More on the Damaging Implications of Corporate Cash-Hoarding

John Authers of the Financial Times provides an update on corporate cash-hoarding. In brief, it’s getting worse due to probably-warranted executive nervousness about business prospects. As Authers puts it:

Corporate chieftains the world over have lots of cash, and want to hold on to it. It is a critical symptom of a new Age of Anxiety, as the corporate world tries and fails to convince itself that the global financial crisis has blown itself out. As Richard Dobbs, head of the McKinsey Global Institute, puts it: “Companies are uncertain about where the world is going to go. Until they are sure, they don’t want to pay the money out.”

In their drive for efficiency, companies have gone for operating too lean. There are two elements to this tale. One syndrome is well known, the now-infamous big company short-termism, which can easily come at the expense of longer-term results. But there is a second, related, but less well recognized aspect, that of operating with fewer buffers against risk. You see it in all sorts of practices: whittling down supplier networks to fewer companies (so as to gain more bargaining leverage over then) to just-in-time inventory to outsourcing (reliance on a partner reduces flexibility and responsiveness).

And as we wrote some months ago, we’ve hit the point where capitalists are no longer playing their proper role. The intuitive understanding most people have of how a proper economy works is that households save and businesses invest. But that is not how it has worked for quite some time. The time of onset varies by country, but in most advanced and emerging economies, the business sector has been a net saver too, in many nations for over a decade. And as Authers observes, that pattern has gotten even worse among big companies in the wake of the financial crisis:

According to Credit Suisse, the free cash flows of non-financial companies in the biggest four developed economies now account for 4.3 per cent of gross domestic product. This is double what it was a decade ago, and a record. Yet the share of gross domestic product going to investment is its lowest in decades, at about 16 per cent.

Where did the cash come from, then? Companies moved arguably too aggressively to cut costs in the wake of the Lehman shock. That created unemployment, but left far more cash on their books once the recovery started. Big companies have no problem accessing the cheap financing available from governments and central banks – unlike consumers and smaller companies, which must contend with the tighter standards being imposed by lending officers on the ground.

In China, companies pay less in dividends than their US counterparts, and save even more. But the resurgence of Chinese demand has generated cash elsewhere. Miners and natural resources groups in particular are awash with cash thanks to a resurgence in commodity prices that looks unsustainable.

In the US, small businesses somewhat offset the tight-fistedness of larger companies, but not by enough to make the business sector a net spender after the 2001-2002 recession. And this new pattern, of corporations as savers, has serious implications.

If you look at an economy from an accounting perspective, you can see why this pattern is dangerous. As we noted in July,

What happens when corporations on balance are saving, and households in aggregate try to save too? Families and individuals typically tighten their belts and bolster their bank accounts in bad times; the tendency is even more acute now, since many are trying to pay down borrowings, which is a form of saving,

If households and corporations are both saving, it must be balanced by the other two sectors of the economy, the government sector and the import/expert secto. In other words, the foreign and government sectors must spend more cash than they are taking in. In lay terms, that means running a trade surplus and having the government incur budget deficits.

Therefore, when both domestic households and the corporate sector are saving at the same time, then you need to have a VERY large trade surplus, a very large government deficit, or some combination of the two. There is no other way to square this circle – anyone who tries to tell you otherwise does not understand double entry book keeping, which the West has used for at least the last five centuries with some success.

And what if a government embarks on an austerity program in the face of private sector efforts to deleverage? Income growth will stall, and if the austerity program is large or sustained long enough, falling household wages and business profits can result.

That result might not sound bad, since lower wages and prices would make US goods more competitive abroad. But in economies suffering from a debt hangover, as incomes fall, it becomes even harder to make payments on outstanding loans. Defaults and bankruptcies cascade through the financial system, leading to even more reluctance to borrow and lend. In other words, the result of Austerian fiscal policies, is deflation – falling wages and prices – which can easily snowball into a depression.

