THE FAILURE OF CAPITALISTS TO ACT LIKE CAPITALISTS
Yesterday’s discussion regarding Jeff Gundlach’s opinion that the US economy would default raised an excellent question from a reader. In the article I mentioned that private sector net savings are government deficit. Steve Randy Waldman at Interfluidity (in a far more detailed look) beautifully described what I was trying to communicate: net household financial income = current account surplus + government deficit + Δbusiness non-financial assets. The question from the reader was this: if the above equation is true then where is all the private sector surplus? This question was masterfully answered by Rob Parenteau the other day on Naked Capitalism. His conclusion:
“Remember the global savings glut you keep hearing about from Greenspan, Bernanke, Rajan, and other prominent neoliberals? Turns out it is a corporate savings glut. There is a glut of profits, and these profits are not being reinvested in tangible plant and equipment. Companies, ostensibly under the guise of maximizing shareholder value, would much rather pay their inside looters in management handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment.
What we have here, in other words, is a failure of capitalists to act as capitalists (emphasis added).”
This fact was best portrayed yesterday by Edward Harrison who writes the excellent Credit Writedowns website. Edward showed us just how much hoarding is going on at the corporate level:
I pulled a quick and dirty scan of some of the corporations with very high cash balances. As you can see most of the world’s largest corporations are flush with cash. They are literally hoarding billions. The problem of course, from an economic perspective is that these corporations, are in many ways, effectively debiting the system by not spending their retained earnings. Many of these companies have simply been amassing cash for years on end. Think paradox of thrift at a time when the consumer is struggling with an unbearable debt load. Not exactly a recipe for economic growth….
The conundrum here is what can be done about this? Is this even a problem that can be solved? Should it be solved? What can we do to get capitalists to start acting like capitalists again? Rob Parenteau thinks he has a solution:
“What we have here, in other words, is a failure of capitalists to act as capitalists. Into the breach, fiscal policy must step unless we wish to court the types of debt deflation dynamics we were flirting with between September 2008 and March 2009. So rather than marching to Austeria, we need to kill two birds with one stone, and set fiscal policy more explicitly to the task of incentivizing the reinvestment of profits in tangible capital equipment. A program to do so would include the following measures:
1) a prohibitive tax on retained earnings that are not reinvested with a 24 month period after they have been booked;
2) a financial asset turnover tax that raises the cost to businesses of playing casino games in various financial asset markets, rather than reinvesting profits in the productive capital stock;
3) a reinvigorated public or public/private investment program that helps speed up the shift to, and lower the costs of production of new energy technologies.”
Very interesting stuff. In summary, a great deal of today’s economic woes lie with the fact that corporations are having trouble finding a good use for cash or remain fearful to put it to use for varying reasons. This isn’t a new phenomenon, but rather, something that has been building up for many many years. What exactly is going on here? What can be done about it? Does something need to be done about it?
I’d like to do something a little different today. Rather than stand on my soapbox and pipe off I wanted to open the floor to the readers. What can we do now to promote this money to start moving thru the economy again as opposed to collecting dust in bank vaults? What can we do to get capitalists to start acting like capitalists again? Should something be done? It’s time that we all start recognizing that we’re in this together (the mailman, the entrepreneur, the banker and even Uncle Sam). We all benefit the sooner we get out of this horrid recession. So what can be done to eliminate the corporate savings glut? What can government do in partnership with the private sector to promote economic activity? The masochists out there believe pain is the only answer to get us out of this mess. I think we’re more creative than that. How can we get capitalists to start acting like capitalists once again?
Interesting indeed. Not so sure I like the idea of taxing retained earnings. Companies need savings and should not be encouraged to spend just for the sake of spending. Just like we shouldn’t punish consumers for saving.
I think you hit the nail on the head when you ask if this is even a problem. No it is not. It is simply a result of what we’re all going through – balance sheet shock. So we’re tightening our belts. No one knows what is around the corner. Welcome to deflation.
The answer is pure and simple: deflation. Under normal inflationary circumstances, companies (and everyone else for that matter) are incentivized to invest their funds, otherwise they are losing to inflation. But under deflation, their cash balances earn a real return with no risk at all, so the incentive to take on more risk and invest is destroyed.
Unfortunately, these companies with large cash balances *are* being capitalists. It’s just the deflationary cycle that’s killing us.
SS & GF:
That’s the unfortunate answer. This is what happens in deflation. Although I would argue that there was much the govt could have done to gain the public’s trust and bolster the environment from a psychological perspective. Instead, they have bailed out bankers and other market participants who should have lost – it has us all quibbling with one another to no end now.
This was, in large part, why I believed in a Swedish approach to the banking crisis. You make the losers lose, but do so in a way that minimizes moral hazard while maximizing public trust. We’re more Japanese in this regard. Unfortunately.
The response now? I don’t know if there is one. They had their chance to spend efficiently and they blew it. Now the markets want austerity. And with austerity will come deflation and with deflation will come further belt tightening. Let’s hope it doesn’t snowball too badly….
The response now? I don’t know if there is one. TPC
Debtor and saver bailout (everyone) is a solution with leverage restrictions to preclude hyper-inflation which is not plausible anyway according to your comments yesterday.
And then what after we buy some time? I suggest liberty in money creation usage and acceptance: Government money for government debt and private money for private debts with floating exchange rates amongst them all. That should satisfy everyone, the gold bugs, the fiat crowd and anyone else who has an idea on how money might be implemented.
TPC
A great commentary and a great intelectual question you ask. My feeling is that taxing retained earnings is not a good idea, very uncapitalistic. Companies currently dont have much of an incentive to invest and that is why they appear to be holding on to their money. Like a family hhld they are very cautious about the future. When one perceives risk one does and should be cautious. I am no masochist, however, the unwinding of what has been wound will take much time and much pain. That most unfortunately is the way of things. I vote for getting the pain overwith as soon as possible so we can get back to doing what we do best, inovating. As you stated, moral hazard, has contributed greatly to our current imbalances and getting back to a more balanced system is what defaltion tends to be about.
We can just have the Feds confiscate it and do a massive stimulus project! (/s) I’d like to know more about the charts and numbers before coming to any conclusions, just some off the top of my head:
- Why just corporations? What about LLCs, Partnerships, and Sole Proprietorships?
- How about inflation-adjusted distributed/undistributed corporate profits?
- What if ~1980 was an artificial low for “hoarding” and 1965′s 6% rate is the “right” rate?
- If 6% isn’t the “right” rate, why is it a problem now and not in 1965 or prior?
- How has leverage and the capital structure changed for the corporations since 1970? What if this is the difference between the undistributed corporate profits between 1965 and today?
- Is there a survivor bias in the data?
- How have tax laws changed?
- How about data before 1965?
Funny thing is i was just reading all those articles you have linked to today. And then I asked the exact same question.
That is a lot of cash…have we reached the limits of our technological progression? I tend to agree with the above comments – companies are probably experiencing deflation to some degree and this is evident in their behaviour.
But undoubtedly the overriding factor ignored here is the endless bailouts seen over the past couple of years. If losers were allowed to lose, its very possible that companies would have confidence in the capitalist way of life once again.
The answer is to stimulate demand for the products and services that the companies supply. We again come back to tax cuts that leave households with some disposable income after their debt payments. Most of the other approaches amount to pushing on a string.
