Cooking the Books 2 – The rich remained rich
‘Why’, the Times asked a few days after Trump announced the imposition of tariffs on imports into the US, ‘are global stock markets in a tailspin?’ Their answer was substantially correct and surprisingly honest:
‘The short answer is President Trump’s tariffs. The longer answer is that global investors are betting that the president’s tariff walls will result in a fall in corporate profits as companies face higher costs and lower demand for their goods. The prospect of falling profits encourages investors to sell their shares because it means companies will not be able to pay as much out in dividends and will be worth less in future’ (8 April).
Shares are, as the word suggests, a share in the ownership of a business and entitle their owner to some of the profits of that business. They can be traded in their own right independently of the activity of the business. The price at which they are bought and sold depends on the anticipated future profits of the business and is mainly arrived at through the expected stream of future profits being expressed as a notional capital sum which, if invested, would bring in the same amount. But this sum only exists as a share of anticipated future wealth which may or may not be realised.
This is where the Times was being honest in talking about ‘betting’ because that’s what trading in shares is partly about. Traders buy shares at a certain price because they calculate that the shares will bring in a bigger dividend or that they can be sold later at a higher price. But there is no guarantee that either will happen, any more than there is a guarantee that a horse you bet on will win. It may but, then again, it may not.
However, the stock exchange is not just a casino. It is also a place where a business can raise new or extra capital to invest by selling new shares. But once these have been issued and bought they can be traded and subject to betting and speculation just like any other shares. If their price goes up that does not of itself mean that the business that issued them has more capital to invest. Similarly, if their price falls, that doesn’t of itself reduce that capital.
The movement of the prices of shares does not affect, either way, the value of the real wealth in which capital has been invested. Obviously it does affect the amount of notional capital attributed to shareholders:
‘The world’s 500 richest people lost a collective $536bn (£417bn) in the first two days of stock market trading after Trump’s “liberation day” announcement last Wednesday. It was the biggest two-day loss of wealth ever recorded by Bloomberg’s billionaires index’ (Guardian, 7 April – tinyurl.com/3yw2vnws).
The losses here are calculated from the fall in the price of the huge holdings of shares that Musk, Zuckerberg, Bezos and the others hold in the companies they founded. But it was not a reduction in the capital value of the real wealth they own as the means of production held by their companies. That remained the same. It was a reduction in the size of a notional capital sum based on expected future profits, as traders adjusted their bets on the size of these. To some extent, a reflection of a change of betting odds.
The fall in share prices sparked by Trump’s tariffs did not mean that the value of any of the real underlying wealth the billionaires owned was wiped out, simply that the current market valuation of it was reduced.