This is why deficit spending, particularly on long-term investments, as Martin Wolf stressed, is sound in a deep recession or near depression. The problem is this policy was abused in expansionary periods and has gotten an undeserved bad name. The fact that antibiotics are overprescribed is no reason to refuse them if you have a gunshot wound. Yet the public has been conditioned to make a similar type of rejection in the economic realm. We are seeing the results in Ireland, where strict adherence to an austerity program has resulted in a nearly 20% fall in nominal GDP, making debt/GDP ratios worse, the exact opposite of the goal of this exercise. A far better policy is to write down and restructure bad debt, something creditors routinely do (think the US Chapter 11 process).

But bondholders have somehow gotten themselves in the position where they are refusing to share in collective pain, even though their investments were risk capital and they should be subject to the consequences of poor decisions. Instead, the losses have been shifted to taxpayers and ordinary savers (who are suffering due to negative real interest rates, another salvage operation for bank stock and bondholders). And the public at large has been steamrolled with Austerian logic, which again is the doing of….bond vigilantes!

As general Phyrrus said, “One more such victory shall utterly undo me.” But our leaders seem unable, as Phyrrus was, to keep proper stock of the true costs of their successes.

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37 comments

  1. attempter

    This corporate profiteering and hoarding is a result of the directly zero sum civil war we’re in. Every cent of it was stolen directly from the people as workers, and indirectly from the people as taxpayers (through the bailouts).

    This proves:

    1. Trickle-down doesn’t work.(Proving that yet again, as if we needed more proof.)

    2. Corporations serve no constructive purpose. Under these dire, crisis conditions, if corporations are just going to steal these windfall profits (all of it a windfall from the public-funded bailout and the veritably fascist “austerity” onslaught), then why should their profiteering be tolerated at all?

    3. Profits have zero moral or rational or practical validity. I defy anyone to explain on any of those three grounds how any corporate profiteering over the last two years has been legitimate; how anyone had any right to extract one cent for bonuses or dividends or to hoard it.

    We have the terminal proof. Capitalism doesn’t work. Every word claimed on its behalf was always a fraud.

    1. Brian

      Such broad strokes, makes it hard to take you seriously.

      1) Ok.
      2) Your problem is government. Government bailouts and distortions in the real economy through government spending.
      3) Profits have no validity? I forgot I should work for the good feeling I get inside. Again, you seem to mean “profits at institutions benefiting from *government* intervention.

      I think we have terminal proof that government intervention in the economy doesn’t work.

      This is why posts like these from Yves throw me off a bit. Deficit spending is not pure. It’s politically motivated and does not cure long-term allocation of resources.

      1. attempter

        2) Your problem is government. Government bailouts and distortions in the real economy through government spending.

        So this government spontaneously constituted itself on a corporatist basis, forced all this bailout money on the poor, hapless corporations, which they really had no use for but hoarding and bonuses. They would have preferred virtuous bankruptcy in many cases, and profit falling to its natural, mature textbook rate in all other cases. But the deranged government gratutiously forced all this bailout money, the whole pro-corporate legal structure, the whole pro-corporate concept of pseudo-federalism, and so on, upon them?

        Got it.

        3) Profits have no validity? I forgot I should work for the good feeling I get inside. Again, you seem to mean “profits at institutions benefiting from *government* intervention.

        No, the self-owned, self-managed, productive people should work for the use and enjoyment of what they produce, and the leisure their productivity affords them. That’s why they shouldn’t tolerate unproductive profiteering parasitism.

        Although, now that you mention it, I bet that would indeed be of great help in the Pursuit of Happiness. You laugh at it, but it’s right there in the Declaration, a document with which we really need to reacquaint ourselves.

        1. Dan Duncan

          Attempter, your response is absurd.

          You write: “So this government spontaneously constituted itself on a corporatist basis, forced all this bailout money on the poor, hapless corporations…. But the deranged government gratuitously forced all this bailout money, the whole pro-corporate legal structure, the whole pro-corporate concept of pseudo-federalism, and so on, upon them?

          Got it. ”

          What in the hell are you talking about?

          First off, Paulson did force the bail-outs on the banks.

          [See for example, http://www.guardian.co.uk/business/blog/2008/oct/15/banking There are many other sources from Bloomberg to WSJ to VF which state the same.]

          Secondly, even if the government didn’t “force” any corporation to take a bailout– [Or looked at from the other end–even if the corporations voluntarily took the bailouts]–who gives a shit?

