Sunday, April 15, 2012
Ouroboros and Irony
To solve a problem in computer programming, you break the problem down into smaller parts and solve each part separately.
That technique works very well.
To solve the problem of debt, it seems to me, many people like to break the problem down into small parts and then say: Look! There is no big debt problem!
That technique doesn't work.
I'm pretty confident that finance grew because productive-sector profits were declining, making finance relatively more attractive. And I am fairly confident that financial costs are the primary contributor to declining productive-sector profits. Ouroboros. It becomes necessary to reduce the size of the financial sector so that the productive sector can grow. Irony.
But I distrust the notion of putting limits on finance. Sht runs downhill, and soon those limits will be on me. The US Congress is not wiser than the Roman Senate, nor less self-interested.
If we -- the nonfinancial sector -- use half as much credit, the financial sector will shrink. The easy way to use half as much credit, without hindering growth, is to pay off old debt. Continue with the new uses of credit that become spending and create growth, but accelerate the repayment of debt to reduce the total demand for credit.
I keep coming back to the question that if we just need credit for growth, then why do we need credit use at 350% of GDP? And I keep coming back to the observation that there is nothing natural about the size of the debt accumulation we have achieved. It must be a result of policy.
Yes, I want to achieve the same thing that can (presumably) be done by imposing limits on me. But my plan of attack is different, and my thinking goes all the way back to the rudimentary assumptions that underlie policy.
I want more fiat money in the economy to make up for the reduction of credit use. (That's the whole plan.) But the quantity of fiat money has been reduced (see: M1/NGDP) while our use of the more expensive credit-money has increased. The quantity of fiat money has been reduced because of our assumption that printing money causes inflation.
Meanwhile, our use of credit has increased -- leading to the bizarre accumulation of debt -- because of our assumption that credit use is good for growth. (See "irony".)
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13 comments:
I'm pretty confident that finance grew because productive-sector profits were declining, making finance relatively more attractive.
Data says otherwise.
http://jazzbumpa.blogspot.com/2012/01/where-has-all-money-gone-pt-i-corporate.html
If we -- the nonfinancial sector -- use half as much credit, the financial sector will shrink. The easy way to use half as much credit, without hindering growth, is to pay off old debt.
Catch 22. How can we use less debt when we have less income? Only by spending less, which is an economic drag. If we devote resources to paying down debt, then doubly so.
You also have to consider this.
http://research.stlouisfed.org/fred2/graph/?id=FICTCMDODFS
JzB
"Data says otherwise."
The people who make decisions based on their profits do not measure profit relative to GDP but as ROI.
Hi Art, seen this?
http://www.debtdeflation.com/blogs/2012/04/16/inet-presentation-minskian-perspective-on-instability-in-financial-markets/
Art -
Forget about the GDP comparison and focus on the corporate profits log scale chart.
Corporate profits have achieved super-exponential growth in the post WW II period.
I don't know where you can get aggregated ROI data. Profits/Gross Private investment should be a reasonable proxy.
http://research.stlouisfed.org/fred2/graph/?g=6tt
Pretty steady until the beginning of the Reagan admin. Then after a drop, through the roof.
I don't think you can make any kind of a case for profits declining.
JzB
Sackerson,
Keen: "The endogenous creation of money by banks means that the level and rate of change of private debt play crucial roles..."
Yes!
Every time I click a blank area on Keen's blog -- something I evidently do rather too often -- it brings up a different page than the one I was reading. Keen should remove that feature from his blog.
Jazz,
Your first comment above quotes me comparing profit of the financial and non-financial sectors. You reject my view without distinguishing financial from non-financial profits. Your later remarks continue to consider profit without comparing financial versus non-financial.
Robert Brenner says: "In 2001, the rate of profit for U.S. non-financial corporations was the lowest of the postwar period, except for 1980." (quoted here)
See my Corporate profit in context for a general decline in profits all through the Golden Age and right up to Reagan.
re your FRED 6tt graph:
I would not expect profit/GPDI to be a good proxy for Return on Investment. I have used (corp profit) / (total corp deductions) where deductions serve as a proxy for spending. Not only "investment" but every dollar of corporate spending is a cost against which profit must be measured. (Could be wrong; I developed this approach myself; and yes, I am aware of what the "I" stands for in "ROI".) See my Corporate profit context data.
Oh, for Christ's sake.
Steep rise in non-financial corporate profits.
http://research.stlouisfed.org/fred2/graph/?g=6tK
Steeper rise in total profits.
http://research.stlouisfed.org/fred2/graph/?g=6tI
Non finance fraction declining - making finance more attractive - sure.
http://research.stlouisfed.org/fred2/graph/?g=6tL
But not because non finance profit wasn't growing - it was growing dramatically.
You need to find another root cause.
JzB
Like pulling teeth to get you to face facts sometimes, Jazz.
Corporate profits declined as a percent of corporate expenditure from World War II until the Reagan policies took effect -- policies that YOU reject.
Under the policies that you accept, Jazz, profits declined consistently for almost 40 years.
You reject gross private investment as a proxy for investment, while using total expenses - salaries, utility bills, price of towels and gloves, bribes to regulators, etc - in fact all charges that are NOT investment as a proxy for investment.
OK. Have it your way. Consider my teeth pulled.
Now I'm going to go define beer as a roast beef sandwich and drink my lunch.
JzB
P.S. BTW, in case you haven't noticed, I don't consider the great growth in corporate profits since 1982 to be an especially good thing.
Art,
Look also at Dirk Bezemer's talk at INET
Also John Kay's talk
Where did all those profits come from?
How 'bout govt deficits?
http://www.pimco.com/EN/Insights/Pages/Equity-Focus-Newtonian-Profits-April-2012.aspx
Here is a snippet form the article;
"Some investors have used the Kalecki profits equation to break corporate profits into its fundamental macroeconomic elements, specifically:
Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends
From this equation, investors can see that corporate profits have expanded to such a large share of GDP due to large government deficits. Therefore, if the government implemented a deficit reduction plan, corporate profits could suffer."
Read the rest
Greg,
From the PIMCO piece: "We know that Washington D.C. is currently dysfunctional and that large deficit spending is ultimately unsustainable."
There's the problem, right there: The things "we know", from which "we" draw immediate conclusions.
"Policy analysts of both parties know that long-term deficits are being driven by demographic changes and the long-term expansion of entitlement programs for our aging society."
Ah, see? It's *my* fault, because I'm getting older. I guess it's true, because I was getting older even way back in the 1970s, and the economic problem goes back that far...
Hey, PIMCO disagrees with the Kalecki equation: "It is hard to see corporate profits, or stock prices, falling because of long-term fiscal discipline."
Kurt Richebacker would probably agree with the part you quoted. His focus is different, but his theme is the same: "The widespread measures that individual firms take to improve their own profits have, in the aggregate, the opposite effect on the profits of other firms. Business spending is the key source of business revenues, not consumer spending. A retrenchment in business spending cuts business revenues. Higher profits and higher prosperity cannot possibly come out of general cost cutting."
I like that last sentence.
Jazz, return on 'investment' has to be a return on all of the spending it took to get that return. Of course anybody could "fake" a good profit by not counting all the spending it took to make that profit, but such a policy would not be sustainable.
Here's a definition of investment I just found, from Natural Finance:
Investment, to deviate slightly from Wikipedia, is total business spending excluding financing cashflows. It is Expenses plus plant and equipment purchases. It is not financial holdings.
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