I shouldn’t worry about the cash conundrum, world governments will get their hands on it soon enough.The spotlight will turn from the banks to all corporates as being the enemies of main street. All these corporates have hoarded cash rather than keep people employed. This has assisted in the downward recessionary spiral and our ever benevolent governments will step in to redress the balance
I think most corporations really do not have any good use for their cash. As the reliability and longevity of their automation capital equipment grows, the productivity of the workers increase. The companies sees no reason to increase capital or labor expenditures when the marginal increase in productivity is so small. I think the 800 lbs gorilla that everyone refused to acknowledge is that as productivity increased with better and more reliable automation, there is less need for human labor in the chain. At the same time, we continue to have a population increase, mortality increase and thus productive life (work) increase. Where do we find enough work for everyone? Do we need to decrease our reliance on automation and/or increase partial work instead of full time employment? At this point I really have no ideas how policy makers will adapt to this reality when waves and waves of college and working age young adults find themselves unable to find any work at all.
I think the 800 lbs gorilla that everyone refused to acknowledge is that as productivity increased with better and more reliable automation, there is less need for human labor in the chain. At the same time, we continue to have a population increase, mortality increase and thus productive life (work) increase. Where do we find enough work for everyone? mike
There is plenty of work to do else the world is a Garden of Eden. Does the world seem that way to you? Currently, we just have a shortage of money in the right hands, those it was stolen from via the government backed banking cartel.
F Beard is partly right here. The world is not a “Garden of Eden”, people still have unmet needs, so there is work to be done if we organize ourselves correctly. But the problem is not just that money is in the wrong hands.
The bigger problem is that America is uncompetitive. If we need a job doing, why pay an American when we can get the job done in Asia for up to 90% less? When a business is uncompetitive, it goes bk. When a country is uncompetitive, theory goes that there should be a currency adjustment. Problem is, for various reasons (Mercantilists, reserve currency etc.) that hasn’t been allowed to happen. Result: we get even less competitive.
See my comment below on hard reality of the way forward.
The bigger problem is that America is uncompetitive. CP
No, I am not a vulgar redistributionist. The system which resulted in that theft is also why we are uncompetitive, if we are indeed uncompetitive. Let’s just practice genuine capitalism and we should be able to beat the pants off the world which has adopted our fascist model, I’d bet.
The question is: Is true capitalism superior to fascism?
Profit in the Bible is good; there is no doubt, so this puzzled me till recently:
“In you they have taken bribes to shed blood; you have taken interest and profits, and you have injured your neighbors for gain by oppression, and you have forgotten Me,” declares the Lord GOD.”
“Behold, then, I smite My hand at your dishonest gain which you have acquired and at the bloodshed which is among you. Ezekiel 22:12-13 (New American Standard Bible)
from http://www.biblegateway.com/passage/?search=Ezekiel%2022:12-13&version=NASB
Interestingly, I used to think that when corporations held a huge amount of cash, it signaled a juicy takeover opportunity. For one thing, that meant that the current owners of the business didn’t know how to use the business to grow. Time for somebody else to takeover. But also, that particular asset is so attractive to raiders because they can use it to loot the company, pay for the takeover, take the business in a different direction – it’s a lot more flexible than metal lathes bolted to a floor somewhere.
So perhaps the question that we should be asking ourselves is: where have all the raiders gone? If this is just a smattering of the companies that are sitting on enormous hordes of cash, why have there been no takeover bids to strip it from them and put it in hands that are more interested in risk and return?
Where have all the raiders gone?
Answer — They were eliminated by the Delaware judicial system allowing any and all types of “poison pill” provisions — and a federal judiciary that has refused to hear any “poison pill” cases (in large part because very very few individual at-risk shareholders – principals – have the money to fight a legal battle thru the federal courts where they will be opposed by both Wall Street and agents/insiders/CEO’s of virtually all major corporations).
Glad to see you got the identity right today. As for the good question, speaking as a capitalist in a similar (relative!) cash position, I would say:
1. These businesses ARE acting like capitalists. Their actions make micro sense.
2. Like all market participants, their actions are unfortunately procyclical and they rightly have little confidence in the (domestic) economy.
3. The fundamental reasons for that are down to the global imbalances and their impact i.e. that America is now uncompetitive and it makes no sense to invest in an uncompetitive way and have your lunch taken by Asia.
4. We will not go back to making T shirts, but we have to change our competitive position at the margin i.e. we have to stop the current trend for things like IT services and drug research to be outsourced to China.
5. The bottom line is that can only happen with cost (wage) rebalancing – partly in Asia and partly in the US. Theoretically, that can be achieved by deflation, but realistically will be easier to get to via a lower dollar. Either way means lower US living standards.
6. All of this requires support from Asia (China). They need to allow REAL currency realignment, open their domestic markets and support domestic consumption. None of this will be easy to achieve but we’d better make a start.
I think th government missed an opportunity with its first stimulus effort. Instead of throwing money at shovel-ready projects wily-nily, it should have diliberately identified the basic needs of the country regarding health, transportation, housing, environment,utility, et al. and set about a short term and look term plan to address these issues in a rational way by introducing the incentives to businesses across the board to invest those cash assets to tap into the opportunities that would become available – so we would not only have not capitalists doing what capitalists should do, but governments doing what governments should do.
What can we do now to promote this money to start moving thru the economy again as opposed to collecting dust in bank vaults? What can we do to get capitalists to start acting like capitalists again? Should something be done? It’s time that we all start recognizing that we’re in this together (the mailman, the entrepreneur, the banker and even Uncle Sam). We all benefit the sooner we get out of this horrid recession. So what can be done to eliminate the corporate savings glut? What can government do in partnership with the private sector to promote economic activity? The masochists out there believe pain is the only answer to get us out of this mess. I think we’re more creative than that. How can we get capitalists to start acting like capitalists once again? TPC
Beautifully said. But we don’t have true capitalism in the US. Instead we have a government backed banking cartel in a government enforced monopoly money supply. This is the fundamental problem, imo.
I keep hearing this argument about records amount of cash. Why has Dr. John Hussman been the only one to discredit this notion. Yes, there is a record amount of cash on the sidelines. However, there is a record amount of DEBT behind that cash on the sidelines. I compare the situation that is occurring to a person with a 5% 30yr home mortgage with about 300k owed. If they have 100k in a savings account that might look pretty good to someone who is cash poor. However, unless they pay off all of the debt they are essentially borrowing that money at 5% until they pay it off. Why does this never get talked about or explained?
I don’t have the time or resources to investigate whether corporate debt levels are at historic highs, relative to cash.
Instead, I took the top ten companies from TPG’s list above, and compared cash to debt.
Combined they have about $315B in cash and $356B in debt. Throw out only two companies (Ford and Toyota, accounting for $271B of debt and $74B in cash), and the remaining seem relatively low debt ($241B in cash and $85B in debt).
I tried to find a reference to your assertion from John Hussman. I did find a reference to banks hoarding cash (which some certainly should, considering the level of bad debt they hold in Option Arms).
Can you provide a reference or data?
Hussman’s assertion is not applicable here. Corporations really do have cash on the sidelines. If they were to invest that money in the stock market (in a brokerage account) they would be adding net new money to the equity markets. If they bought stocks with that money they would simply swap assets with someone else. Their transaction nets to zero. But in terms of just looking at corporate balance sheets this really is money on the sidelines. Unfortunately for equity investors companies don’t use this money to buy stocks so it doesn’t really matter in terms of the Hussman argument. His ideas only apply to the equity markets.
