This Could Be Economists’ Worst Nightmare

Economists often get a lot of respect from the public, but when it comes to their predictions, they don’t always come true. And with such low confidence levels, some economists have warned that economists “could use their forecasts for things like the weather or election results as a form of insurance”.

And now, alongside high unemployment and stagflation in Europe; high interest rates and low inflation in America; and rising stock markets around the world, there is also an impending global economic slowdown. So what’s going on? In case you haven’t guessed already, this could be an economist’s worst nightmare. What kind of business organization are Caleb and Anna operating under now? If you guessed undercapitalized entrepreneurs and self employed artisans you would be correct! While I did not find this to be a very accurate model for how corporations operate (as I will explain later on), it does represent something that may be in the future.

This Could Be Economists’ Worst Nightmare :

1. You’re Desperate for Cash

If an undercapitalized entrepreneur does not have money to sustain his business venture and it’s about to close shop, he or she is going to have to sell some of the business assets. Since a corporation value can never be reduced below zero, these assets will be paid out as dividends, i.e., they will be paid out to shareholders. This is how corporations are able to make a profit and turn a profit, which really is all they want.

2. You’re a Banker

If you’re a banker, sometimes it’s a good thing to own stocks in various corporations. If the banks have loaned these businesses money, and if the businesses are in financial distress, then you can take your stocks and use them as collateral against the loans. In other words, if these businesses are completely insolvent, then their stocks could be worthless and you can confiscate them from the owners. 

The bank is essentially trading the stock for that particular corporation’s assets. This is why it was so easy for creditors to confiscate Detroit’s pension funds. You see, it is illegal for governments to file bankruptcy or receivership on behalf of corporations (i.e. cities, states, and nations). 

3. You’re a Creditor

If you’re a creditor and you have loaned money to a corporation in financial distress, then you can either let the corporation go bankrupt (which will force the corporation’s assets to be liquidated), or you can exercise your right as a creditor to seize the corporation’s assets (i.e., the shareholders’ stocks). This would give you greater control over the company and its operations and could provide some financial relief (via dividends) for yourself even though it would devastate all of the shareholders.

4. You’re a Retired CEO

When a corporation is going through a rough patch, then the CEO can leave. For example, if the CEO wants to take a few months off and has enough money to live comfortably, he or she can just walk away from the company. To make things easier for him or her, he or she can own enough stocks in the company’s stock so that he or she can use those as collateral on his loans. If there is not enough stock left over at closing (since some of it will have been paid out as dividends) then the remaining shares can be liquidated for cash via bank call loans.

5. You’re a Government Employee

If you’re a government employee, then you can become the company’s CEO if you want. You see, as mentioned above, it’s always illegal for governments to file bankruptcy or receivership on behalf of corporations. This is because if a government did this, then the country would go bankrupt and the majority of its citizens would become unemployed and homeless either temporarily or permanently. But because the shareholders are theoretically protected by limited liability, they have no protection against the creditors. The shareholders probably don’t even know that their corporations are already bankrupt.

6. You’re a Shareholder

If you’re a shareholder, then you have no rights whatsoever. You are merely an asset owned by the corporation. The shareholders are merely a part of the corporation. For example, when an undercapitalized entrepreneur was forced to sell off some of the business assets, then the shareholders would receive their dividends (i.e., their share of the assets), which are paid out in cash or stocks. 

In this case, because the corporation is insolvent, the stock will likely be worthless and will be taken away from you via bank call loans. If there is enough left over (after paying out all of the dividends), then it can be sold at auction and liquidated for cash via bank call loans. Sometimes the shareholders receive their dividends in the form of stocks, which are often worthless since they are overpriced and trade via bank call loans.

7. You’re a Bankruptcy Trustee

If you’re a bankruptcy trustee, then you can probably exercise your right and force the shareholders to liquidate their stocks (and possibly even take payment on account) so that you can use those stocks as collateral against the corporation’s other debts. You can also seek to terminate the corporate charter and confiscate its assets (i.e., its intangible assets like patents). You see, bankruptcy trustees are essentially a “partner” of the corporation’s creditors.

Bankruptcy trustees have been appointed as conservators (i.e., keepers) of corporations since some people might be tempted to steal their own companies if they could not make a profit. But because the shareholders are theoretically protected by limited liability, they have no protection against the creditors.