Tuesday, 22 October 2019

The people who run our country don't know what "investment" means.

It's very simple. Businesses 'invest' (in productive assets, tangible or intangible) and individuals (or pension funds on their behalf) 'save' (defer consumption), by either accumulating money in the bank or buying shares (directly or a pension fund does it on their behalf).

Individuals dissave (accelerate consumption) by cashing in a pension; withdrawing money from the bank and spending it; or selling shares and spending the proceeds. When one individual buys shares, another must have sold them, so the two sides cancel out and it's not even net saving, let alone net investment.

The actual businesses whose shares are bought and sold couldn't care less who buys and sells their shares and are unaffected. They make profits (hopefully), reinvest what is needed to make more profits in future and dish out the rest as dividends to whoever own the shares.

The people who run our country (from MPs to the Governor of the Bank of England) are too stupid to understand this not particularly subtle or difficult point. From City AM:

Three hundred MPs are calling on the trustees of the £700m Parliamentary Pension Fund to end their investments in fossil fuel companies...

The pledge, supporters of which include Labour leader Jeremy Corbyn, Lib Dem leader Jo Swinson, SNP Westminster leader Ian Blackford, and mayor of London Sadiq Khan, stated: “We believe members of parliament have a responsibility to act on climate change, and a unique opportunity to show leadership on climate action, responsible investment and the management of climate risk through addressing the practices of our own pension fund.”

Caroline Lucas MP, the leader of the Green Party, said: “I am encouraged by the huge number of MPs who now agree that we must move our investments away from the polluting industries of the past, and instead support policies that will bring about a clean energy future.”

Bank of England governor Mark Carney and the Environmental Audit Committee have warned that people’s pensions are exposed to overvalued carbon assets as the world moves quickly towards cheaper, greener renewables, and governments legislate for net-zero emissions.

OK, so all "ethical" pension funds simultaneously try to dump their shares in oil or mining companies, what happens? The price falls and they've lost a lot of money anyway - and the yield to future investors goes up. Other pension funds, whose very statutory duty is "getting the best return you  can for your pension savers" would be acting entirely unethically if they didn't snap up those cheap, high yielding oil and mining company shares on behalf of their pension savers. Oil companies won't care less either way.

And anybody who drives a car is contributing to oil companies' profits and encouraging them to continue extracting oil; there's no point them being squeamish about owning shares in oil companies and thereby getting a bit of their own money back.


Lola said...

It's deliberate language mangling. They think Nineteen Eighty-Four is a manual not a caution. Whenever one of them says that in my hearing I correct them. sSame applies to bureaucrats.

Bayard said...

L, yes, the correct term for a lot of "investing", speculation, doesn't have the right connotations.

Dinero said...

I see your scrutiny of cash flow is yes, correct, but there is another aspect. A high share price helps a firm raise cash from new share sales at that price due to "market sentiment" or contributing to its credit eligibility for bond issues or bank loans .

Mark Wadsworth said...

B, there's no harm in people speculating as long as the markets aren't rigged, and as long as people aren't leveraging up using public money.

Din, only new businesses that want to expand faster than normal profits allow need to raise money. Oil companies are old, mature businesses, they keep ticking over nicely with existing assets. Companies like BP or Texaco haven't issued new shares for decades.

Mark Wadsworth said...

L, and does anybody ever take heed?

Lola said...

MW. Nope. But it annoys them as they know they've been found out by someone, especially when there are witnesses. Same as with the 'I'm a bureaucrat and I pay tax same as you' argument.