The dirty little Secret

David Leonhardt writes a good article defining the difference between nominal and real Stock pricing. He didn’t mention that the Dollars used to purchase Stock in 2000 would have keep up with the Inflation rate only if they were priced some 15% higher than they than they are Today; whereas Savings Accounts have relatively kept up with the Inflation rate. There is also another deadly little Secret which he did not detail: Stock Prices would have exceeded the real and nominal Inflation rates with an increased Profit ratio, if the base total amount of Stock had remained at a constant level.

Corporate CEOs and other Executives have gotten Rich absorbing Corporate Profits through Stock Grants and Stock Options, while expanding their Power base by acquisitions by venue of Stock Trades of newly-issued Stock. Corporate leadership may make a high Profit for the Corporation they manage, but they most often take it for their own; and even insist on taking such Profits when the Corporations must absorb an overall Loss. This Corporate leadership even makes it much worse for Stockholders, by the practice of ‘Buying Back’ Corporate Stock to maintain Stock Prices; though the Stock should not have been issued in the first place, and this same leadership exercise their Stock Options and Grants to sell their Stock at the maintained Stock Prices. It would be cheaper for Stockholders to simply change the Rules of Employment, and tell Executives that they would double their Salary every year that they worked for the Corporation (Most would doubt this assertion, but try running an Economic model comparing this Thesis against total exercised Benefits granted to Corporate Officers of the top 400 Companies; remember to start from their initial First Year salary).

Study of the greater Problem of Stock Issuance without Cause will likely find that Corporate leadership remains a little ahead in absorption of Profits, than the actual gain in Corporate Profits themselves. Modern Corporate leadership shows expertise in issuing Stock to bilk Stockholders of the normal Share of the Profits based upon their Stockholdings. Any lapse at the end of the Year is covered by a refusal to distribute Profits under the myth of an Investment Fund for future expansion. Corporate leadership has intrinsic aid in selling the excess Stock through Tax laws granting Tax exemptions only through Investment; Participants never realizing that the Tax is still in place, but going to Corporate leadership, not Payment for Government Services. How is this Tax derived? It is the exact differential between the real and nominal value of Stock. I estimate that this equates to about a 22% Tax on such Income, regulated by Corporate policies to buy back Stock so as not to become obviously excessive. lgl