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.

Money: Banking on the Economy of the Absurd

Money and banking seem far too mysterious to far too many people.  Read all about it and you may feel that much of your time was wasted, simply because at root it seems not all that complicated.  Oh, the world of money and banking has been made quite complicated, but that’s because of who is running things and why they make decisions over all of our financial lives the way that they do.  With the endless elaboration of the complex institutions from which emanate the decisions that matter for the rest of us, the so-called “financial industry” has emerged as a much larger share of the economy than ever before.  But what does that mean?  Are we all wealthier?  Hardly.  As the “main street” economy has faltered while big corporations and banks grow ever larger profits, why has the financial industry—which claims to be so vital  to the nation’s economy—grown so large?

Along with the ideologically excused deregulation of banking and finance—driven, actually, by the growing influence of the big banks and their corporate companions over the laws that govern economic activity—have come a steady onslaught of banking practices that have made a very few people and corporations very, very rich and resulted in the rest of us falling further and further behind.  By expanding their control over the creation and lending of money, these institutions have expanded far beyond their usefulness to the nation. To big to fail?  Yes, if propped up by government bailouts.  But more important, too big to tolerate!

Have you ever wondered why over many generations people pay mortgages on their homes, yet very few of the succeeding generations ever live in a home without it being mortgaged?  Where is the accumulation of wealth?  Well, while complex interactions of a number of factors are at play, and individual cases vary, the “bottom line” is that we live in a debt-based economy, and it is debt based on purpose.  No, it wasn’t your idea and it wasn’t my idea.  It was the idea of the private bankers who took over the public function of banking way back when.  In a debt based economy, new money has to be created to pay the interest on old debt.  That requires endless economic expansion financed by new debt.  It is a never-ending cycle until one of two things happens:  1) a crash brought on by the excessive speculation in new debt—gambling—by the Banksters; or 2) the whole system expands beyond the carrying capacity of the ecological system on which we all depend.  The Great Depression of the 1930s has been matched by the real unemployment of the “Great Recession” of 2008-present as the absurd economy roars past sustainability.

Banking is an inherently public function.  In fact, money is a public institution.  Whether private banks control it has varied in time and place.  When you are playing Monopoly (the board game) the players are equivalent to the public but each acts as an individual, not as a member of that very small public—which helps to instill in the players an individualistic sense of what money is.  But the “play money” used in the game is “real money” for the purposes of that game.  One player is designated the banker, but only manages the allocation of money during play.  The players agree as to the initial distribution of money (usually equal) and to the rules of the game.

Eventually, through luck and skill, one of the players gathers so much money and property that the game is over—s/he won!  Oh, but then there’s no game anymore, unless the players want to start another game, in which case they have to redistribute the money so each player will have money with which to play.  In fact, once the game is over, there is no money, only amusing little pieces of colored paper in a box with the board and various symbols of property, etc.  But why does someone always win Monopoly?  The widely ignored fact of economic reality also ends every game of Monopoly.  Once a player has accumulated significant economic power, that player’s ability to gain economic power increases.  So it is in the real economy, with the added bonus of increased political power, which means that to keep the game going, something’s got to give.  The result has to be either collapse or some form of redistribution, that’s what history demonstrates.

So, you can see the difference between a game and social reality, or, technically, economic reality.  In the real world, the game can never be over, even when one element—the Banksters in our case—accumulates enough wealth to render the other players powerless to make a successful move.  In the real world, this holds right up to the point where some starve to death for lack of resources.  In the game, with all the money accumulated by a small number of lucky and/or skilled players, everyone else is out of the game.  In real life that is deadly and is bound to result in some kind of chaos, collapse, or major restructuring of the economy.  Look around, both in the world today and in history.  Money hasn’t been in play all that long.  It emerged slowly and in various odd forms when and where some surplus of valued goods was accumulated.  When, at various times when wealth became so concentrated in the hands of the elite, a monarch or emperor recognized that wealth had to be radically redistributed in order to keep the economy going.

The earliest examples of money and debt were in societies where sedentary agricultural practices replaced nomadic hunting and gathering.  Much of this is chronicled in David Graeber’s fascinating book, Debt: the First 5,000 Years.  Graebner is an anthropologist whose analysis of money and debt as cultural phenomena clearly breaks out of the illusions about money and debt upon which our deeply absurd, and equally unjust, economy is based.