          The corporations aren’t elected officials charged with representing our interests. The transgression wasn’t corporate acceptance of the bailout money, it was the government offer.

          I realize, however, that the nonsensical response was but a vehicle for you to be able to write “the whole pro-corporate concept of pseudo-federalism”…and thus, shouldn’t be taken seriously. Because that’s the point—for you, DownSouth and the others—isn’t it? To string together “proto-parasitic”, “pseudo-feudalistic” and “neo-[FIll-in-Blank]”, in a staccato rhythm that puts both writer and reader in a blog-zombie trance.

          Believe it or not, there is a real parallel between the standard Blog-Zombie Prose and Hypergraphic religious-philosophical writing. It’s as if there is an insatiable desire to spew interchangeable, prefix-laden words in Garanimal fashion to express some new and deeper insight that never changes. Since the insight cannot evolve, the words “evolve” in an attempt to fill the void. At the moment of conception a phrase like “pseudo-proto-fascist” seems revelatory, and it gives the writer a fix.

          But of course, “pseudo-proto-fascist” isn’t revelatory, and the high soon wears-off. And the solipsistic blog-zombie is back at his key board chasing the next pseudo-revelatory–proto-philosophical-rhetorical-flourish.

          1. attempter

            Ah, the Dunkster again favors me with one of his ad hom tirades. It’s just like old times.

            It’s cute that you consider the government, e.g. Paulson, the puppetmaster and the banks the puppets. Those of us who live in reality know the opposite.

            In case the term “pseudo-federalism” wasn’t clear enough to anybody else, I’ll clarify.

            True federalism means power resides at its proper level, that is with the people, and is only conditionally delegated upward, under specialized circumstances. But the local or worker council is the basic unit of government and repository of power.

            But when the centralizers usurped power upward in 1787-88, they also pulled off America’s first great terminological heist, successfully usurping the term “Federalist” and slapping their opponents, many of whom were true federalists, with the label “Anti-Federalist”.

            It’s this illegitimate, truly anti-federal usurpation, which set us up for corporate tyranny, which I referred to here as “pro-corporate pseudo-federalism.”

            It’s government designed to be corporate thug and bagman.

          2. jcrit

            This is totally true. Too much of the People’s sovereignty is tied up in corporate charters that have gained Frankenstein status among us. Economic monsters. Is this not self-evident?

      2. john

        > Deficit spending is not pure. It’s politically motivated and does not cure long-term allocation of resources.

        As Yves points out, because it was abused when it was unnecessary does not mean it should be forsaken when it is.

        1. Patricia

          Moreover, deficit spending in “the necessary situation” isn’t the one-and-only answer to the crisis.

          Dan, going on a rant about wordage is just a way to slip sideways from the subject at hand. If you don’t like the way they use their words, use better words in response, words that prove your point, if you want to be useful.

          However you and Brian may disagree with Attempter and DownSouth, they are thoughtful and multi-faceted. You, however, present one-dimensional solutions. If you won’t broaden your thinking, you will not contribute in an intelligent way to these serious issues.

      3. Alan

        Well said.

        I also like the “gunshot wound” example above. Right now the economy certainly needs the “antibiotic” of deficit spending, but because that spending has been so corruptly and wastefully used for years, and incompetently used by this Administration so recently, the population is turning away in distrust and revulsion.

        Blame those who wrongly choose the austerity path now of course, but save some blame for those who poisoned the deficit path through their excess spending in the past.

        Which party more wrongly invokes Keynes? The Democrats who rightly deficit spend in recessions but never cut back in booms, or the Republicans who want to cut taxes in recessions but don’t realize that’s Keynesian too?

    2. JLCampos

      It is a fact worthy of tragic treatment by a supreme poet that capitalists are destroying the very system that sustains them. Socialism is at hand.
      Oedipus wanted to eliminate the Theban plague by trying to find its cause and then he found that the cause of the plague was himself.
      The nation states are threatened by the “market”. What do we think will survive? the nation or the “market”?
      Assuming that the “market” would win out it would become ipso facto the state.