I’m in the tax incentive and money velocity camp. US (and maybe foreign) manufacturers (companies that make things) should be incentivized to invest in US plants and equipment, with a deadline. In other words, a private sector stimulus. In the end, modernization will make us more competitive globally. Get that money moving and it can be taxed further down the chain.
What about paying dividends with some of the excess cash to those of us who “own” these companies? Then we can spend or invest as we see fit. The tax structure should incent dividends and long-term investment and penalize short-term speculation. Corporations should be taxed heavily for manipulating their stock prices through repurchase.
One idea I don’t know if I’ve heard discussed is changing the mandate for public corporations so that they are not simply beholden to operate solely in their shareholders interest but in the public interest more generally, and particularly to the benefit of the economy of the nation(s) in which they operate. It would be difficult to enforce this without specific rules (like the tax on retained earnings), but the list of companies above has half a trillion dollars in cash just sitting there. They won’t spend it, so, instead, the government spends in their absence? That’s not sustainable. I think spreading some of that wealth as dividends to shareholders and as bonuses to rank and file employees would go a long way to giving the masses some ammunition to work with. Republicans always bitch anytime you use the phrase “spread the wealth” but the reality is that if you don’t have a core of say 75 to 100 million people in our country who are doing better than just getting by, the economy as a whole is not going to fare well. It’s not just a bit of social sadness when the middle class withers — it’s the death of your engine of economic growth. Hoarding by corporations and the top 1% just sucks the lifeblood (money) out of our capitalist system. So you have to find a way to keep the incentives to risk-taking without over-rewarding just a handful of folks who don’t, in turn, recirculate what they’ve accumulated.
I think spreading some of that wealth as dividends to shareholders and as bonuses to rank and file employees would go a long way to giving the masses some ammunition to work with. T.W.R
There would be little need to spread the wealth around if it was not stolen in the first place by a (one more weary time) government backed fractional reserve banking cartel dealing in a government enforced monopoly money supply.
Thought experiment: Suppose there was no government backed cartel. How would banks or corporations get anyone to accept their money? By backing it with a probable ability to be redeemed in gold or silver? Yes, some will try that in a free economy but leverage would be limited due to competition from other banks. I would bet that corporations would instead be forced to share wealth by purchasing capital and labor with their common stock. That bypasses all the problems of loaning at interest, deflation, unchecked inflation, and wealth concentration while allowing capital concentration. It would make capitalists of the WHOLE population to the benefit of us all. It is decentralized and requires no precious metals.
I’m inclined to agree with those who have talked about the impact of automation and competition from lower cost countries. Over time, wages in the afluent countries have stagnated as a result of both of the above. Companies have been able to take a bigger share of profits and the benefits from increased productivity. For a long time, the absence of growth in real income was at least partial offset by debt fueled consumption. That can’t go on forever, and it looks like it may have come to an end.
Going forward, companies have no incentive to ramp up production because consumers lack the means to buy (i.e., stagnant income growth). Instead, investment is probably targeted at replacing older plant and equipment with more efficient plant and equipment in order to lower the cost of production and improve profitability. Improved productivity, however, could mean more layoffs (i.e., the same level of production requires fewer people).
Almost no one mentions the fact these companies are likely to invest more in emerging markets than in the US (adjusted by GDP). I’m not sure if it would be good or bad. Good if emerging markets remain open and US gets the benefit of selling (hi-tech stuff, management expertise, etc) to them. That itself seems to be atleast one way out for the US economy from the doldrums. The emerging markets can clearly give better returns on this cash with mutual benefits.
@Michael: Good point! Hussman & you are saying that companies are hoarding cash as a buffer, right? And they do so, because they know / expect the consumer (the entire household sector) to deleverage. Possible solutions might be ways to encourage companies to invest their cash in the American economy or offer them easy accessible, reliable buffers, say through the Fed.
That brings me to @T.W.R.: “in the public interest”. Hear, hear! It’s also dangerous, because, were the Fed to provide buffers, it would give the American government ownership in all the companies listed above. At Naked Capitalism Marshall Auerback argues that the ECB is the “United States of Europe”. Not very democratic and I don’t think you’d want a similar thing for the American economy.
Last but not least, I want to ask a terrible noob-y question: what kind of cash are they hoarding?
some very interesting comments and reaction. I agree with most of the views that this is a product of deflation and business cycle management. The other point that I dont think I have seen, which is disappointing on a site like this, is- how about the government start acting like capitalists? how about letting the free market act like a capitalist?
when businesses (or households for that matter) are unsure of policy and regulations going forward, what else would you expect them to do besides hoard cash and hunker down?
Its disturbing that immediately people even at TPC are talking about taxing retained earnings and more regulation. If we would just let the market work, that would solve a great portion of these issues.
@ARS: “If we would just let the market work, that would solve a great portion of these issues.”
I think this common lament that the government is keeping capitalism from working is so bogus.
Don’t be naive: Capitalism is a lion. If you don’t control it, it will eat you.
We can debate the level of control required, no doubt. We probably can’t even control the markets/economy to the extent we’d like to, but to suggest that we all ought to just get out of the way and let the beast devour us is nuts in my view.
… but to suggest that we all ought to just get out of the way and let the beast devour us is nuts in my view. T.W.R.
Capitalists I can in theory deal with. It is when they become fascists that problems arise because now the legal monopoly on force is at their disposal.
The US recently has shown willingness to adjust contracts via judicial or executive fiat (think court-ordered mortgage modifications) and to override investment terms (think auto company bond holders in the recent bailouts). Moreover, property ownership is also under attack, with increasingly egregious (mis)uses of eminent domain.
Given the government’s repeated pattern of fiat vs. rule of law, why in the world would anyone invest significant cash into capital assets (not movable easily) in a nation that on top of that has the world’s second-highest corporate income tax, unions and labor policies that are almost as business-hostile as Europe, and a system where the government is flailing and huge electoral changes are likely in 2010 and 2012? Nothing makes CFOs as uncomfortable as change and risk.
No wonder they won’t invest their cash. I wouldn’t either; in liquid form, it’s easier to try to move it away from whatever parasites are going to try to confiscate it next.
I don’t think it’ll change until the household balance sheets in this country are significantly improved; until the population displays a clear preference in multiple elections for a government that returns to rule of law and respect for contract; until there is a sustained positive trend in government finances; and until either US labor costs drop significantly (perhaps by getting rid of some of the ridiculously bloated benefits US employees expect and get) or until “somehow” US labor force productivity becomes so good that it even competes with China.
Institute the Fair Tax, which eliminates corporate income taxes, personal incomes taxes, and capital gains taxes. Start cutting government regulation left and right. Eliminate the Federal Reserve and countless federal agencies – Department of Energy and Education come to mind. Restore America to the free, capitalist society it once was approximately 100 years ago.
Dividends MUST be encouraged or at least viewed neutrally and not punished. Currently, dividends are punished (relative to interest-earning capital) via the corporate tax code. In effect, they are double-taxed — once at the corporate level and again at the recipient level. The solution is to do what Australia does — see “franking” dividends.
Restoring a rational cash-return-on-equity-capital-invested tax policy will also greatly reduce the most obscene corporate governance problem of the last 3 decades — the growth of insider/agent stock options. Those grants are the reason that CEO pay has risen so much relative to everyone else — because those options-receiving CEO’s are far more rewarded by the VOLATILITY of their company’s share price than by the growth in real value-creation over time. It is their lack of a dividend stream that creates that excess volatility and CEO
s/boards are absolutely taking advantage of that excess volatility to dilute shareholders.
