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Debtonator: How Debt Favours the Few and Equity Can Work For All of Us
Debtonator: How Debt Favours the Few and Equity Can Work For All of Us
Debtonator: How Debt Favours the Few and Equity Can Work For All of Us
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Debtonator: How Debt Favours the Few and Equity Can Work For All of Us

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A powerful argument that transcends left vs. right to address one of the most pressing problems of our era

We are all swamped in debt. Households, corporations, governments—debt has become so ingrained in our culture, it is an unquestioned fact of life. But it has not always been this way. And there is increasing evidence that this model is damaging both business and society. Debt leaves control and ownership in the hands of too few: it is a direct source of extreme inequality. However, there is another way of bankrolling our economic future: equity. This book argues that, by broadening direct ownership of assets through equity, we can make everyone better off—not just the few. There is value in equity way beyond what financiers, economists, investment bankers, and many corporate CEOs will tell you. It is the value of aligned interests, of trust and fairness, of optimism and patience, of stability and simplicity, of shared endeavor. Only when we unleash this value will economic democracy secure the political democracy that we cherish.
LanguageEnglish
Release dateMar 19, 2015
ISBN9781783961665
Debtonator: How Debt Favours the Few and Equity Can Work For All of Us
Author

Andrew McNally

Andrew McNally has spent twenty five years in the investment industry, both as an institutional investor and a stockbroker, for companies such as Sun Alliance, Henderson, Morgan Stanley and Berenberg. During that time he has met the founders and senior management of hundreds of companies in which he has invested clients' money, and has written for the Financial Times and the Daily Telegraph on politics and finance

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    A short, 4-star explanation as to why the very rich get richer and the rest of us don't. Recommended

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Debtonator - Andrew McNally

For Jessica, Michael and Sophia

Contents

Introduction

1.  Debt and Equity 101

2.  The Real Value of Equity Finance

3.  Nobel Finance

4.  The Rise and Rise of Debt

5.  How Debt Favours the Few

6.  The Social Value of Equity

7.  A Sense of Urgency

8.  Beyond the Debt Bias

Conclusion

Notes

Bibliography

Index

Introduction

It is absurd to entrust the defence of a country to men who own nothing in it.

Diodorus Siculus, 60–30BC1

We are in an age of financial extremes. Since the 1970s the Western world has seen the most prolonged rise in inequality, both in income and wealth, since the 1800s. At the same time, government, household and company debt in total has become more prolific relative to income than at any time in history; it plagues our financial system and, although it might look to many like governments and central banks have the worst effects under control, indebtedness is still increasing for the world as a whole. Despite many explanations of income disparity, the causes of inequality in wealth are not widely understood. The concurrent rise in debt and wealth inequality is curious, however; this book offers one explanation of why the two might be linked.

UK prime minister Harold Macmillan famously said that ‘most of our people have never had it so good’. He made that statement in the 1950s and most people have it even better today, at least economically. The wealth produced by post-war industrial recovery, together with the welfare state, improved the lot of the vast majority. In recent years, though, the economy has not been working for everyone in the way we were led to believe it would – not just by politicians but also by the economic theories that define their debates. As in the early part of the last century, those at the bottom and in the middle of society are being left behind by those at the very top. The UK economy is almost half as big again as it was in 1994 and yet, for those who are somewhere in the middle, incomes have gone up by just a fifth; they have actually flat-lined since 2002.2 The bottom 25 per cent of American workers haven’t had a real wage increase in twenty-five years.

The year 2014 was a tough one for 113 American billionaires who failed to secure a place on the Forbes 400, the prestigious list of the wealthiest people in the United States; as the stock market reached new highs, the competition simply pulled too far ahead. They should have moved to the UK; with only 107 billionaires, the slightly less prestigious Sunday Times Rich List left plenty of space.3 The wealth of the top 1 per cent has been growing at a much steeper rate than anyone else’s. In The New Few, Ferdinand Mount wonders if this is down to ‘an undiagnosed malfunction or a series of malfunctions’.4 He is right to wonder; the system is malfunctioning and it is allowing those at the top to leave the rest behind – way behind.

There’s a debate raging right now about the role central banks have played in the creation of inequality. While the central bankers themselves claim their actions prevented a second Great Depression others, both on the left and the right, focus on the impact they have had on the value of assets held mainly by the wealthy. So-called quantitative easing involved the central banks buying bonds and other assets in an attempt to free up cash in the banking system and the real economy. This is a valid debate but it says nothing of the more powerful and enduring forces that are the subject of this book. A relentless increase in the use of debt, especially amongst corporations, I argue, is a crucial link in the creation of wealth inequality; our faith in debt has left ownership of the most productive wealth, shares in companies, in the hands of the few.

Priorities change in politics; it’s the nature of the beast. There was a time when ownership was the big agenda, not just of homes but of everything. The UK’s early privatisation programme, for example, may have been mainly designed to offload corporations from the state and subject them to the free market, but the opportunity to create a new shareholding class was not overlooked; the ‘If you see Sid … Tell him!’ campaign during the privatisation of British Gas remains an iconic moment in stock market history nearly thirty years later. Sid, however, didn’t keep his shares for long and the dream of a stake-holding society never became reality.

Politicians are often playing catch-up. Keith Joseph, one of the key architects of Thatcherism, for example, broke ground in 1974 with his famous Preston speech, ‘Inflation is Caused by Governments’. It was a challenge to both sides of the political spectrum after successive governments had relied on money creation to solve our economic woes and, although his speech rocked the political establishment, it addressed an issue that was becoming apparent almost ten years before. In a similar way, we need to admit that extreme inequality today, to a large degree, is caused by our financial system; to acknowledge that central banks with governments by their side, at least in their current form, are part of the problem.

In the autumn of 2011, seventy Harvard students walked out of the esteemed university’s Economics 10 course. It’s the course that covers the basics – the fundamentals of economic theory. ‘Harvard graduates have been complicit and have aided many of the worst injustices of recent years. Today we fight that history,’ said one of the dissenters at the time.5 They see where the theory is lacking while their professors stick doggedly to the established syllabus.

We often forget that finance exists because of us, that we created it; we established the rules by which it works and which allowed it to thrive in the first place. Since the 1500s, when the Christian church found a way for Jewish money-lenders to bypass usury laws,6 we have continuously shaped finance; learning new lessons, new flaws and new approaches. Nothing in finance occurred in nature; we can deconstruct it and reconstruct it to serve our needs.

In this book I argue that the use of equity, not debt, as a means of financing companies should be a key ingredient in the fight against the growing inequality that we are witnessing in the West. Equity, in the financial sense, is two things at the same time: it is both an investment and a rich source of finance. Equity finance, when companies sell a share in their future success, is often seen as the poor cousin of debt finance, the source of funding a company resorts to only when it really has no other choice. On its page on equity, Wikipedia describes equity investors as the ‘most junior class’ of investors; however, equity is the only way to invest in new real wealth creation. Technically speaking, equity holders receive a return on their investment that varies according to the performance of a firm. In practice, equity represents a share in success – in the success of a company; in the success of an economy. It is the best means by which the wealth created by the growth in the value of assets can be distributed more widely in society.

After the financial crisis of 2008, like the Harvard students, many in business and banking glimpse a different model for finance – while governments and central banks perform CPR on the old one. The foundations of the next version of global finance need to be built

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