Saturday, September 22, 2012

profits and recession

Are crises caused by overproduction? Overproduction is the form that crisis take in capitalism,  while underproduction was the form of crisis in pre-capitalist societies, but this is altogether different thing than to say that are its cause.  In saying one causes the other is not to say very much, in fact its completely meaningless.

The ultimate cause of crisis surely has to be in the anarchy of production itself, producers do not know that there is a buyer for their commodities until after they have been put on the market. Of course we talking about "overproduction" of commodities as articles produced for sale in relation to the market for them, not of products in relation to people's needs.

"The word over-production in itself leads to error. So long as the most urgent needs of a large part of society are not satisfied, or only the most immediate needs are satisfied, there can of course be absolutely no talk of an over-production of products— in the sense that the amount of products is excessive in relation to the need for them.  On the contrary, it must be said that on the basis of capitalist production, there is constant under-production in this sense.  The limits to production are set by the profit of the capitalist and in no way by the needs of the producers.  But over-production of products and over-production of commodities are two entirely different things." Marx Vol 2 of Theories of Surplus Value

Basically, a crisis is the result of capitalism running out of steam with the potential for profit no longer visible. The most likely way out of the crisis would be when wages had fallen enough and assets had devalued (not necessarily physically destroyed) enough to restore the rate of profit, however long this might take.  Capitalism is a crisis. We are observing a "crisis" which impacts on the production of commodities.  The surface appearances of this crisis seem to affect the whole of society but the truth is for the capitalist class there is no crisis its just business as usual.

A common explanation of the current crisis, put forward even by people who consider themselves Marxists that it is  classic crisis of overproduction, this being the design fault built into the capitalist system.  As the masses of workers – who at the same time make up the bulk of consumers – are, in the interests of profit, paid as little as possible and reduced in number as much as possible, they are increasingly unable to buy all the increasing mass of commodities that the capitalist enterprises bring to market.  This in turn bankrupts the least “efficient” of the capitalist enterprises, causing further job losses and downward pressure on wages caused by an excess of the supply of labour power over the demand for the same.  Bankruptcies start to escalate, while economic activity stagnates.

Even though it calls it a crisis of "overproduction" it's actually a crisis theory of underconsumption and it's not true as it ignores the fact that what the workers can't buy (out of their wages) the capitalists can (out of their profits). Crises are not caused by workers not being able to buy back all they've produced. If this was the case, what would need explaining would not be crises but why there could ever be a boom.

Again Marx explains "It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective ones, except that of sub forma pauperis or of the swindler. That commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption). But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and “simple” (!) common sense, such a period should rather remove the crisis. It appears, then, that capitalist production comprises conditions independent of good or bad will, conditions which permit the working-class to enjoy that relative prosperity only momentarily, and at that always only as the harbinger of a coming crisis."

In fact, from one point of view, a crisis is caused by capitalists choosing not to buy (not invest profits because they judge they won't make any profits or not enough). The current crisis of capitalism is that there is "surplus liquidity". In other words, the rich have so much wealth they have exhausted places to store it. If it is not invested its value depreciates. And they won't invest unless it produces a return. This is why we see record amounts being spent on gold or on art (ironically mostly on art that depicts the pain and isolation of capitalist society). While workers are having their jobs and wages cut and governments are enforcing austerity, companies have never held so much cash. As one author reports: "Globally, companies are sitting on more than $5 trillion." This is a classic case of "over-production".

"British listed companies are sitting on a cash hoard worth a total of about £19 billion as they hold off from investing due to the shaky economic outlook. Research from corporate financial health monitor Company Watch found that 211 UK-listed non-financial companies are sitting on cash of at least £1 million. Construction giant Amec led the way with £521m, followed by fashion house Burberry, which has £338m in the bank. Argos and Homebase owner Home Retail Group has £194m stashed away and Carphone Warehouse has £103m. Companies in other Western European countries are holding even more money, although nowhere has as many hoarders as Britain. In total, European firms are sitting on £110bn net cash. A survey of chief financial officers (CFOs) from accountancy firm Deloitte, which showed worries about recession and a break-up of the euro are having a direct impact on the confidence, behaviour and business strategies"

 In regards, to B of E injecting all that Quantitative Easing - as the saying goes - you can lead the horse to water but you can't make it drink. No prospect of profit - no investment and the money put under the mattress big style!!!

Companies are actually cash-rich and not re-investing but hoarding - can this be described as a capitalist strike? - these links may be useful.