    3. Yearning to Learn

      Capitalism doesn’t work

      bingo.
      Now is when some free market-eer will whine with: “but we don’t really have real capitalism, we have (input concept here)”

      but the problem of course is that pure capitalism is no more workable than pure communism. Both work great as ethereal concepts, but cannot function in human society.

      why is that? because eventually the dog eat dog world will lead to consolidation and eventually those consolidated entities will have too much power and will devour everything else and then the host. on a side note, this is part of the reason why we see boom-bust cycles.

      we are at the natural evolution of practical pseudo-capitalism now… the beasts are so big and so bloated, but they have overfed and have to work harder and harder to suck the blood from their hosts.

      for a time, government acted in a better way as a countervailing force to the bloated parasite-businesses (RICO, anti trust laws etc) but eventually they were co-opted leaving us worse than before.

      the last remaining foodsources are the national sovereigns and the taxpayer.

      once that is done they will feed on each other and starve to death.

      too bad for us.

      1. attempter

        Exactly. Capitalism, centralized communism, “free markets”, “free trade”: These are all examples of things which have had many chances to work according to ivory tower theory, and never came close.

        In each case, by now it’s empirically proven that the thing truly is what it is in practice, while the ideal of theory is nothing but a fiction.

        1. Patricia

          Yes! I’ve never been able to understand why we humans keep latching onto one idea and insist that it is universe rather than realizing that functionality is an ever-living-moving conflation of opposing principles that need to exist in careful balance.

          This insistent one-dimensionality is seen in its most flagrant absurdist form in the art world, which has been plainly ruined by it.

        2. Still Above Water

          “Capitalism, centralized communism, “free markets”, “free trade”: These are all examples of things which have had many chances to work according to ivory tower theory, and never came close.”

          As a small business owner, it’s been my experience that capitalism works pretty well when practiced by ethical beings. It appears that communism also works pretty well with the right practitioners, such as monastic orders.

          It seems to me that what you’re really railing against is human nature. The real problem with the large corporations is that they’re run by sociopaths, for sociopaths. Morals mean nothing to them. Laws are there to be changed for their advantage, or ignored. And lawmakers are venal enough to let them.

          Until we find a way to identify and remove sociopaths from positions of power, we’re all going to suffer.

          1. Patricia

            I agree. There was an old saying when I was in college: “You can’t legislate morality”. I always thought that peculiar. All laws, in a fundamental sense, legislate morality. If we, whether socialist or capitalist, cannot make immorality (in its broadest sense) far more difficult than morality, the system will fail, no matter what kind of system it is.

            Humans are inclined to be selfish, to tell themselves convenient lies, and to take the easiest route–not all of them and not all the time, but generally and regularly. That we keep refusing this basic truth about ourselves shows it to be true.

  2. F. Beard

    But in economies suffering from a debt hangover, as incomes fall, it becomes even harder to make payments on outstanding loans. Defaults and bankruptcies cascade through the financial system, leading to even more reluctance to borrow and lend. In other words, the result of Austerian fiscal policies, is deflation – falling wages and prices – which can easily snowball into a depression. George Washington

    The way to bypass the Austerians is not Keynesian deficit spending but a direct bailout of the entire US population with new legal tender, United States Notes. How can they oppose that? Debt forgiveness is Biblical so they can hardly oppose it on moral grounds. No new taxes are required so they should have no complaint there. Also no new debt is required either since US Notes are debt free money. Inflation risk? Then put banks out of the counterfeiting business via leverage restrictions.

    1. Paul Repstock

      Tarbender..Tarbender..Another whiskey..make it a triple. I’m hearing voices.
      In one ear I got the Devil’s advocate of socialism, in t’ other I got the prophet o’ free money for all, an’ comin up the middle is a temperate anarchist..more whiskey I say.

      Well, Mr. Authers doesn’t paint a pretty picture, but it isn’t news to any of us. The ‘Corporate Hoards’ he speaks of will possibly fund the New World Order.

      I don’t think there is the moral fiber in government to take FB’s advice to just print and distribute new money.

      1. F. Beard

        I got the prophet o’ free money for all, Paul Repstock

        Well, I do advocate fundamental reform after the bailout so it should only be necessary once.

    2. Brian

      I get the point, but how many new US Notes do I get? How many do you get?

