Questioning Capitalism: Goldman Sachs on Corporate Profit Margins

Bloomberg News reported on February 3, 2016, that a new report from Goldman Sachs Group Inc. analysts wonders whether currently very high corporate profit margins can be sustained. They are at near record levels, despite a stagnant real economy characterized by record low wages and listless job growth and declining opportunity structures. Well, according to the report, profit margins have expanded due to four trends: strong commodity prices, cheap goods made in emerging markets, demand growth from emerging markets, and improved “corporate efficiency” resulting from the use of new technology. Corporate profit margin strength, it seems, has little to do with the strength or weakness of the U.S. domestic economy.

Historically, profit margins oscillate, but periodically revert to the mean. The Bloomberg story quotes the Goldman report thus: “We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.”


So, the question is, what are those broader questions about capitalism to which Goldman Sachs alludes?

Essentially, if profit margins continue at historically very high levels while investment in real economic activity (i.e., actual production of goods and services, other than the “financial services” sector which has grown insidiously in recent decades as a proportion of total GDP) remains stagnant, then what is actually happening to capital to make it produce such record profits?

I would suggest that we already know the cause, but most Banksters – the executive elites of the biggest banks – thus far have been unwilling to recognize it explicitly. Capital has become increasingly abstracted from the economy. That is, it is essentially feeding upon itself instead of feeding economic activity in the real world the rest of us inhabit. As long as large financial institutions are allowed to continue to generate phantom “value” by creating derivative financial instruments and by cannibalistic mergers and acquisitions, the function of capital will continue to be one of incestuous abstract ‘capital formation’ rather than fostering useful economic action. The Goldman report also mentioned, but apparently did not emphasize what I think is far more important than any external factor: the use of capital and cheap money from the Fed to undertake mergers, acquisitions, and share buybacks instead of investing in company projects that could contribute to “main street” economic activity.

The biggest multinational corporations have been awash in capital, with little incentive to invest it in production of benefit to society ever since the crash of 2008. Goldman does not elaborate, or at least the Bloomberg report doesn’t, but it is not alone in sensing that something is very wrong with the current condition of corporate capitalism.

What is capital, anyway? I would suggest that, ordinarily, it is nothing more than credit applied to the labor required to extract and process materials or to do other work that produces goods or services useful to some segment if not all of a society. But that is not what most of the “capital” held by central banks, investment houses, and large corporations does today. In fact, it seems quite a stretch to even call it capital, since it really does not venture outside the finance-capital complex in any real way.

Why do you think so many economists were afraid of hyperinflation when the Fed infused so much money into the central banks after the crash? The Fed bought up toxic “assets” – derivatives comprised of defective mortgage fragments. Operators like Goldman Sachs had sold “credit default swaps” – uncovered bets that claimed to insure a payoff if risky investments failed. The Fed covered trillions of dollars of losses by these speculators, resulting from their uncovered bets, by issuing debt upon the U.S. Treasury. “We the People” took on those losses in the form of an increased national debt.

Most economists assume that when money is “printed” – or, more commonly, electronically posted to the accounts of Fed member banks – it will be lent out to various entities in the real economy. That would result in too much money chasing too little goods and services, thereby driving up prices. But that never happened with the massive infusion of trillions of dollars of what some consider “phantom money” into the nation’s biggest financial institutions.

Why did this massive “printing of money” not cause hyper-inflation? Because the Big Banks and Brokerages did not lend it out to businesses. And they certainly were not about to lend it into the collapsing housing market they had triggered. So, in effect, they spent it on themselves. They bought up each other, they bought back millions of shares of their own stock from the public, driving up “valuations” in the stock market, and they also used it to retire some of those toxic assets. That was not inflationary for the whole economy since it was isolated from the real economy; but it was and continues to be inflationary for the financial industry, which had already expanded significantly as a percentage of the national economy. Those same banks and investment houses – like Goldman Sachs – have grown immensely since the “Quantitative Easing” that forced the American people, via the federal treasury, into such a huge increase in debt.

Republicans and corporate Democrats are fond of whining about the odious prospect of a “redistribution of wealth” that might occur “if we raise taxes.” And they always refer to the damage that would cause “small business.” But of course, it is Big Business (corporations) and Wall Street that make the political contributions that “encourage” politicians to take such a stance. However, the greatest transfer of wealth in human history has been accomplished by the government itself by creating massive public debt to finance the “bailout” of the nation’s financial elite, further enriching the CEOs of the Big Banks and investment houses in the process.

Of course, taxes have not increased in any significant way since the 1950s, just the opposite; they have regularly decreased, mainly for corporations (through loopholes, exceptions, and subsidies) and the very rich. The rest of us are paying for this crime. The greatest heist in history was not a bank robbery; it was the Banksters robbing the people.

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