The FT writes that in 2006, corporate treasuries placed a mere 23 per cent of their funds in banks. But 2011, the proportion of funds sitting in banks doubled – and this year it rose above 50 per cent. Companies are eschewing capital market products, since they think that the returns are too low to justify the risk.

Another factor that is prompting this flight towards the bank is a perception that bank deposits are relatively safe, if they are Federal Deposit Insurance Corp insured. Thus, the favorite destination for treasurers now is a non-interest bearing account, which carries a FDIC stamp. Never mind that this is producing negative returns; it does at least promise to return the cash. And that is important in a world where 98 per cent of treasurers are now also telling the AFP that their top priority is to protect their money, not earn yield.

It could take years before they really start feeling confident enough to take long term investment bets again. The velocity at which money moves around the system - and cash is used in a productive way - may have now slowed in a more permanently; doubly so since the banks themselves are very risk averse and wary of lending. A corporate freeze is a world where money has slower velocity is also a place where it will be harder to produce growth.

This story seems to be verified by this article in Business Insider

Borrowing costs for government are plummeting everywhere. US 10-Year Treasury, which is once again within a few basis points of an all-time low. Australian 10-yr bonds are at new lows. What this essentially means is that there's a lot of money out there that sees no productive investments in the real world, and thus people are willing to stick it with entities that promise them a very meager return. It's not about governments reaching their end-game. It's about a growth-deficient world, governments being the one place that can absorb all this money.

"Never before in the history of the world has so much cash been hoarded in so many places by so many large organizations...Canadian companies have piled up more than $525 billion in cash reserves – almost a third the size of the entire economy – up from little more than $150 billion a decade earlier. According to a recent analysis by the Gandalf Group, at least 45 per cent of Canada’s biggest companies are hoarding cash rather than investing... In America the Federal Reserve estimates that a staggering $5.1 trillion – an amount larger than the economy of Germany – is piling up in American corporate cash holdings...In Britain, companies have accumulated almost $1.2 trillion in cash and deposits, equivalent to half the entire economy. And, no surprise, investment there grew by only 1.2 per cent last year......It’s strange, because this should be a great time for companies to invest: low prices, low interest rates, cheaper labour costs. A sensible company would build up cash during boom times – when investments are more expensive – and spend it during recessions, when consumer demand is weak and capital is cheap. Yet this is the precise opposite of what actually happens. Companies look at the low consumer demand and become terrified"

Wot recession? Continuing evidence of a too cash-rich capitalism and a capital strike.

The Federal Reserve reports  that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets,(triple the Fed figure) which equals $5.1 trillion in today's dollars and equal to America's entire economic output that year from New Year's Day through May Day. It makes perfect sense these days to hoard cash. First, Congress lets overseas profits accumulate untaxed, so long as offshore subsidiaries own the cash. Second, companies have a hard time putting cash to work because fewer jobs and lower wages mean less demand for products and services. Third, a thick pile of cash gives risk-averse CEOs a nice cushion if the economy worsens. Given the enduring hard times, you might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, data from the federal Bureau of Economic Analysis shows. That is nearly $1 trillion of increased profits over two years.  Dividends, wages and capital expenditures all grew less than profits, while undistributed profits rose. The single biggest expense to any company is full-time employees due to payroll, taxes and benefits. During the recession, and recovery, businesses have kept very tight controls on costs by reducing inventory levels, cutting budgets and maximizing productivity per employee.  This has also led to massive changes in hiring and employment.  Temporary hires (which have lower wages and no benefit costs) have substantially outpaced permanent employment since the end of the last recession.  Since the first quarter of 2009 part-time employment has increased by more than 1.5 million while full-time employment is still lower by 1.25 million. Over the past decade the demand on businesses to increase profits, from shareholders and Wall Street, has driven productivity higher and wages lower.  Real wages are well below the long term trend due to the large, and available, labor pool which keeps wages and salary levels suppressed. While it is enticing to want to force corporations to deploy the cash and create jobs - the unfortunate situation is that it is the very demands to maintain profitability that keeps them on the defensive.  Secondarily, let's not forget that we live in a free market economy and businesses are in the "business" of making profits. Corporations will not increase hiring, and ultimately wages, until end demand substantially increases.  Businesses have no incentive to release their "cash hoards" as long as "poor sales" remain their primary concern.

The result: more cash.

Companies will return to the capital markets again. History suggests that greed usually triumphs fear, in the end.

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