Posts Tagged ‘investment’


What are U.S. corporations doing with all the surplus they’re managing to rake in? Well, they’re not investing it. Instead, they’re paying it out to shareholders and upper-management, buying back their stock and expanding their portfolios of financial assets, and hoarding the rest in cash. The net effect is to dampen the rate of economic growth and the creation of new jobs.

And that’s worrying mainstream economists and others who celebrate capitalists, since they appear to be failing in their “historical mission” to accumulate capital.

According to a recent paper by Joseph W. Gruber and Steven B. Kamin (pdf), of the Board of Governors of the Federal Reserve System, in the years since the Great Financial Crash, investment spending by non-financial corporations (the red line in the chart above) has been much lower than their “savings” (undistributed profits, the blue line), which has placed them in the position of being net lenders (the black bars at the bottom of the chart).

Their conclusion?

we find that the counterpart of declines in resources devoted to investment has been rises in payouts to investors in the form of dividends and equity buybacks (often to a greater extent than predicted by models estimated through earlier periods), and, to a lesser extent, heightened net accumulation of financial assets. The strength of investor payouts suggests that increased risk aversion and a precautionary demand for financial buffers has not been the primary reason firms have cut back investment. Rather, our results are consistent with views that, for any number of reasons, there has been a decline in what firms perceive to be the availability of profitable investment opportunities.

In other words, corporations have been distributing their profits for many uses other than real investment, a process that started before the crash and has quickened in the years since.

As it turns out, I’ve been teaching about Marx’s theory of the accumulation of capital this week, using the following equation:

ΔK = Δc + Δv = βDI = s – [(1-β)DI + DO + DM + DR]

The idea is that the accumulation of capital (ΔK = Δc + Δv) represents a distribution of the surplus to internal managers (βDI), which is equal to the difference between the total surplus (s) and all other distributions of the surplus—to internal managers other than for the purpose of accumulation ([1-β]DI), to owners (DO), to merchants (DM), and all others (DR ). Obviously, if the distributions of the surplus in the form of CEOs salaries, dividends, merchants, and all others (e.g., taxes to the state, rent to landowners, interest payments, and so on), plus cash holdings, increase, then less accumulation of capital—that is, investment—will take take place.

And that’s exactly what’s been going in recent years—thus undermining the legitimacy of both capitalists and of capitalism.

As Marx wrote (in chapter 24 of volume 1 of Capital), in one of the most quoted and yet misinterpreted passages:

Accumulate, accumulate! That is Moses and the prophets! “Industry furnishes the material which saving accumulates.” Therefore, save, save, i.e., reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation’s sake, production for production’s sake: by this formula classical economy expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth. But what avails lamentation in the face of historical necessity? If to classical economy, the proletarian is but a machine for the production of surplus-value; on the other hand, the capitalist is in its eyes only a machine for the conversion of this surplus-value into additional capital. Political Economy takes the historical function of the capitalist in bitter earnest.

Bitter earnest, indeed—on the part of classical economists then and mainstream (neoclassical and Keynesian) economists today.

Thanks to Bruce Norton, we know that that passage is not Marx’s assertion that capitalists are driven to accumulate capital. Instead, it’s what mainstream economists (then as now) claim is the role capitalists can and should play. It’s one side, if you will, of our pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and jobs.

When they fail to to fulfill that historical mission, and use the surplus to line their own pockets and to share it with their friends, they break the pact and lose their legitimacy in having sole control over the surplus.

Mainstream economists want to do everything possible to encourage the capitalists to accumulate capital. The rest of us recognize that the time has come to replace the capitalists and use the surplus to benefit the mass of people who, until now, created but have had no say in deciding what should be done with the surplus.