A second solution to the “hoarding of cash at the corporate level” is to restore a balance between principals (those who actually invest their own at-risk capital) and agents in corporate governance. “Index” investors and other institutional investors (pension funds, etc — all of whom are agents not principals) must be required to play active fiduciary roles re proxy votes, board elections, M&A votes, etc. Not just abdicate governance to other insider-agents (CEO’s, boards, M&A advisors, etc) and in doing so to screw at-risk shareholders. This should also mean eliminating the things like poison pills and golden parachutes that have led to the entrenchment of insider agents by eliminating the “activist investors’ (aka corporate raiders) who, in the past, used to be around to “force” incompetent executives to disgorge hoarded cash and/or unproductive assets.
I strongly disagree that a government tax on retained earnings will accomplish anything. Government is merely yet another freaking agent. But one that is incompetent at corporate governance — and far worse will, guaranteed, view “retained earnings” as yet more seed corn that it can eat in furtherance of its own short-term electability
ikbr, aib and sch are holding clients cash, so its not theirs to invest. a more meaningful stat would be net liquid assets (after deducting liabilities).
how about introducing a bond into which excess cash can be directed that is loaned out to SME’s the real growth engine of the economy.
cash on the balance sheet invariably leads to dumb M&A activity to stroke the ego of management eg. pfizer who have a history of value destroying acquisitions.
everytime i think pragcap is the best overall investing site,it gets alittle better……..info,comments(mostly), tone.
my only fear is you’ll get tired of doing this.
got here late today i ‘ve got nothing to add to the great comments. i even appreciate snickering at the marxist leaning ones…….legislating corporate conscience…..maybe only once more cullen,….child please.
and no this is never directed at anyone in particular.
http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html
Excellent points in this opinion piece by Andy Grove…
We have undervalued manufacturing.
We have forgotten that scaling is crucial to our economic future.
“We broke the chain of experience that is so important in technological evolution.”
Good, diverse discussion. Not a lot of talk about thw negative role our governmment’s policies/plans play into the ‘why’ of this perceived ‘hoarding’. If Joe average consumer is uncertain of his own economic prospects; of how Obamacare, the expiration of tax credits, the certainity of additional taxes and other job killing incentives in the pipeline of this administrations’ dream sheet, are going to affect his future; he naturally spends less and is cautious with his finances and leery of the future. Why would corporate America act any differently?
Companies have been rebuilding their balance sheets because they had to. They have been hoarding cash so that it would be available if they couldn’t borrow it. They have no reason to convert cash into expenditures until they can reasonably expect their customers to spend more money; businesses don’t spend money just for the sake of it.
The supply side stuff (corporate tax cuts and business tax credits) don’t work in these circumstances. Businesses rarely expand without a good reason for doing so, and their current behavior is being driven by the level of demand from their customers, not so much by tax rates.
Nor does it help the economy that banks have transformed themselves from being velocity creators to velocity destroyers. During this time, they have been competing for cash instead of generating it, leaving less cash for consumers to dedicate to consumption and investments.
What are needed are demand-side drivers, which means more consumer and government spending. Businesses will invest their cash when they have reasons to invest it. Give them more customers, and they’ll expand to serve the need.
The most direct way to help consumers would be to reduce the amount of their debt, so that they spend money on consumption that feeds the multiplier, instead of on debt service that doesn’t. This would require government-managed cramdowns and workouts, as was the case with the RTC.
A (far) more indirect way of doing this is to stabilize and increase the value of their assets, including housing and equity values.
The government has been doing a lot about the latter, but not much about the former, while stimulus spending is more talk than action — about half of the ARRA funds committed 18 months ago have yet to be spent. So it’s not surprising that the recovery is moving more slowly than most people would like; asset inflation policies can be effective, but they aren’t quick.
This is basic Keynesian stuff. Monetarism is the ideal way to combat inflation, but Keynesianism was purpose-built to fight deflation. Let the Keynesians prevent disinflation, then hand back the reins to the monetarists so that any risk of future inflation is reduced. Allowing political ideology to blind us to some basic truths is a foolish exercise in madness and masochism.
@angry mba
only an mba could possibly believe this sentence
“Businesses rarely expand without a good reason”.
your comment was lifted from a govt handout or a middle school economics text book.
so not only are mba’s ethically challenged but also unable to parse cliched jargon.
Along with other readers’ comments, companies are “hoarding cash” not only because their debt is higher (vs. 30 years ago), but for future unfunded liabilities as well (pensions).
Over the last 30 years, consumer debt has pulled forward consumption and now there is a pause or mean reversion. For companies, the increasing debt contributed to above trend earnings growth via increasing operational/finincial leverage, which is not necessarily bad, but make their profit generating ability much more volatile.
For the consumer, loose money policy or QE is meant to punish “hoarders” (ha, you and me saving for retirement!) … the question is can this be effective for private corporations? Do private corporations fear a devaluation of their cash or USD assets? I don’t think so … companies do not retire, their behaviour is merely mimicking the consumer sector and cashhoarding hurts their ROC, thus I think Parenteau’s suggestions are misplaced. What needs to be attacked is hoarding by consumers and Eurodollar holders that are above “a reasonable retirement cushion” .. a wealth tax, an attack on tax and money laundering havens and other forms of asset hoarding (e.g. Porop 13 in California). Once this money is liberated, corporations will follow.
I don’t know if it’s been mentioned yet in the comments, so if it has, my apologies. “We” can’t do anything about the deflationary trap we’re in. Markets need two conditions to advance. Stability and predictability. We have neither. We have a gov’t that is running around like lunatics bashing every productive sector we have and saying we need more government, more taxes, and more regulation. Now maybe we do need some of these things, but do we want those decisions made by our current crop of political scoundrels? Look at the farce the FinReg bill became. The incompetence of our political class is exceeded only by their avarice and sense of political self preservation. They are virtual paragons of instability and unpredictability.
So businesses are doing what comes natural when confronted with such an environment — nothing. A defensive shell. Batten down the hatches and we’ll see what the landscape looks like after the storm has passed. Should we “compel” them with laws that require them to spend that money? We’ve been punishing savings at the individual level for 30 years and look how well that’s worked out. This storm has been building for decades. There is no quick answer, but if there’s a way to make it worse, I’m sure that the charlatans we have for a political class will find a way to do it. God help us.
Sorry about that. I should be more upbeat going into a holiday weekend.
We have to re-establish trust in government to revive our animal spirits. Clear and consistent rules of the game, sensible regulations, credible economic and fiscal policies. I’m not sure that’ll be possible with the current crowd in D.C.
This ratio does not show the full picture as it is a different when you compare it to debt. Cash/debt
A prohibitive tax on retained earnings will make the US closer to Venezuela.
Corporations are obviously not in business simply to hold cash. When they do this they have there reason(s).There is a storm out there and the captain said take the sails down for a wile. He is protecting is passengers and his boat.
A prohibitive tax on retained earnings would distort every thing and create malinvestment, a worst storm down the road with weaker balance sheets.
TPC,
I believe it is the confluence of many factors:
1. The political game evolved from influence derived from the military-industrial complex owning politicians (Eisenhower through Reagan) to the financial complex (esp. Wall Street) owning politicians. This shift, in my view, created a money flow climate of “building big stuff” (highways, dams, missiles, planes) to building paper profits (and generating cash). Sort of a real engineering v. financial engineering.
