"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Wednesday, March 23, 2011

Profit Margins and Crisis

Figures can be interpreted in many ways. Lets take for example the following grap which depicts the evolution of the margin earning in the US:

That picture is reflected in other parameters, especially the shape of the main stock market indices. So many could argue that the graph reveals that the situation is just fine, we are back in business and the crisis is over. Is it so?

First of all, you can notice that the American business sector enjoyed the same extreme margins just before the last financial bubble exploded into the worst recession in 70 years. So the margins by themselves can be hardly regarded as a signal for “ Business as usual”.

As a matter of fact that profit rates are a genuine alarm before the next round of crisis. Let me explain: Business profits are the mirror picture of purchasing power of the average citizens or in simple words, every cent out of the total sale goes to the profit is taken from salaries. Therefore the graph means that the average citizen , the one that may own some shares or funds and predominantly lives from his salary is in nowadays worst shape than in the midst of the crisis .

But that is not just a question of justice and distribution but a very serious economic issue. If the average worker is poorer, then to whom will the business sell their products? That is exactly the very root of t he economic crisis we are still in , the unbalanced growth and concentration of wealth and profits among too few hands that are not able to consume the excessive production. The credit bubble was just a mean to cover that lack of purchasing power until it could not be sustained. As the crisis developed, the public sector stepped in to cover that lack of demand … ( no more taxes… but a lot of debts ). So the imbalance went from private hands into public hands.

So we are once again experiencing an unbalanced growth, though this time the reaction capacity of the governments will be much more limited. Under these circumstances a more intense crisis is just waiting around the corner or for the most a sluggish economic growth.

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