Both sides of mainstream economics will likely claim support in the International Monetary Fund’s latest report, the April 2015 World Economic Outlook—especially chapter 4, on business investment.*

The Keynesians will certainly like the relationship between investment and output—in other words, the idea that private business investment has declined since the start of the economic crisis because aggregate demand has fallen. Even more: they’ll find support in claim that fiscal policy aimed at reducing budget deficits has actually undermined private investment (which is the flip side of the Keynesian crowding-in argument, i.e., the notion that deficit spending doesn’t crowd out private investment, as neoclassical economists claim, but actually spurs or crowds in corporate investment).

The neoclassicals, for their part, will be encouraged by the focus on “business confidence,” that is, the argument that uncertainty (e.g., with respect to government policies) has played a role in discouraging business investment.

In other words, for Keynesians, the problem with insufficient business investment is mostly on the demand side; while for neoclassical economists, it’s mostly on the supply side.

And, true to form, the authors of that section of the report suggest policy changes on both the demand and supply sides:

We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to precrisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus ‘crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.

What no one seems to want to admit—the authors of the report as well as mainstream (both Keynesian and neoclassical) economists—is that private corporations, which got us into this mess in the first place, have failed to get us out of it. They’re the only ones that have benefited from the recovery, as corporate profits have reached record levels, but they haven’t responded by increasing investment. Instead, they’ve been using the profits they’re accumulated to buyback their stock, engage in new mergers and acquisitions, and distribute them to high-level executives and shareholders.

They want us to believe they’re superman. But we know they’ve simply failed—on both the demand and supply sides.

*To be clear, the chart does not indicate actual declines in business investment and output. Rather, it represents percent deviations from forecasts in the year of recessions.


It’s a good thing I don’t teach Money and Banking. I wouldn’t be very good at it. That’s because, as Magpie and Bruce remind me, my understanding of money and banking is riddled with myths and bad textbook theories.

But I am willing to learn. . .


Lesson #1: it is not the case, as countless textbooks and on-line courses teach, that banks collect the deposits of countless small savers and loan them out for investment projects. That image—of banks as useful financial intermediaries, given the existence of money—is simply false. Instead, what banks (commercial banks, that is) do is make interest-earning loans and leases and then, on the opposite side of the ledger, credit deposits—thus creating money.

So, what role do customer deposits play if not to create loans? According to Ellen Brown, “while banks do not need the deposits to create loans, they do need to balance their books; and attracting customer deposits is usually the cheapest way to do it.”


Lesson #2: quantitative easing has not involved the Fed printing money, and then giving that money (as costless or free cash) to banks in order to encourage lending (much less to buy back government debt). Instead, what the Fed has done is expand bank reserve deposits by purchasing Treasury bonds (and mortgage-backed securities) from banks, thereby increasing both the Fed’s holding of Treasury securities and the excess reserves of depository institutions.

The fact is, however, banks of late have renewed their purchases of government debt instruments (as we can see in line 3 of the latest Assets and Liabilities of Commercial Banks in the United States statement). The question is, why? According to Bloomberg, commercial lenders have increased their holdings of Treasury bonds this year “as loan growth fails to keep up with record deposits and banks prepare for rules that take effect in January requiring them to hold more high-quality assets.”

As I see it, banks are not lending at the pace we (and, for that matter, the Fed) would like not because they don’t have adequate reserves (as Paul Krugman argues today) but because they don’t see enough profitable opportunities among their corporate customers—who are not investing but, instead, hoarding their cash, buying back stock, and finding ways to shelter their income from taxes.

The fact is, the nature and pace of the current recovery are not determined by the savings of individuals and households, but of the profit-seeking investment decisions of large private banks and corporations.

So, thanks to Magpie and Bruce, I’ve learned a few things. But, I’ll admit, I still may be getting some of this wrong—and therefore am still not ready to teach Money and Banking.


Special mention

karikatur für tribüne-mahl 151698_600


We’re all betting on the success of Obamacare to expand people’s access to decent, affordable healthcare. Apparently, for quite different reasons, so are investors [ht: sm].