      Do the same politicians that happily give out FedBucks to every TBTF get to decide this too? (This is what Paul said too I see)

      I’ll stick with the dollar if we can just stop the bailouts and lock up the TBTF crooks and their politician henchmen.

      1. F. Beard

        I get the point, but how many new US Notes do I get? How many do you get? Brian

        We (all US adult citizens), borrowers and savers, alike would get the same amount.

        As to the grand total, if we wish to move to 100% reserve banking without deflation then I guess it should at least equal M1. However, since government backed fractional reserve lending is theft and since the Biblical restitution for theft is from 2-7 fold it could easily be more than that.

        I’ll stick with the dollar if we can just stop the bailouts and lock up the TBTF crooks and their politician henchmen. Brian

        Don’t forget your local banker then. All fractional reserve bankers are thieves of purchasing power.

        1. Brian

          Count me out of your crazy plan too then. Everyone gets the same amount? I better have some kids fast to cash in.

          Fractional reserve is not the enemy if people and bankers understand that their deposits are a loan they may need to “run” to call in. Credit money is annoying to compete against, for instance college or houses. Not so much for clothes and tvs, where default means a loss to the lender rather than a bailout.

          1. F. Beard

            I better have some kids fast to cash in. Brian

            What part of “all US adult citizens” don’t you understand?

            Fractional reserve is not the enemy if people and bankers understand that their deposits are a loan they may need to “run” to call in. Credit money is annoying to compete against, for instance college or houses. Brian

            I would not outlaw fractional reserve lending except in the government’s money supply. Bankers would be free to practice it in their own private money supplies assuming they could find suckers.

          2. F. Beard

            Count me out of your crazy plan too then Brian

            And Great Depression II and possibly WW III are sane?

        2. mansoor h. khan

          if you want to stop banks from issuing currency via FRB just remove the government deposit insurance protection and create a government owned bank for safe storage of deposit money for the public.

  3. Jim the Skeptic

    In the past corporations didn’t want to own a building, they wanted to lease it. Corporations were saddled with debt in all those hostile takeovers and some not so hostile. Businesses borrowed money for operating expenses. Companies ran on debt to maximize payouts to executives and shareholders. They were weaker and more likely to go bankrupt during downtowns in the economy. It was an asinine way to run a business.

    Now they are operating in the roughest waters since the 1930s. Recognizing the risks they have reduced the number of employees, accumulated cash, and probably are running a little less debt. This seems like a reasonable response to me.

    It is imperative that we put the unemployed back to work. But asking companies to hire more employees than they legitimately need is wrong. That is no better than having the government hire employees to produce nothing.

    This phenomena seems to be just a part of the new normal.

  4. Mickey Marzick in Akron, Ohio

    Inasmuch as companies have concluded that “demand” is likely to be flat for the foreseeable future as individual households deleverage, another form of “savings”, there is little point in expanding productive capacity. And this failure to invest isn’t, as the article points out, offset by smaller business investment.

    But to the extent that this is becoming a more persistent problem in advanced capitalist societies, dare I say structural or secular, is CAPITAL simply on STRIKE and refusing to invest to impress upon both the public and the political leadership which tail really wags the dog or the realization on its part that “POSTSCARCITY” economics [an oxymoron] is upon us?

    It is no longer a question of producing foodstuffs and/or manufactured goods in sufficient SUPPLY but rather of consuming the latter – DEMAND – to render sufficient return – PROFIT. Absolute scarcity in both agriculture and manufacturing, and increasingly even in services, is no longer the “problem” in advanced capitalist societies. The bane of humanity – SCARCITY – has been largely overcome in these societies. Hence, neither Keynesianism nor Neoliberalism are adequate to the extent that both are predicated on “scarcity” and the subsequent need for additional growth. The supposed need for the latter is predicated on “scarcity” so as to render any discussion of redistribution moot. The whole efficient allocation of resources argument and subsequent incomes/dividends derived therefrom, etc., is predicated on SCARCITY, right? I’m simply more productive than you are and hence my income… sayeth the CEO. Sound familiar? But growth is always the solution… But is it in a postscarcity environment?