Unless we face some very fundamental and widespread social illusions, we will be unable to grasp how debt drives our absurd economy and how deeply destabilized the system has become.  Sometimes these illusions have two sides, neither of which reflects economic or cultural reality.  For example, we have the “gold bugs” and the advocates of “fiat money.”  Gold bugs confuse symbols with reality and fiat money fanciers confuse wealth with abstractions of value.  Both obsess over the form of money, failing to see that the very essence of its existence is consensual rather than essential.

There is nothing in the essence of gold that makes it money and there is nothing in the essence of paper that prevents it from being money.  All manner of items at one time/place or another have been money because the conditions allowed and the people agreed to define them as money, from sticks to shells to stamped pieces of copper or other metal to beads to paper.  In no case did just any stick, shell or piece of paper do.  It had to have certain qualities or it couldn’t become money.

In one fascinating example, a stick with certain inscriptions would be split in two and the creditor and debtor each took a piece.  No other stick could represent that relationship of value-exchange because no two sticks will split in exactly the same way.  That made the stick parts a unique symbol of the value exchanged.  With gold, the size, ie., weight, of a nugget or shaped coin stands for its exchange value.  In every case of an object that becomes money, its value is designated in such a way that it cannot be altered.  So it is with paper.  With paper money, methods are devised to make it nearly impossible to duplicate without detection, but of course some counterfeiters have been very skillful, which results in a technology race between the legitimate and illegitimate printers of money.

Today, of course, most money takes the form of an electronic entry in computerized accounting systems controlled by banks and other financial institutions.  And that brings on an entirely new level of complexity and exploitability of what at base was a very simple relationship. But, as always, who controls the creation of money is still at the root of the way the money system works.

Because the nation so stupidly gave away the rights to control a fundamental public utility—money—to a cartel of private banks, the Federal Reserve, the creation of money (except for coins, which, trivially, are minted by the U.S. Treasury) is controlled not by public policy but by private banking interests.  “The Fed” is owned by its member big-private-banks yet is politically defined as a quasi-public institution even though it is entirely controlled by the cartel of private banks, except to the extent that the political system can influence its actions, which is almost nil.  Power flows from the banks to the government, not the other way around.

Well, you saw how well that worked out when the federal government essentially gave away the commonwealth by “covering” the bad bets of the world’s biggest gamblers—the Banksters, as I prefer to call them—because their agents, from Treasury Secretaries “Hank” Paulson and Timothy Geithner, Larry Summers, and the rest of the Wall Street gang were very much in control of the political response to the crisis.  These same Banksters had helped steer the congress to do away with the protections against gambling with depositors’ money that resulted from the Great Depression of the ‘30s.  The recent ‘Great Recession’ was the result of the same kinds of financial manipulations as precipitated the great crash, but now with lightning speed of computerized trading and lax limits on holding reserve capital to cover losses, as well as a whole new breed of “financial instruments” which are “derivatives” of complex combinations of debt.  The whole Dodd-Frank “reforms” were a smokescreen to cover continued abuse by the financial elite.

The whole system is, as they say, rigged.  And because it is entirely dependent on generating more debt in order to sustain profit, ultimately all that debt cannot be paid, since it is really a pyramid scheme basing illusory wealth on ever-expanding debt that cannot be sustained.  No, it is not about “the national debt” and “deficit spending” by the federal government, though they are part of the system.  And the “debt ceiling” is pure political theater.  It is about the centralized private control of the public means by which money is allocated to the actual people who participate in the economy as a way of sustaining their lives—through debt—with that private control being exercised in the sole interests of the so-called “masters of the universe,” the Wall Street Banksters and financial deal makers who have no idea what a real economy looks like.  It’s all about the art of the deal which generates paper profit [or, I should say, electronic profit] out of money generated with no other purpose, but which bounds the people to a system of debt over which they have no participation except as victims.

Therein lies the absurdity of the economy for you and me.  Money, the function of which had been to provide a medium for and a repository of actual exchange value—that is, the exchange of real objects and services of value to people in a real economy—has been perverted into a devise for generating false wealth—paper or electronic profit—which is treated as real wealth by the Banksters who control the Economy of the Absurd.