THE FAILURE OF CAPITALISTS TO ACT LIKE CAPITALISTS
by ilene - July 3rd, 2010 12:02 am
THE FAILURE OF CAPITALISTS TO ACT LIKE CAPITALISTS
Courtesy of The Pragmatic Capitalist
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….