2. Technology and innovation have had a crippling impact on the marginally skilled, but the benefit has been increased margins and cash flow. America’s education system produces less qualified workers every year relative to the rest of the world. Firms didn’t just outsource to China, India and other countries because it was cheap. They did it because of cost AND because the quality of the workforce was very high relatively speaking. Also, the efficiency of high skilled workers has improved dramatically with gains in hardware/software. This has expanded margins. Compare early IBM or DEC with Apple. No contest. Compare Google to any other technology player: no contest. Fewer people make more marginal profits. (I personally have experienced this in my 30 year career and still derive marginal gains each year: more profit with less people).
3. Procurement became an industry v. a guy in the back office with a catalogue. While there is always money wasted by companies most good companies have made an art of procuring product/materials and services. Each deal we win is argued over, scrutinized, and turns into a nasty fight. Companies have procurement “divisions” that decrease the cost of every item procured every year. US companies, EU companies, Asian companies don’t procure from local markets exclusively but from the global market. Their DNA changed and they simply spend less and get more.
4. Lastly, and this is pure conjecture, but there are an awful lot of smart people out there who think the world economic system peaked in 2000 and it has a ~25-50 year cycle flat to down ahead. Immelt yesterday said the national mood was gloomy and bizarrely he blamed it on Obama (who certainly isn’t helping, I admit). But hasn’t it more or less been gloomy for years? We had our “roaring 20s” and now we’re going to have our down to flat 30s and 40s.
5. My prescription for change: overall I would create a political and economic culture of simplicity. I would create changes that make the world seem more fair. For example:
a. Flat income tax of 20%. Flat VAT (sales) tax of 20%. No loopholes, no weird write offs.
b. Politicians have exactly 2 terms max.
c. Basic healthcare insurance should be provided by the government. Premium health care can be purchased by richer people or companies as perks. Incentives to NOT spend your $x per year should exist. Each person needs a healthcare “debit” card. You can spend x per year and receive 50% credit for NOT spending the money.
d. Create a national “back to the farm” campaign where local farmers provide a significantly larger % of our food than “package food” companies. Governments can build infrastructure that decreases farms’ costs. Governments should sponsor/finance “real food” in every public institution: schools, hospitals, government offices, and companies should be incentivized to have “real food” cafeterias. Let’s face it: we eat crap and it makes us unhealthy and it drives up the cost of healthcare.
e. Decrease the size of the financial engineering industry. Heavy taxation of paper profits would cure this problem. it is a sick joke that the hedge fund industry produces every year the equivalent of hundreds of John D. Rockefellers.
f. Put the country on course towards energy self-sufficiency. Cars should get 100mpg; houses and buildings should be built with mandated energy efficient infrastructure. I have deep love for several Middle Eastern friends but there should really be no such thing as “rich Middle Eastern countries.” [Another sick joke non-existent 50 years ago.]
g. Change the education system and its goals. Only in a totally screwed up world can only the rich afford high quality education. Not everyone needs to go to college. My three wealthiest friends didn’t get a college degree (tech guys) and our local farm that we have a 10% share in is run by a woman with 2 degrees from an Ivy League university. Isn’t that exactly backwards?
Edna Rider for President!
Nice prescription.
I think a lot of economic problems for businesses (hoarding cash), has to do with future uncertainties.
Everyone seems to agree that the financial incentive structures need to change, but there is less agreement as to how, and even less confidence that the changes actually adopted will be rational, beneficial or long lasting.
Mr. Market hates uncertainty.
I think if the political class (Obama is only class president) can inject more certainty, much will improve.
http://www.huffingtonpost.com/lloyd-chapman/jobs-report-proves-congre_b_633547.html
What can we do?
We could support small business…
“…The most recent data released by the Obama Administration indicated Textron, a fortune 500 company, was the largest recipient of federal small business contracts. Textron received over $775 million in government small business contracts in one year.
H.R. 2568 would end the abuses and redirect over $100 billion a year in existing federal infrastructure spending to legitimate small businesses.”
That and retain/revive our manufacturing capacity/ technology as discussed in
the article posted @ 9:01 AM by Andy Grove. The government should be working to support small businesses but also help with the scaling of new technology so we can reinvent our manufacturing capacity.
I do not see how we can afford to be ONLY a country of ideas any longer. We need to go back to the days of “commodity” manufacturing. TVs, batteries, now solar technology being manufactured elsewhere means the technological evolution is happening elsewhere as well…the chain of experience has been broken. We should not allow that to happen again.
If the government is going to spend money, let it be spent on small businesses, job creation and incentives for reinvestment of profits.
@vick
well said vick, small and startup companies are what will solve the problems, not tinkering around with large corporations.
so long as large corps and govt get off their backs.
in the uk the SBA equivalent has been used as a subsidy scheme to banks for over 20 years. (quote from ex head of the service)
This is usually my first read of the morning, and well justified.
Angry MBA gets my vote for the best solution. Elegant, and succintly stated.
For an investor, a decent answer is to invest in Master Limited Partnerships, which are prevented by their charter from hoarding cash. I’m invested in several, both in RE and Natural Gas.
TPG, you deserve a wider audience, but I fear if that were to happen, the quality of guest commentary would suffer.
TPC – first thanks for the great site, it’s a daily must read.
I can’t help but see the dots connected from Japan as well, because those companies did not maximize shareholder value, but instead were forced to minimize debt (per Richard Koo), otherwise they would go bankrupt. This time, corporations are maximizing their personal wealth instead of shareholder value. How can the instituional investors who own the most of these companies hold management accountable? I say by forcing them to return cash flows to the shareholders (as businesses and partnerships are ran). Of course this is easier said than done because of the fear of career risk by these managers to underpeform the benchmark or fall in the bottom quartile for a year. In the end, we may have to see prices deflate where a portfolio of quality, dividend paying companies yields 6%-8% while the ten-year has a 2-handle – then the shift will be forced by the market and investors.
Great discussion everyone. Thanks. The quality of comments is outstanding. Imagine if we could get Congress to have real productive debates like this? How different would this country be? We probably wouldn’t be an economic disaster….
Our Corporations are behaving exactly as capitalist should behave in lieu of the political environment in Washington. I read somewhere that a high percentage of this “cash hoarding” has occurred just in the last 3 years.
You can thank the Obama regime for this. The same thing happened during FDR’s regime and rightly so. Obama’s regime may go down in history as being the most anti business administration ever. Why would our Corporations invest billions of dollars in this environment? Just to see their investments vanish in thin air due to the Obama regime forcing another socialist law down our throats. I have had this discussion with many successful businesses, both small & large, over the last 18 to 24 months and everyone says “Why in the hell am I going to risk my money when there is so much political and financial uncertainty?”
Just re-read your own article. Are suggestions 1, 2 & 3 suggestions a Capitalist would make or a Socialist? I rest my case. We should be exploring the polar opposite of this. Why not find some incentives for the businesses to let go of some of their cash. We have moved so far left in our views of business since the Obama regime took office that it has had a chilling effect on capital investment by our Corporations.
Obama and his regime are causing our Nation to freeze up in defense of his anti business and Socialist agenda. This is not a Republican / Democrat issue. It is an issue about the fundamental beliefs of “what type of government our legislatures believe should represent the citizens of this Nation. You don’t have to have a title of a democrat or a republican to hold a view of this. As a matter of fact I would suggest that 90% of the dead beats that believe in big government and expect big government to provide them more and more for free have never voted in their life much less know how to define a political party.