    Even the expansion of credit witnessed over the course of the past three decades can be seen as an attempt to bolster sufficient demand for the various foodstuffs/goods produced. And it “worked” for a while. But if one controlled for the “credit spigot” how much real growth has occurred in advanced capitalist societies during this period? Without this expansion of credit, would there have been any “real” growth outside of construction? Where? In agriculture and/or manufacturing? Certainly not in the area of employment as both sectors have witnessed an absolute decline. This is particularly the case in manufacturing across the board in all of these countries. Less so in agriculture… as its mechanization and ability to produce a surplus preceded that in manufacturing.

    This is not to say that scarcity may occur but that it is now artificially-induced, more by conscious design than by natural forces, to maintain “profit” – to maintain the legal, political, socioeconomic values/institutions on which capitalism is based. Capital may appear to be on strike in advanced capitalist societies but postscarcity offers a more substantive explanation as to why? Even the argument made elsewhere that there isn’t sufficient avenues/opportunities for private capital investment implies postscarcity by default. Otherwise, why is CAPITAL on STRIKE?

    1. scraping_by

      Post scarcity? While it’s true that technology is creating some efficiencies, and the added value of those efficiencies can be available as cash, it’s not necessary to reframe it as an operational windfall. How about the vast majority of people being kept out of the value they add to the economy so it accumulates with a privaleged actor like a corporation?

      The well documented shrinkage of the middle class means a shrinkage of the consumers who power the economy. With no market to sell to, there’s no reason the invest in capital goods. With no capital goods, there’s no reason to use capital.

      Capital isn’t on strike, it just has nowhere to go. So it will end up in the pockets of the rich, and the corporate aristocracy. It’s a good sign this is rents and not added value. At least they will enjoy the ride down to the bottom.

      My first thought on this was remembering Enron had positive quarters up until the smash. And, indeed, a lot of balance sheet mugging is going on. For the most part, there’s little difference between money you borrow at 0% and cash from continuing operations. The difference shows up down years,but that’s long after the bonus check’s been cashed.

      But really, with all the tax breaks, subsidies, gifts, “loans”, and other grift available to any corporation, it would take some pretty incompetent management not to accumulate money. Until the middle class goes from the edge to over the edge.

  5. Richfam

    It seems reasonable to expect corporations to secure their liquidity and balance sheet safety after a massive liquidity event. No? So aside from taxing unused capital, we know how well that worked in the 1930’s, isn’t it a good idea to figure out ways to encourage corporate investment? At least to not discourage investment.

    Consider that people, working at corporations, make decisions about capital allocation based on recent experience and expected returns. Recent experience is clearly still driving corporate investment. As the memory fades the investment will come in my opinion.

    I won’t complain too much about government policy but too low rates, bailouts, regulation, taxation all influence new investment I would think. But that stuff is only a slight pull.

    Note that m&a is picking up (corporate investment) as well.

    So maybe this time it takes a little longer to heal the liquidity wound.

    Also, and I mean this in the nicest way, isn’t there a better way to refer to previous quotes without quoting yourself? Sorry, no intent to offend.

  6. Paul Tioxon

    Spain’s debt and its real estate inflation, seems to be derived from a national build out of a high speed rail system, that connected the nation state into a more fully realized integrated society. This PBS news report shows that real estate values and development followed the expansion of a state of the art, consumer friendly i.e., clean, safe, not smelly, bright, useful, air conditioned and climate controlled, smooth riding, a joy to be on experience. This brought previous far away places within easy reach, measured in minutes and hours instead of days and weeks of travel. Spain, will have a valuable asset in its national rail system and all of the economic drivers of realizing an integrated society. The debt hang over of America did not produce such wonders, unless you count the marvels of dedicated nostalgic baseball parks, and retractable roofs on football stadiums used about 10 days out of 365/yr as a measurable improvement and valuable economic drivers of our society. Oh, yea and flat screen TVs the size of garage doors, seriously, I’ve seen them in homes of less than 5,000 sq ft in size. The hot weather girls are larger than they would be if they were live in your great big kitchen, living, dining-room area. So, if the Obama who seems to have disappointed nearly whining crybaby with a busted balloon could move forward on this investment, along with an urgent rapid solar electric build out on the nations existing rooftops up and down the East Coast and points West, would that be a revolutionary change in the social order worth more than a golf clap?

    http://www.pbs.org/wnet/blueprintamerica/reports/beyond-the-motor-city/web-video-spain-the-next-american-system/902/

  7. Ryan E

    Quick question:

    1. Why doesn’t the government place some sort of tax on unspent corporate savings?

    and 2. Is it possible that companies don’t want to hire again because that’s the reason they’re profitable. They’ve laid people off to improve their bottom line- and have made profits not through sales, but through cost cutting- if they start hiring again, with no uptick in demand, don’t then end up where they started?

