppose short-term interest rates were unusually low; a firm might choose to take advantage of this and increase its short-term borrowing, even if there were no clear advantage to debt in relation to equity.
- 5.
When we know the ratio of debt to equity, we can apply it to planned investment plus existing capital to get total debt, so that, given the long-term interest rate, we can calculate the present value of the stream of payments issuers will offer to portfolios.
Bibliography
Asada, T, Chiarella, C, Flaschel, P and Franke, R. (2010) Monetary Macrodynamics, London: Routledge.
Semmler, Willi. (2017) “Destabilizing Effects of Bank Overleveraging on Real Activity,” Macroeconomic Dynamics.
Turner, Adair. (2014) “The Consequences of Money-Manger Capitalism,” Oct. 4, YouTube.com.
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Nell, E. (2019). Real-Financial Linkages and Holding Securities. In: Henry George and How Growth in Real Estate Contributes to Inequality and Financial Instability . Palgrave Studies on Henry George for the 21st Century. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-18663-0_8
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