I had to laugh at this headline on Yahoo this morning:
“CEOs Launch Campaign To Get Congress To Finally Fix The Deficit”
The irony here is hilariously sad. First of all, let’s step back a second. Where do corporate profits come from? Profits ultimately come from the flows of spending in the economy. James Montier recently broke this down using Michal Kalecki’s famous equation:
Proﬁts = Investment – Household Savings – Government Savings – Foreign Savings + Dividends
Profits are really the result of the flows of spending in the economy. If everyone sits on their dollars and doesn’t spend then there are no profits to be had. There is no “flow” in the economy. In normal times, the private sector is very healthy and investment and spending is high. The flow in the private sector is high. But when the economy entered into the de-leveraging in 2008 something very unusual happened. The flow stopped as households focused increasingly on fixing their balance sheets. One of the key things that kept us from entering a depression was the government’s spending.
This is disconcerting to some. As I mentioned the other day, it leads some to believe that the government has a magic money tree that generates higher profits. That’s not necessarily true. Just because there is a flow in the economy does not mean it’s a good flow. For instance, let’s say the government is spending money to build 10 million houses in parts of Southern California where real estate inventories are still too high. Is that efficient or positive flow? I’d say no. It’s likely to exacerbate current problems in the economy and cause future crisis. So it’s foolish to think that all government spending is good. That’s obviously not what I am saying. But there’s a simple fact behind those houses being built – they’re generating a profit for corporate America. All those dollars flowing from Washington to Southern Californian homebuilders are generating a profit and bolstering corporate America’s bottom line. Lord knows those homebuilders aren’t getting their profits from de-leveraging households….It’s not a coincidence that record corporate profits are occurring during unprecedented government budget deficits.
Anyhow, I hope you get the point. There’s a certain hilarious irony behind a group of CEO’s calling for the budget to be balanced at a time when the deficit is the key cause of their record high profits….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.