Kalecki profit equation
One of the hottest debates in the stock market right now is about where record-high profit margins are heading next.The rebuttal: savings cause investment, since saving is the residual of income not consumed, and that is profit (surplus) available for investment.
GMO's James Montier and John Hussman of Hussman Funds are among the market strategists who are convinced margins are unsustainable and doomed to fall to a long-term average.
To support their thesis, they both point to a somewhat obscure national income equation advanced by Polish economist Michal Kalecki. It looks like this:
Profits = Investment - Household Savings - Government Savings - Foreign Savings + Dividends
From there, Montier and Hussman conclude that record high profit margins are largely attributable to fat government deficits and depressed household savings. Indeed, that relationship appears to form a pretty tight correlation as seen in the chart from Hussman you see above.
Conversely, when deficits shrink and savings rise, profit margins will be toast.
However, not everyone agrees with that conclusion.
"S&P profit margins are high from structural reasons, not because of the deficit," argued Deutsche Bank's David Bianco, a strategist who has long-argued that margins are sustainable.Business Insider
"This construct assumes that no savings are recycled as investment," he said...
Deutsche Bank Blasts James Montier And John Hussman's Case For Falling Profit Margins
Sam Ro
1 comment:
Among his errors, he says "if households consume less, they will invest more". This would seem intuitive, but if they consume less, someone else's income and saving has been reduced. As we know. investment creates savings not the other way around.
He seems to think the Kalecki framework is inconsistent with Savings = Investment. He says the equation Profits = Investment minus Household Savings can't be right. If you add Household Savings to both sides of this equation you get: Profits (which are business savings) + Household Savings = Investment. That is, Savings = Investment.
Deficits add to profits as this "payment" (lower taxes or higher spending)gets largely spent into private sector businesses. These additional revenues have no associated costs (at the macro level) and hence profits are increased.
Anyway, you can take your pick as to who is right (a) Deutsche Bank or (b) Kalecki, Keynes, Minsky, etc. That's an easy one.
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