This is the crescendo/result of 25 years of policy and economic trends. Blaming any single administration is very nearsighted, politically motivated and incorrect. I’ll admit that Obama isn’t doing much to help, but it’s not accurate to pin this all on him. You could easily make the argument this all started under Carter, expanded under Reagan, ballooned under Clinton and imploded under Bush and Obama.
RSDallas
I think many people are expecting an immediate solution where there is none.
It’s like asking God to pay your credit card.
People are doing the correct thing. They are starting to pay there bills and the Government as usual is doing the opposite.
I think many people are expecting an immediate solution where there is none. first
Ah, but there is: What it amounts to is running the fractional reserve
lendinglooting machine BACKWARDS. Basically, FRL works by looting savers of honest interest rates and driving borrowers into unsustainable debt. The solution then is to bailout both borrowers and savers with new legal tender fiat.This would:
a. enable underwater home owners to pay down their mortgages to market price levels.
b. compensate savers for years of artificially suppressed interest rates.
c. Fix the banks in nominal terms.
d. Fix state tax revenues.
Inflation risk? Maybe, but if banks were put out of the counterfeiting business via a 100% reserve requirement then the only source of new money into the system would be under government control, the Fed and US Treasury.
Long term solution? Liberty, not the current fascist money and banking system.
Come on Beard. “driving borrowers into unsustainable debt.” You act as though ALL banks and debt is EVIL.
This is where you need help. Even Austrian Economics acknowledges that debt, if sparingly used in a manner that can enhance profitability, is and can be a good thing.
The previous administrations promoted your view and all the bankers did was fulfill their request and idiotically ignore the basic fundamental principles of allocating debt in such a manner as to produce a profit.
We have 3 problems that occurred:
(1) The government got involved in deciding who should get credit and who shouldn’t for the sole purpose of getting a vote. This also includes the Feds decisions as well.
(2) Bankers, business people and investors got greedy. By the way, this will never change.
(3) Individuals made some really stupid decisions to take on debt that they could not realistically pay back.
We don’t need a damn government plan, fed plan or any regulation or any other person’s suggestion to fix what occurred. What we need is for you, me, the bankers, and more so the government to let the market decide who in fact made the correct decisions along the way. Anything short of this is and will produce the results we are currently experiencing.
You act as though ALL banks and debt is EVIL. Dallas
No, I just advocate abolishing the government backed banking cartel and total liberty in money creation after a bailout of debtors and savers.
This is where you need help. Even Austrian Economics acknowledges that debt, if sparingly used in a manner that can enhance profitability, is and can be a good thing.
Actually, I believe borrowing and lending is obsolete. But let’s just have liberty in money creation, usage and acceptance and we shall see.
The previous administrations promoted your view and all the bankers did was fulfill their request and idiotically ignore the basic fundamental principles of allocating debt in such a manner as to produce a profit.
What is idiotic and unjust is allowing banks to issue money in exchange for debt. No wonder everyone wanted to get credit! It’s called moral hazard.
We have 3 problems that occurred:
(1) The government got involved in deciding who should get credit and who shouldn’t for the sole purpose of getting a vote. This also includes the Feds decisions as well.
Agreed.
(2) Bankers, business people and investors got greedy. By the way, this will never change.
Greed is a given but true liberty can keep it in check. What we have instead is a government backed banking and money cartel that allows banks to get away with greed.
(3) Individuals made some really stupid decisions to take on debt that they could not realistically pay back.
No, I remained calm and got priced out of the housing market so I guess I was stupid in this environment of negative real interest rates in housing.
We don’t need a damn government plan, fed plan or any regulation or any other person’s suggestion to fix what occurred. What we need is for you, me, the bankers, and more so the government to let the market decide who in fact made the correct decisions along the way.
I am a radical libertarian but government intervention caused this problem and it dang well can partially solve it too. It’s not time to say “Let the free market rule” when the banks drove people into unpayable debt with government enforced monopoly money. Let’s deal with that debt and then have liberty.
Anything short of this is and will produce the results we are currently experiencing.
What is your beef? I propose giving an equal amount of new legal tender to savers too. Liberty is the solution but not till we have some justice for past tyranny.
It’s like asking God to pay your credit card. first
God commands debt forgiveness (Deuteronomy 15, Leviticus 25) and a minimum two-fold repayment for theft and I doubt FRL (money from nothing in exchange for debt) even existed in those days.
How ’bout this?
There are 2 sectors in industry: manufacturing and service.
The service industry makes the manufacturing industry more efficient. If, however, there is too much emphasis on services(i.e. financials) rather than manufacturing, then the service industry NOW becomes inefficient, resulting in losses within that sector and a general downward drag upon the economy. Somebody, somewhere, has to produce product, not just money.
troll To me, that’s exacly it
The early 1950’s was a period of little or no inflation, great prosperity good employement,low consumer credit and yes,lower government expenditures and it did not take hours to get good services.
TPC,
Respectfully, are you the boss at your shop? If not have you ever been a boss? If so you know as well as I do that it doesn’t matter what happened in the past, but rather what are you doing to correct any problems you are having. Please reference my point of:
“This is not a Republican / Democrat issue. It is an issue about the fundamental beliefs of “what type of government our legislatures believe should represent the citizens of this Nation.”
We have been drifting farther and farther to left for many years. The Obama regime has jumped, by far, more to the left than any president in my adult life. My point is, is that Obama has created an extremely confusing and uncertain environment for business and henceforth the so called capitalist are responding accordingly.
I’m not one to dwell on the past Dallas. I think it’s important to learn from the past, but all this finger pointing does little to help us move past our problems.
There are a lot of moving parts here. You can blame deregulation. You can blame globalization. You can blame big government. You can blame small government. You can blame consumers. You can blame the banking sector.
At the end of the day I am not convinced at all that the politicians have ruined the driving forces that make the US economy great. If there is any great macro theme occurring here it is that Americans have become complacent. We have become the fattest and the richest and we spent a bit too much time letting everyone know it (via spending and excesses). Now we’re paying the piper. But this too shall pass. Perhaps a little pain will remind us all what we once were? I’ve often used the analogy of the Great Depression and how that molded a great generation of productive Americans. Maybe we need some of that?
http://pragcap.com/the-things-we-make-make-us
Govt can’t destroy American ingenuity as much as they try. Only Americans can do that. The debt binge we’ve been on has brought us close to the brink, but I am quite certain we won’t fall in. I know people like to blame govt and point fingers, but ultimately, it comes back to the man in the mirror and not some asshole we elected.
Perhaps a little pain will remind us all what we once were? I’ve often used the analogy of the Great Depression and how that molded a great generation of productive Americans. Maybe we need some of that? TPC
It also gave us Hitler and 50-86 million killed. WWIII will not be so kind, IMO.
I know people like to blame govt and point fingers, but ultimately, it comes back to the man in the mirror … TPC
Ah, so the bankers get to socialize the shame as well as their losses?! I doubt they’ll suffer much during a Great Depression particularly if they are allowed to blame the victims.
You’re the host and I hate to cross you but what happened to:
The masochists out there believe pain is the only answer to get us out of this mess. I think we’re more creative than that. TPC ?
But maybe you only mean a little pain and a little fear. I hope that is all it takes for the bankers and the other fascists to repent.