“A new online broker, Motif Investing, is offering Obamacare’s friends and foes alike a chance to put their money where their mouth is. Co-founded by a former Microsoft executive, Hardeep Walia, and backed by Goldman Sachs and other investors, Motif allows customers to bet on narrowly tailored concepts.”

“Two of the hottest motifs right now are Obamacare and repeal Obamacare.”

“What’s most striking isn’t the performance of the two funds, but where investors are choosing to place their money … One is clearly more popular: … Motif investors have bet 45 times more money on Obamacare’s success than on its failure.”



In the end, about $1.1 billion of contemporary art were purchased during the two-day sale at Christie’s and Sotheby’s.*

I argued at the time that the auctions were a perfect “illustration of conspicuous consumption and the rise of inequality in the New Gilded Age.” Well, Georgina Adam seems to agree:

Driving their prices higher and higher are a group of ultra-wealthy buyers, who are indulging in a form of gladiatorial combat to win the most glittering trophies. Owning a major Bacon, Freud, Basquiat or Koons immediately sets them apart from other billionaires, giving bragging power as no other possession can. Displaying such a prize in their penthouses, luxury yachts or private museums is the equivalent of hanging a cheque on the wall, asserting that they can afford these multi-million-dollar baubles.

The pool of these mega-wealthy buyers is growing; they come from Asia, the Middle East, Latin America and India, and have entered the fray alongside the more established American and European collector base. The market is now so global that taste has become homogenised: billionaires across the world know who are the top artists and want the same recognisable things – pushing up prices even further. Two Asian bidders, for example, went after the Bacon at Christie’s, one pushing it right up to its final price. . .

But that’s not all:

There is no doubt that investment – and speculation – is also driving this market. With stock exchanges unpredictable and interest rates pathetic, the blue-chip artists are seen as a safe place to park money. As the prices rise, so does the incentive to buy more – and bidding up works by a name already in your collection increases their value even more, which might be really useful if you want to use it as collateral for a loan one day.

Is there financial manipulation going on as well? A small group of dealers and collectors are certainly encouraging this inflation, by giving so-called guarantees on works sent for sale. Under this system, they promise to buy a work of art at a secret price, so ensuring it will sell. If it goes over their bid, then they share in the extra money generated. So the work is sold even before it hits the auction block. The system has become a fearsome weapon in the auction houses’ armoury when they are fighting for consignments: many blame it also for inflating prices. Christie’s sale this month was underpinned by no less than 22 guarantees, some given by outside investors, others by the firm itself.

So at the upper reaches of the market, buying the top names is also a pretty safe bet. Today, the world’s richest people are worth multiple billions, so putting even a sliver of their fortune into art will hardly dent their bank balances – and buying art is a sure-fire entry ticket to what has become a very exclusive, billionaires’ playground.

*Dan Colen’s “Holy Shit” was auctioned at Sotheby’s for $341,000.


Q: Why are corporations sitting on mounting piles of cash? A: Because they can.

All kinds of folks (like Paul Krugman, Tyler Cowen, Noah Smith, and Timothy Taylor) are trying to figure out why U.S. corporations are holding their earnings in short-term marketable securities instead of, for example, investing them or distributing them to shareholders.

So, what’s going on? First, income is being redistributed from labor income to corporate profits.



Second, of these profits, the ratio of cash to net assets is at an all-time high.



Corporations are sitting on large piles of cash because, first, the amount of surplus they’re able to appropriate from workers has been increasing and, second, they’ve chosen to keep a large chunk of those profits in the form of cash until they have the opportunity to use them to make even more profits.

In other words, corporations are sitting on the profits because, within current economic arrangements, it’s their decision to do what they want with the enormous surplus in their hands. If they don’t want to accumulate capital—and thus create jobs for the millions of unemployed workers—or distribute it to shareholders—and thus enriching the top 1 percent even further—they don’t have to.

They’re doing what they’re doing because they can.