An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Friday, April 4, 2014
Marshall Auerback — Why Are US Corporations Borrowing So Much If Profits Are At A Record Percentage Of GDP?
It is financial engineering, the only engineering modern management wants to hear about. They are borrowing to buy back shares. This partially to reverse the dilution from stock options, the rest is to reduce share counts to raise earnings per share.
Right there may have been borrowing to buy back shares but even if that is not the case, firms may still be making a lot of profits and borrowing a lot.
The deficit has been declining. That, of itself, suggestsrofits should be biased to decline. So why is borrowing increasing when profits are said to be rising? I would suspect chicanery.
One additional point - there is a gap between net borrowing for a sector and the change in gross debt outstanding. The profitable firms may not be the ones investing. A firm could borrow $100, and another firm increase its bank deposits by $100. The net lending for the nonfinancial sector is zero, but gross debt would rise by $100.
The argument in that post contains way too many degrees of freedom to come to any substantive conclusion, let alone refute Aurbachs premise…rather it only suggests the possibility that under some conditions profits could rise even as deficits decline.
Like most things there is the mathematical possibility…but extremely unlikely. Auerbach has the odds and logic in his favor.
"But if other things are themselves changing — such as if investment is rising”
It’s a growing system, so everything is always changing…the only measures that have much meaning are relative measures.
For the record, growth in Investment spending in the US since 1980 fell off dramatically from the 30+years post WWII trend and is currently well below even that level of growth.
From 1947 to 1980, investment (GPDI) grew at an annual rate of 8.4%
From 1980 to 2008, it grew at an annual rate of 5.6%
From 2008 thru 2013 it grew at a rate of 1.9%.
Lets wait and see if the recent "uptick" is sustained.
The thing is you quote one type of percentages for one thing and another for a different type. So investment rise has been high. From 2009 to 2013, private investment has risen $700bn.
But for bank borrowing which is not all source of borrowing, you quote a big percentage number which is not relative to GDP but relative to itself. Even a small increase in absolute terms may be a big rise in percentage.
My post was not just on possibilities and to point out that is what has been happening. See my earlier post on Auerback as well:
It seems contradictory but it isn't really. Someone tell him he is wrong!
ReplyDeleteOf course, there may be reasons to think that the debts are going back to unsustainable territory but profits and borrowing can both rise together.
It is financial engineering, the only engineering modern management wants to hear about. They are borrowing to buy back shares. This partially to reverse the dilution from stock options, the rest is to reduce share counts to raise earnings per share.
ReplyDeleteRight there may have been borrowing to buy back shares but even if that is not the case, firms may still be making a lot of profits and borrowing a lot.
ReplyDeleteThe deficit has been declining. That, of itself, suggestsrofits should be biased to decline. So why is borrowing increasing when profits are said to be rising? I would suspect chicanery.
ReplyDelete"firms may still be making a lot of profits and borrowing a lot."
ReplyDeleteIf a company is borrowing its profits then down the line it has to pay the money back…out of revenue.
If revenue doesn't increase to cover the increased debt what happens?
…the company gives up the profits it took, like people who borrow too much and can't make the payments lose their house and equity.
This isn't rocket science. Auerback is right.
http://www.concertedaction.com/2014/04/04/profits-and-borrowing/
ReplyDeleteRamanan - I read your post, and I agree.
ReplyDeleteOne additional point - there is a gap between net borrowing for a sector and the change in gross debt outstanding. The profitable firms may not be the ones investing. A firm could borrow $100, and another firm increase its bank deposits by $100. The net lending for the nonfinancial sector is zero, but gross debt would rise by $100.
Brian,
ReplyDeleteGood point.
"http://www.concertedaction.com/2014/04/04/profits-and-borrowing/“
ReplyDeleteThe argument in that post contains way too many degrees of freedom to come to any substantive conclusion, let alone refute Aurbachs premise…rather it only suggests the possibility that under some conditions profits could rise even as deficits decline.
Like most things there is the mathematical possibility…but extremely unlikely. Auerbach has the odds and logic in his favor.
"But if other things are themselves changing — such as if investment is rising”
It’s a growing system, so everything is always changing…the only measures that have much meaning are relative measures.
For the record, growth in Investment spending in the US since 1980 fell off dramatically from the 30+years post WWII trend and is currently well below even that level of growth.
From 1947 to 1980, investment (GPDI) grew at an annual rate of 8.4%
From 1980 to 2008, it grew at an annual rate of 5.6%
From 2008 thru 2013 it grew at a rate of 1.9%.
Lets wait and see if the recent "uptick" is sustained.
Paul,
ReplyDeleteThe thing is you quote one type of percentages for one thing and another for a different type. So investment rise has been high. From 2009 to 2013, private investment has risen $700bn.
But for bank borrowing which is not all source of borrowing, you quote a big percentage number which is not relative to GDP but relative to itself. Even a small increase in absolute terms may be a big rise in percentage.
My post was not just on possibilities and to point out that is what has been happening. See my earlier post on Auerback as well:
http://www.concertedaction.com/2014/03/06/massive-overstatement-of-profits-question-mark/
Yes it is not sustainable but that is a bit different from saying "cooking the books"