TPC,
I could not agree more. Especially with:
“We have become the fattest and the richest and we spent a bit too much time letting everyone know it (via spending and excesses). Now we’re paying the piper.”
I think this has occurred since the beginning because most people elect their leaders for the wrong reasons and the leaders run for office for the wrong reasons. Reasons that, in the end, leave many Americans no better off than the drug addict who has to have their fix. Our government has provided too many fixes for its citizenry.
I got to get some work done. See ya.
Get out and VOTE America.
Absolutely right on the individual and the mirror, but the state of the US financial situation has absolutely nothing to with you, me or any other individual citizen. It is the result of some dumb ass elected official and fed chairman who have wrongly assumed what is best for the American people.
TPC,
Sorry for the off topic comment, but I just wanted to say nice call on the market in March/April. Your short call was the contrarian of contrarian calls and now everyone is talking about the things you were pointing out in March. I remember your Chinese death cross post. Now everyone is talking about death crosses, economic slowdown. Thanks for all the hard work and as boatman said, please don’t stop.
Thanks!
Lars
When I covered it on the day of the flash crash a commenter said I was early. They were right.
Such is market timing…Thanks though Lars. I hope I helped some people steer clear.
Capitalis are in China with Jim Rogers.
“…the so called capitalist are responding accordingly.”
Agreed.
“You could easily make the argument this all started under Carter, expanded under Reagan, ballooned under Clinton and imploded under Bush and Obama.”
Agreed. But after watching “Thirteen Days” recently for the first time…maybe it goes back to not letting the generals end it then, as opposed to the wall dropping in 1989. More directly, and realistically, I say we are still paying for what the Netscape IPO unleashed in Aug 95 — which was good and bad.
TPC,
You’ve nailed the problem on the head. Right off, what is clear is that this country has a huge energy problem, and the nat gas shale play model is not a solution as it is horrifically polluting of groundwater. So government credits/partnerships to produce a smartgrid and smart energy revolution. If we can stop sending $100 billion overseas, that will go a long way towards correcting global imbalances. The second big thing is a national education plan.
I read somewhere that a high percentage of this “cash hoarding” has occurred just in the last 3 years.
You can thank the Obama regime for this.
Er, three years ago, it was July 2007. Obama wasn’t president until January 2009. Hell, it wasn’t even clear that he was the Democratic nominee until about June 2008. Yet you wish to blame him personally for events that allegedly occurred before he took office.
This sort of internet rabble is absolute madness. We have this small segment of people who are blinded by anger to the point that they have to blame everyone and everything around them for all that ails them, yet they can’t even keep basic facts straight.
Once upon a time, they just wrote letters to the editor that were placed into the round file, never to be published. But now the online cat is out of the bag and we end up with stuff like this.
Angry MBA,
You are one annoying poster. You either didn’t even read the post in full or your response is indicative of your intellect. You exist to be contradictive. What a wasteful and shallow way to live.
I will re-post this since you are somewhat slow:
“This is not a Republican / Democrat issue. It is an issue about the fundamental beliefs of “what type of government our legislatures believe should represent the citizens of this Nation.”
The Obama regime has pushed America farther to the left than ever before and this has created more uncertainty than ever before. So, the Nations businesses are responding by “hoarding” their cash and postponing capital investments if they can.
It is obvious that you do not make, nor have ever made any capital investment decisions other than how much to spend at the grocery store.
The Obama regime has pushed America farther to the left than ever before and this has created more uncertainty than ever before.
What a bunch of rhetorical bilge. You act as if the country is some Marxist worker’s paradise, when it is anything but that.
Let’s remember that you’re the one who attributed stuff that you claimed occurred in 2007 to the current president. It shouldn’t take a genius to figure out that your great nemesis wasn’t even president at that time. You can believe what you want, but rewriting history and simply making things up as you go along is not much upon which to build a cogent economic view.
I didn’t care much for Bush 43 myself, but I wouldn’t hang all of this around his neck, either. It will shock some of you, but a lot of our economic dynamics have little or nothing to do with who is president at a given time. Perhaps if some of us would wake up to the realities of the global that they would realize that isn’t simply about us, or who is our Fed chair or our president.
I realize that some people can only make it through the day by having scapegoats and rhetoric, but it’s still nonsense. Fortunately, this only represents a minority of the country; if it went much deeper, we’d be in quite a bit of trouble.
Obama is not responsible for creating the Depression, but he certainly has no incentive to see us get out of it, and he is doing everything he can to create a bad business climate while having plausible deniability that he is doing so. Obama’s whole schtick is having as many people dependent on the government as possible – since those dependent on him for their survival have no choice but to vote for Obama in 2012. I think he actually wants the Republicans to take the House in 2010 so he can blame them for the renewed Depression and get himself reelected in 2012. He certainly has no incentive for the economy to recover. Then when 2012 rolls around he will have given Amnesty and fast-track citizenship to 18 million illegals, he will blame a Republican House that couldn’t do a damm thing for 30% unemployment, and guarantee a big win for the Dems.
He is playing a dangerous game though. The Democratic Party might just dump Obama in 2012 for a more competent socialist like Hillary.
TPC,
This guy’s article is just so much socialist claptrap , maybe good reading but still BS. If he had his way Obama would force the capitalist’s to be capitalist’s just like Hugo Chavez has done in Venezuela, and that is not working out too well is it? The very fact that all of these businesses are acting independently to save back cash tells you that they are scared to death of all of the attacks on business. No business knows who Obama and his government are going to attck next, thus they need cash to be able to withstand whatever is coming. The sad fact is that as Obama’s policies destroy businesses, he is destroying jobs for average working Americans. Even the families that had loved ones die in that BP rig explosion do not want to shut down the drilling in the Gulf. They have been on TV and said so; they know that more of their friends and families will lose good paying jobs. Even after 911 we did not stop flying for 6 months to make sure everything was safe. We need this government to start trying to help create jobs and stop attacking businesses or we will never get out of this mess.
Nothing like sipping a martini on the Friday before the 4th of July, and reading all these great comments. This is a great website. It’s a great country. God Bless America. Y’all have a safe and fun weekend!
What a great discussion.
The US government already has a tax on excessive accumulated earnings. It is called the accumulated earnings tax; it came about when the public saw how much cash Ford was retaining. The tax is a joke because the IRS doesn’t really enforce it.
Just few questions.
Which is the nature of this Big Companies Cash?
I saw Toyota and Ford in the first places in this ranking.
Could it be that this cash is what written in their balance sheet (i.e. nr. autos x price per auto) as “invoiced” but not yet “collected” (i.e. I can buy a car today and pay next year the first pro-rata)?
In plain English…how much of this cash is really cash? 100%? how is it composed? (gold, money, treasury bills…)
Moreover…are we sure all this cash is kept in the “pocket” because of lack of demand?
In plain English…could it be that Big Companies sucked too much from their clients’ pockets (consumers)?
Could it be that this cash is what written in their balance sheet (i.e. nr. autos x price per auto) as “invoiced” but not yet “collected”
No. Cash is cash.
Cash is on the balance sheet. “Revenues”, which include both money taken in from sales and money due but not yet collected, are on the income statement.
Don’t confuse the balance sheet, income statement and statement of cash flows. The balance sheet reports on assets and liabilities on a given day, an income statement reports accrual-based measurements of income and expenses over a period of time, and the statement of cash flows describes cash in and cash out, regardless of the source, over a period of time.