  8. Hugh

    You know historically high corporate profits 3 years after the housing bubble burst, 2 years after the meltdown, in the absence of any recovery, are not natural. Indeed they are profoundly unnatural. I think this gets lost in the discussion.

    When we say that corporations are not investing, that they are making do with less, cutting corners what we are saying is that they are disinvesting in their workers, their plant, and research. That is they are cannibalizing themselves or more precisely they are being cannibalized by their managements.

    The post makes this sound like an overshoot, that they are running “too lean”. But I see no evidence on the part of any corporation or their management to the effect that they have cut too deeply or that they are sitting on too much cash. As the saying goes, this is not a bug, it’s a feature.

    It is important too to remember that money is tokens giving access to resources. So when we talk about great inequality in wealth or the high profits which corporations are sitting on, what we are really talking about are resources being tied up in non-productive uses. Add in the calls to cut back on government spending and you can see how it is magical thinking to think that with all these resources off the table there is somehow going to be a recovery and people will be able to work themselves out of debt.

    It’s not going to happen nor should we expect it to. High corporate profits are a symptom of the disease not its cure. They represent only a slightly different aspect of kleptocracy, the corps looting themselves.

    And a final note, it is Pyrrhus, not Phyrrus, hence a Pyrrhic victory.

  9. Paul Repstock

    Rather than work through the preceeding tower of babble, I am restarting the thread.
    J Campos said “It is a fact worthy of tragic treatment by a supreme poet that capitalists are destroying the very system that sustains them. Socialism is at hand.”

    Here is the point: Corporations are no more ‘Capitalist’ than the government!

    Corporations are reactionary conservative entities.The highest ideal for a corporation is self preservation. To pursue this self preservationanything else including growth and profits will be sacrificed. Corporations grow far more from M&A than from innovation and investment.

  10. Koshem Bos

    The TBTF banks sit on trillions that were given to them by the government after the crisis. Had the government instead spread the money among the population (particularly the needy), demand would have grown, the TBTFs wouldn’t have too much money to sit on and spread as bonuses and the economy would have been farther ahead.

    Sadly, a political system run by the moneyed forces cannot make different decisions from the decisions it made.

  11. Francois T

    But bondholders have somehow gotten themselves in the position where they are refusing to share in collective pain, even though their investments were risk capital and they should be subject to the consequences of poor decisions. Instead, the losses have been shifted to taxpayers and ordinary savers

    Financiers help political parties with cash; in turn, political parties help financiers with rule-tweaking; which in turn, generate more cash available for contributions.

    It’s the perfect scam. Note that bond vigilantes would have NEVER been able to avoid pain if the powers that be were obedient to the people, and not the financiers.

    I just don’t see how we can end such a system. A crisis of social extinction event magnitude will have to take place. One can easily imagine the pain we’ll collectively have to endure to get there.

  12. Lyle

    Two points as others have pointed out corporations have discovered that the you can borrow when you need to meme is not always true (at least in late 2008) As a result the goal is to get to a point where if need be you can go without borrowing for an extended period in the event the money markets freeze up without having to go chapter 11.
    Second given that the rating agencies sold their soul to the devil, its no longer possible to make a riskless investment short of banks, AAA is meaningless and basically in the industrial world covers 6 companies now. Some borrowers are required to make riskless investments by their founding charters. Given the rating agencies not enabling people to detect this with respect to the RMBS market no one trusts them anywhere. So as a result lenders want more return to pay for the risks. This premium got far to low during the boom as people went for yield damn the risks! Today the pendulum swumg the other way. Now parts of it are for example if you lend to a bank holding company the FDIC has higher dibs than the secured bond holders on the assets of the company. (See WAMU)

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