Thursday, June 7, 2012

The Arthurian — "One for You, Three for Me"

In the 1950s, about 60% of corporate profits came from real production, and the rest from finance. During most of the Great Inflation, the ratio was 50-50.

Today, about 25% of corporate profits come from real production. Three quarters comes from finance. From other people's debt.
Should give pause.

Few words, mostly FRED charts.

Read it at The New Arthurian
"One for You, Three for Me"
by The Arthurian

18 comments:

Anonymous said...

different numbers:

http://blogs.reuters.com/felix-salmon/2011/03/30/chart-of-the-day-us-financial-profits/

Tom Hickey said...

Thanks, Anonymous. Here's the clickable link for convenience. Good post to check out, too.

Chart of the day: US financial profits By Felix Salmon

Matt Franko said...

I dont know how they are doing it.

New z.1 is out. Suggest look at page 10, Table F.1

http://federalreserve.gov/releases/z1/Current/z1.pdf

Total credit market borrowings running at 1.5T annual rate in q1 but 1.3T of that is UST "borrowing". Pre GFC they were running in excess of $4T with UST near balanced budget.

Must be trading profits or asset values or something because actual borrowings in that sector are still in the toilet.

This would be a good question for JKH... ie 'How are they doing it?"

rsp

Leverage said...

Matt,

Wealth erosion of households? There is an huge transfer under way.

While in aggregate saving rates may be increasing you have to ask whose savings are increasing. A majority of the population probably is using capital to maintain living standards.

So while profits may be rising for 'money changers' (be them corporations or bankers), with new credit influxes barely covering it there is liquidation of assets to pay for these profits.

In the end they get both cheap assets and all the income to buy these assets. When there is no more capability to extract blood 'inflate away' or 'liquidate' the debts -bankruptcy- (this is already going on for most stressed households).

Matt Franko said...

Good points Lev,

Table L.100 in the z.1 shows the Household Sector is up by about 1T in USTs since 2008, and you can see the rest of the Financial Asset classes.

Households seem to be up in aggregate, but somebody said in another thread, 'everybody is in a household'.

So transfers may be taking place entirely within this sector (distributional aspects).

z.1 doesnt go into that level of detail.

another thing is that if you look at F.8, you can see the savings and investment flows. (at the risk of bringing up S & I again!)

Private savings is running in excess of $500B higher than before GFC I think this is the basic difference in our economic performance since then.

rsp

Leverage said...

A comment on this trend:

In a capitalist system the natural outcome is that profits fall in a mature sector until the market corporate distribution stabilizes.

This shouldn't be avoid, is a GOOD thing. It means the sector is becoming increasingly efficient at managing resources and the relative income compared to the aggregate of the economy is decreasing.

Total efficiency means there are zero leakages, a mature economy should function so leakages are reduced to mere friction. A very mature sector is agricultural industry for example, it has been maturing since centuries ago and when entered the industrialization phase the efficiency has gone higher and higher. A small sector of the population can produce more food that it's needed, this means we are squeezing all the juice from natural capital (resources), in a relatively efficient way 8considering the availability of cheap energy sources).

In financial terms it means there is little space to differential accumulation of capital, financial capital is which is necessary to keep flows of goods and services active. The small surplus needed for savings is provided by a small deficit by the currency issuer to prevent the system collapse.

So the answer to the trend is NOT to increase the share of profits of the rest the economy, but to shrink financial profits. I think that the share has increased is just an other sign of economic maturity by developed nations, because we haven't found ways to solve the job and income problems, we 'financialize' the economy so we can keep the system going with nominal growth.

IMO what should be achieved is income stability for the majority of the population and not only for capital through transfers and and corporate welfare by the government (deficits). If done so we could see how the economy financial share shrinks to it's 'natural' size (the one where it adds value and doesn't actually destroy wealth).

paul said...

Over at NC Matt Stoller is stirring the hornets nest again…

http://www.nakedcapitalism.com/2012/06/mop-up-operations-resume-as-voters-reject-public-pensions-worker-rights-liberalism.html

He may need some MMT help over there.

Matt Franko said...

Paul,

wrt the Stoller article, seems like the state level govts have fashioned themselves retirement packages that ALL US CITIZENS deserve, but the Federal govt REFUSES to provide.

State govts are trying to use their authorized coercive force of taxation and their local monopoly on violence to extract "rents" from the non-state-govt sector in order to obtain the USD balances needed to sustain the state retirement systems.

When we provide local govts with the authority to impose coercive taxes, while not also providing the authority to issue balances of state currency in order for the non-state-govt sector to be able to pay them, it is a DEADLY combination...

Resp,

Tom Hickey said...

"Households seem to be up in aggregate, but somebody said in another thread, 'everybody is in a household'. So transfers may be taking place entirely within this sector (distributional aspects).

This is what financialization implies. As more corporate profits accrue to the financial sector and fewer to the non-financial sector, it's just financial assets getting shifted around ("redistributed") rather than creation of new wealth in terms of new real assets. The direction of the flow is upward.