Revenues earned but not yet collected will show up in AR. These statements work together, but you need to look at all of them to get the full picture.
Parenteau asserts that the traditional roles of a capitalist are “to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment”. That is incorrect. The traditional role of a capitalist is to allocate resources as he/she sees fit. NOT “to upgrade productive plant and equipment”, but TO DECIDE WHEN TO upgrade productive plant and equipment.
There are numerous reasons why corporations have been accumulating cash. One of the main reasons is because of people like Parenteau who are a) willing and eager to force capitalists to allocate resources in a NON-capitalist fashion, and b) willing and eager to confiscate and redistribute wealth.
Hopefully, some people will use this Independence Day weekend to [re]discover the principles on which this nation was founded, and others will remember the “… all enemies, foreign and domestic…” part.
TPC’s question is:
What can government do in partnership with the private sector to promote economic activity?
I have only one suggestion.
Ban all bank stratospheric leverage and cash pyramiding outright and for ever.
I do like me some Ellen Brown’s Web of Debt. I’m currently on page 160. One thing is clearly bogus, the Federal government borrowing money newly created money from nothing at interest, when it could create it interest free itself. That has got to stop.
My point on corporations is to properly INCENTIVIZE the spending.
Say the 35% tax rate is cut to 25%. However, this reduction is only achieved/allowed if the company can demonstrate that the corporation spent 5% of the 10% on new hires, increased non-management/officer wages, or CapEx spending.
Thus, they get to save 5% right in their pocket if they spend the other 5%.
Hold out the carrot, don’t put a gun to someone’s head.
Congratulations TPC for starting this discussion.
I consider the contributions of EP, jfree and especially Edna Rider as most valuable.
A few observations from a European (who ackowledges that most things happen first in the US, and who sorely misses high quality European websites such as this one):
The American entepreneurial and optimistic spirit is your biggest asset. The (current) American political system is your biggest liability. Unbelievable, this weird polarization that you are stuck with. That any good proposal must be spoiled with counter productive pork barrel spending to get it passed. What a pity that your politicians spoiled the chance of this crisis to invest in public infrastructure (don t you feel ashamed when you travel abroad?), vigorous energy saving, reduce costs of your dysfunctional health care system (highest cost in the world, most capable doctors and best treatments, combined with mediocre life expectancy), reign in the power of the financial and other lobbies (unbelievable that your supreme court allows unlited political spending!) and overly high legal costs (lawyers paradise) and dramatically improve education for the non-rich, to the benefit of all.
It is not too late to attack these issues.
I often ask myself whether this is caused by a democratic system with voting districts, like in Japan, where they also famously misspent public money. Countries with proportional represention-like systems, as you find in northern Europe, seem to work much better. (But cultural attitudes toward government play a role too.) Government can be very credible as long as it shows determination to fight red tape always and everywhere.
As for the starting question, I strongly agree with jfree that a much larger portion of the profits should be distributed as dividends rather than stolen by management (as opposed to entrepreneurs) in stock option form. The cash hoarding as such at the micro level though makes sense in the current environment; there is simply a lack of compelling investment opportunities right now. Tax measures to stimulate company investment as such will probably lead to misallocation of capital by companies. Probably wiser to improve your worn down public infrastructure (but not via pork barrel spending, bridges to nowhere etc….)
That said, it would of course be healthy if America would be able, like Germany, to maintain a healthy manufacturing sector. But that requires a certain pride of good and somewhat slow craftmanship that seems to be the monopoly of german speaking people…….maybe Anglo saxons are better wired for services.
Next week I ll travel 4 weeks in your beautiful country and I am really looking forward to it, so keep oup the good spirit, like TPC
F. Beard
Re: “newly created money from nothing”
I think that banks can and did that also.
Leverage and the cash pyramid.
The money was just an entry against inflated balance sheet. We had fake money that was used to build real things. Once the banks started to lose money, they started to call the very highly leveraged and inflated loans but there was no real money to pay back.
Investment banks have been rewarded for this Casino Royal activity and now they have a much bigger share of the market. The best part is that the Federal Reserve took there bad bets so they are now right back at the blackjack table and this time they have free chips.
Perhaps we need Robert Mugabe to fix this.
Perhaps we need Robert Mugabe to fix this. first
I wonder if their mistake was not restricting leverage? Or was it pure economic destruction?
“I wonder if their mistake was not restricting leverage?”
They did not.
Try bying with a 100 to one margin ratio.
If it falls by 2% you lose 200% of your capital.
I prefer the roulette its more concevative. haaaaaaa.
They did not.
Try bying with a 100 to one margin ratio. first
Some advocate 100% reserve banking (no leverage). As for new money to pay interest that could come from government spending. It sounds better than what we have now but I advocate for liberty so the optimum solutions can be discovered.
FDR put a huge tax on retained earnings during The Great Depression, for the same reasons. It didn’t result in hiring the unemployed, though.
If a tax was put on retained earnings today it would be avoided by paying out the cash as increased salary to the insiders that really control the companmies.
With deflation, a lack of business opportunities, and a bad business climate created by Obama’s socialist “change”, why should those companies invest in anything? It is better to hoard the cash until opportunities arise.
Fear of greatly increased costs from ObamaCare in a few years is plenty of reason to hoard cash now.
Since I believe that Obama WANTS to have a bad business climate, tax rates will automatically rise next year to their pre-Bush levels, with Obama’s surtaxes added on. In addition, his lame duck Congress will enact a VAT in December of this year, which will make the business climate even worse. As long as The Great Obama (praise be unto him) sees a bad business climate as being to his political advantage, he will keep on making it worse and worse. Also keep in mind that most small businesses are owned by Republicans, so Barack The Magnificient (may peace be with him) wants to punish and destroy those businesses to the greatest extent possible. His man Rahm has said “never let a good crisis go to waste”, and I believe that he wants the crisis to become maximally bad, while still retaining plausible deniability that he is responsible for it. A renewed Depression will allow Obama to push through more socialist “change” , and if it happens in 2011 on cue, it will allow him to blame a republican congress for it. That is why Obama wants the Republicans to take the house in the midterms – he needs someone to blame for the renewed Depression.
Did I read someone foolishly write recently about the end of Keynesianism? We all need to take another look at what the great man said. The US is in a classic liquidity trap, with a failure of demand and lack of ‘animal spirits’.
I don’t believe the government does good by trying to take active measures to improve the economy. The unintended consequences are almost impossible to predict and almost always make things worse. The tax system should be used to raise the money needed for the necessary core government functions like the police, firemen, judges, national defense etc and should not be designed to achieve social or economic policy. I am not an expert on the economy but it seems to me our problem is too much debt at all levels. This includes government, business and individual debt. We had a great economy when we were increasing our debt and now we are going to have a poor economy while we decrease our debt. We can do this quickly and recover quickly or we can take the approach Japan took and stretch it out for decades. My sense is that the people want to do it quickly and get it over with while the current government policy is designed to stretch it out. I am in the get it over quickly camp.
You can’t change it.
The world is made up of people trying to create and make money, and people trying to get drunk and high and make babies.
When you throw more cash into the game, the people who are trying to get that money WILL GET IT. The others will get drunk and high and make babies.
Why do you bleeding emo types always want to support the stupid masses? When we finally wake up to the fact that killing the useless is the thing to do, then we will get back to competition between the creators. Only then will the next level be reached. Right now we are playing nanny to the ones that only want to get drunk and high and make babies.