So today cooped up at home I'm going to anger you all by describing why "technical debt" is a stupid metaphor. It's actually a great metaphor but for the fact that people widely misunderstand "debt". That's demonstrated by everyone cheering on tweets like:
2/ Whether you are in the "Das Kapital" camp or Adam Smith camp, you understand that businesses run on "capital". There's really only t̵w̵o̵ three ways a business gets capital:
1. debt (loans, bonds, etc.)
2. stock
3*. leasing
1. debt (loans, bonds, etc.)
2. stock
3*. leasing
3/ Let's say Acme Airlines needs $1-billion to acquire airplanes to expand it's business. It can issue $1-billion bonds (debt). It can sell $1-billion worth of shares (stock) in the company. Or, it can convince some leasing firm to buy the airplanes and lease to the airline.
4/ To a large extent, Acme is indifferent to this. They have pros and cons, but are essentially the same thing. They could lease these planes at $100-million per year, or they could issue bonds and pay $100-million per year in interest. It's essentially the same thing.
5/ That includes stock. If you issue $1-billion in new stock to buy the airplanes, those who buy the stock expect a return. Thus, you were expecting to pay $100-million interest on bonds, but issue stock instead, now you have to pay $100-million dividends to the stock owners.
6/ Instead of paying dividends, another way to compensate stock owners is through stock repurchase. Instead of that $100-million dividends per year, you could instead buy back $100-million shares per year. Either way, you are compensating the investors who loaned you capital.
7/ Again, we are talking about something that is ultimately equivalent. There are some abstract pros and cons, such as different tax treatment for investors, but ultimately dividends, stock buybacks, and loan repayments are the same thing.
8/ "Free cash flow" isn't free cash. Instead, it's the money that goes into paying back capital. It's the money that either repays debt, gets paid as dividends, or gets paid as stock buybacks.
9/ A friend won $1000 with a lottery ticket. A tiny sum as lotteries go. But instantly, everybody around her had a good reason why they should share in this "free cash", from small things ("buy Girl Scout cookies") to bigger things ("take us out to expensive steak restaurant").
10/ It's the same thing with "free cash flow" from airlines, where everybody has a better idea what airlines should do with that cash rather than pay back investors, as if investors are chumps whose job it is to provide capital but not realize any returns.
11/ Anyway, it's the same thing with "technical debt". Techies are convinced companies are awash in "free cash" that can be used to "pay down technical debt". They see technical debt as something that must be gotten rid of.
12/ But companies don't really have "free cash". Every cent they have is earmarked for something, such as leasing things, capex expenditures, paying back bonds, or paying profits back to shareholders in the form of buybacks or dividends.
13/ "Technical debt" would be a great analogy if techies talked bean counter, putting numbers on things, proving to the bean counters that paying down technical debt had a better return than stock buybacks.
14/ But techies don't argue numbers. They are largely innumerate about such things. Instead, it's purely a moral argument. Technical debt is morally bad, and thus, must be gotten rid of, regardless of the actual numbers.
15/ It's the same thing here. Using free cash flow to buy back stock isn't anything exceptional -- but because some moral argument when people want free government cash in their own pockets instead of the airlines.
16/ I'm a libertarian capitalist, so I agree airlines should go bankrupt, and investors should lose their money. This includes me, since I undoubtedly have investments in them via index funds.
17/ Sure, it sucks that an act of God wiped out your airline investments, but that's what it means to be a stock holder, acts of God are one of the risks you take. But this has nothing to do with "free cash flow stock buybacks".