Dan said...

The increasing wealth of the non-producing financial sector is consistent with what Michael Hudson has been saying for quite a while.

As others have mentioned, I'd like to see the household sector broken down by class. I'm guessing the improvement is tilted toward the upper class.

Clonal said...

Dan

You can look at Emmanuel Saez' work "Income Inequality in the United States his latest figures are updated to 2010 Tax returns

Also Saez' Summary for the broader public "Striking it Richer: The Evolution of Top Incomes in the United States", updated March 2012

Matt Franko said...

The account of Luke is instructive here:

12 Now tribute collectors also came to be baptized, and they said to him, "Teacher, what should we be doing?"
13 Now he said to them, "Impose nothing more than has been prescribed to you." Luke 3

Getting both the correct balance between spending/taxation and the correct assignment of level of authority are important.

Resp,

Clonal said...

Also there is a new policy note from Jan Kregel - see Lessons of the JPMorgan Chase Affair: What Is All this Risk

Quote:
[S]ince the passage of the Gramm-Leach-Bliley Act in 1999, the major activity of banks is to profit from changes in the prices of the assets held in its trading portfolio—and for JPMorgan Chase, in its hedging of its global portfolio. This activity generates little new investment and virtually no employment. If the bank guesses right, it makes capital gains for its shareholders; if it guesses wrong, and other banks have made the same guesses, the government and the general public are called upon to bear the losses. The problem is not simply that the banks are too large; it is that they generate shareholder returns by betting on changes in asset prices in their portfolios rather than by betting on investments in real productive activities that create income and employment for the economy as a whole.

Matt Franko said...

Clonal,

I see the timing as the same between that JPM soap opera and the recent oil sell off.

Back in 2008 when the GFC happened, oil collapsed to like $33, (I remember pumping at costco for $1.47 in Dec 08) and then back up to recently over $100.

So perhaps this JPM thing has caused a short term risk review in the sector and some positions were reduced/liquidated, causing a short term sell off in the asset values that these banks trade in (oil) (similar to 2008).... when this 'risk off' period is over perhaps expect oil to go back up to $100 as the cartel will regain control after this short term sell off by specs at the banks.

Resp,

resp,

Tom Hickey said...

@ Matt,

Yes, but what was prescribed was still onerous even without it's being inflated by the tax collector for extra rent beyond a just share for doing his job.

Tom Hickey said...

I look at this as a series of bombs going off. While the numbers are encouraging of a nascent recovery, although slow, the continual explosions are reminding that the global financial sector is still precarious.

Clonal said...

Tom - you might want to look at Ellen Brown's Fifty Ways to Leave your Lover"

Matt Franko said...

"what was prescribed was still onerous even without it's being inflated by the tax collector"

Tom, Perhaps not. At least I dont see it in the scriptures.

I see at least 3 different monetary systems operative during the time of Jesus documented in the Greek scriptures.

1. You have the Romans running a state currency system (nomisma) via spending denarius and taxing them back out via the Poll Tax (kensou).

2. You have the local government, probably Herodians also running a state currency system (nomisma) at the local levels by spending drachmas and staters and taxing them back out via Tribute (tele).

3 You have Israelites using silver (argurion) and bronze (assurion) metallic coins as medium of exchange and probably barter.

I believe the authorities probably set the systems up to work, and corruption of the sort John was counselling against by the tax officials would have screwed up the designed flows and led to hoarding and screwed it all up.

The officials were not morons like we have today and would know that they could never tax back their own coins without spending them first. This is just common sense and not abstract at all when you are using physical coins.

My belief is that the leadership of the Israelites did not object to the dreaded "tax collectors" because the tax rates were too high. (Dont tell Grover Norquist!)

It was because they resented the fact that paying the tax made them demonstrate subjection to the authority of the Roman and Herodian civil governments.

Paul went on to reveal this reason for settling the various taxes in Romans:

"1 Let every soul be subject to the superior authorities, for there is no authority except under God. Now those which are, have been set under God,
2 so that he who is resisting an authority has withstood God's mandate. Now those who have withstood, will be getting judgment for themselves,
3 for magistrates are not a fear to the good act, but to the evil. Now you do not want to be fearing the authority. Do good, and you will be having applause from it.
4 For it is God's servant for your good. Now if you should be doing evil, fear, for not feignedly is it wearing the sword. For it is God's servant, an avenger for indignation to him who is committing evil.
5 Wherefore it is necessary to be subject, not only because of indignation, but also because of conscience.
6 For therefore you are settling taxes also, for they are God's ministers, perpetuated for this self-same thing.
7 Render to all their dues, to whom tax, tax, to whom tribute, tribute, to whom fear, fear, to whom honor, honor." Romans 13

I think the leadership had their shit together back then as opposed to now.

I'm sorry to say it, but it often looks like those folks back then were in many ways smarter than we are today.... just because they did not have much of our modern technology does not mean they were morons, in fact I believe to the contrary.

Resp,