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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Saturday, November 18, 2017
Michael Roberts — US rate of profit update
The latest data for net fixed assets in the US have been released, enabling me to update the calculations for the US rate of profit a la Marx up to 2016.
Last year, I did the calculations with the help of Anders Axelsson from Sweden, who not only replicated the results to ensure their accuracy (and found mistakes!), but also produced a manual for carrying out the calculations that anybody could use.
As I did last year and in previous years, I have also updated the rate of profit using the method of calculation by Andrew Kliman (AK) that he first carried out in his book, The failure of capitalist production. AK measures the US rate of profit based on corporate sector profits only and using the BEA’s historic cost of net fixed assets as the denominator.
I also calculate the US rate of profit with a slight variation from AK’s approach, in that I depreciate gross profits by current depreciation rather than historic depreciation as AK does, but I still use historic costs for net fixed assets. The theoretical and methodological reasons for doing this can be found here and in the appendix in my book, The Long Depression, on measuring the rate of profit.…
Right now we need higher rates for savers ... maybe 4 or 5 %... long way to go from here at 1.25% but looks like the Fed will eventually get there...
Implies prime rate of over 5 or 6% and mortgage rates of 6 to 7+%
Raising the rate is stimulative at first but as the rate rises, so do commercial borrowing rates. As borrowing cost increases, investment gets choked as the profit rate falls and assets are hit as carrying cost increases. This results in build up of unplanned inventory, a slowing of the housing market, falling value of financial assets, and increase of non-performing loans. Business cuts back, banks tighten lending standards, and incomes decline, reducing demand. Recession follows.
Tom think about it the first thing that happens is the asset values are immediately discounted to a lower PV so I would not say that is stimulative at first..
It takes some time for the fiscal effects to be realized govt has only about 15% of bonds in maturity of one year or less... we are still waiting for the full effects of the rate raises since Dec 15 Dec 16 Jan 17 and Mar 17 and June 17 to have their full effects...
First comes the NPV discount (this is immediate) then comes the fiscal effects over the next several years...
The GFC happened before the rate increases could have their effects during the last time they raised the rates.. Fed bought trillions of assets and cut off bank credit after raising, so you had the initial discount of assets of the higher rates with no fiscal increase allowed to then develop... they started back down ion the rates right after they made the banks insolvent via the asset purchases..
We’re starting to reverse all of this now slowly...
OK, stimulative in the middle. The point still holds that as the policy rate rises, banks raise rates correspondingly and that makes borrowing more expensive.
When the cost of borrowing begins to approach the expected profit rate of new investment, new investment is curtailed.
One of the most significant rates in a developed economy like the US is the mortgage rate. Every point rise excludes more people based on their income unless incomes keep up with the rate rises, housing will be effected. This is the primary channel through which monetary policy works. There is a known lag. This doesn't happen overnight when the policy rate is raised, but it happens.
"When the cost of borrowing begins to approach the expected profit rate of new investment, new investment is curtailed."
Yes exactly but the posted article indicates the minimum target is around 13% for firms...
So we are a long way away from that ... think of a band pass filter in electronics... it passes above a lower frequency but then cuts off above a higher frequency... same mathematical concept...
We would have been fine in 2008 if they just left it at 5.5% and never did the QE so "banks had more reserves to lend out"... the interest income would have eventually helped incomes of savers and profits of firms..... instead they ended up making the banks insolvent due to the $Ts add of the risk free reserve assets the banks were forced to hold at the Fed...
5.5% default risk-free translates into into much higher mortgage rates from most people. Only the large corps and the well-heeled can borrow at or near the prime rate.
I am also skeptical that 13% profit rate applies to smaller firms without the market power of large corps. Firms that actually have to compete have a lower profit rate that large firms in oligopolistic industries in which the participants have market power.
Settling into a range of 13 to 17 percent...
ReplyDeleteOnce the Fed policy rate starts to edge closer to the lower bound firms start to save ....
Once the margins get up to the upper end other firms get in to compete for the higher juicy returns...
So higher rates probably act to attenuate “Z” but not until they get closer to the bottom of this range...
Right now we need higher rates for savers ... maybe 4 or 5 %... long way to go from here at 1.25% but looks like the Fed will eventually get there...
Right now we need higher rates for savers ... maybe 4 or 5 %... long way to go from here at 1.25% but looks like the Fed will eventually get there...
ReplyDeleteImplies prime rate of over 5 or 6% and mortgage rates of 6 to 7+%
Raising the rate is stimulative at first but as the rate rises, so do commercial borrowing rates. As borrowing cost increases, investment gets choked as the profit rate falls and assets are hit as carrying cost increases. This results in build up of unplanned inventory, a slowing of the housing market, falling value of financial assets, and increase of non-performing loans. Business cuts back, banks tighten lending standards, and incomes decline, reducing demand. Recession follows.
“Raising rate is stimulative at first”
ReplyDeleteTom think about it the first thing that happens is the asset values are immediately discounted to a lower PV so I would not say that is stimulative at first..
It takes some time for the fiscal effects to be realized govt has only about 15% of bonds in maturity of one year or less... we are still waiting for the full effects of the rate raises since Dec 15 Dec 16 Jan 17 and Mar 17 and June 17 to have their full effects...
First comes the NPV discount (this is immediate) then comes the fiscal effects over the next several years...
The GFC happened before the rate increases could have their effects during the last time they raised the rates.. Fed bought trillions of assets and cut off bank credit after raising, so you had the initial discount of assets of the higher rates with no fiscal increase allowed to then develop... they started back down ion the rates right after they made the banks insolvent via the asset purchases..
We’re starting to reverse all of this now slowly...
OK, stimulative in the middle. The point still holds that as the policy rate rises, banks raise rates correspondingly and that makes borrowing more expensive.
ReplyDeleteWhen the cost of borrowing begins to approach the expected profit rate of new investment, new investment is curtailed.
One of the most significant rates in a developed economy like the US is the mortgage rate. Every point rise excludes more people based on their income unless incomes keep up with the rate rises, housing will be effected. This is the primary channel through which monetary policy works. There is a known lag. This doesn't happen overnight when the policy rate is raised, but it happens.
"When the cost of borrowing begins to approach the expected profit rate of new investment, new investment is curtailed."
ReplyDeleteYes exactly but the posted article indicates the minimum target is around 13% for firms...
So we are a long way away from that ... think of a band pass filter in electronics... it passes above a lower frequency but then cuts off above a higher frequency... same mathematical concept...
We would have been fine in 2008 if they just left it at 5.5% and never did the QE so "banks had more reserves to lend out"... the interest income would have eventually helped incomes of savers and profits of firms..... instead they ended up making the banks insolvent due to the $Ts add of the risk free reserve assets the banks were forced to hold at the Fed...
This is reversing... very slowly...
No ceo is going to get all USD zombiefied for 5.5% passive investment when they can make 13% or maybe even a little more doing business...
ReplyDeleteso unless they go back to moron Volcker era policy rates we should be ok....
Except for RE.
ReplyDelete5.5% default risk-free translates into into much higher mortgage rates from most people. Only the large corps and the well-heeled can borrow at or near the prime rate.
I am also skeptical that 13% profit rate applies to smaller firms without the market power of large corps. Firms that actually have to compete have a lower profit rate that large firms in oligopolistic industries in which the participants have market power.