My favorite overrated economist, Paul Krugman, was on MSNBC with Chris Hayes this morning. In an amazing bit of truth finding its way through the fog that Krugman usually spews was this gem:
"The point is right, there is a global savings glut and a lot of it is corporations are saving. It's a lot of retained earnings just sitting there. Not quite sure why except that maybe they're making so much money they don't know what to do with it."
If one parses what Krugman is saying, it breaks down into these points:
1) Across the world, there is a great deal of savings by individuals and companies. Indeed, the savings rate is much higher than it used to be.
2) The portion of that savings which is owned by corporations is "retained earnings". Since it is being saved, it is not being invested.
3) Krugman does not know why the corporations have increased the amount of savings that they are holding compared to levels of five years ago (which happens to be the last time that the corporate savings rate was lower.)
4) Since he has no idea why the savings rate for corporations (like that for individuals) is higher than it used to be, Krugman speculates (in his usual anti-corporate manner) that the companies are making so much money that they do not know what to do with it all.
Even for Krugman, this is idiotic stuff. While Krugman does admit that he does not know the reason for the higher savings rate, he ought to know. While I doubt he reads this blog, I will still endeavor to inform the Nobel laureate about a few rather obvious points regarding savings.
a) The savings rate around the world went up dramatically beginning in 2008 when the financial crisis hit. This is a normal reaction to a financial crisis brought on by too much debt. Individuals and companies are reducing their leverage. In other words, people across the globe are cutting back on the levels of borrowing that they have undertaken. Since it was high debt levels that led to all the problems, there is no question why folks wanted to reduce those debt levels. It is called the will to survive.
b) Since the recession began in 2008, the world has not seen a robust recovery. Europe is currently in a recession. The USA had negative GDP growth last quarter and has yet to see even one quarter where a strong recovery was evident. For companies, this means that the profit prospects of new investments have been dramatically reduced from what they were prior to the recession. Companies will not invest in new plant and equipment if they do not see the likelihood of strong profits resulting from those investments. Slow growth or further recessions will not indicate much likelihood for profits, so the companies hold their funds rather than investing them.
c) For international companies with headquarters in the USA, the tax code contains the incentive to keep profits earned abroad in accounts there instead of bring those funds home for investment here or even for payment of dividends. While this may not sound like much, American companies are approaching two trillion dollars of funds held abroad in order to avoid the 35% American corporate tax on these amounts. Various proposals have been offered in congress to incentivize the American companies to bring the funds home, but president Obama and the Obamacrats have instead opted to oppose the incentives and instead denounce the corporations for following normal economic behavior by keeping the funds where they will not be taxed.
There are a few other reasons which could be added to this list, but the foregoing are the principal ones. It make me wonder? Should I get the Nobel Prize for being able to educate Paul Krugman.
(No need for those email telling me the answer is "no". I truly understand."
"The point is right, there is a global savings glut and a lot of it is corporations are saving. It's a lot of retained earnings just sitting there. Not quite sure why except that maybe they're making so much money they don't know what to do with it."
If one parses what Krugman is saying, it breaks down into these points:
1) Across the world, there is a great deal of savings by individuals and companies. Indeed, the savings rate is much higher than it used to be.
2) The portion of that savings which is owned by corporations is "retained earnings". Since it is being saved, it is not being invested.
3) Krugman does not know why the corporations have increased the amount of savings that they are holding compared to levels of five years ago (which happens to be the last time that the corporate savings rate was lower.)
4) Since he has no idea why the savings rate for corporations (like that for individuals) is higher than it used to be, Krugman speculates (in his usual anti-corporate manner) that the companies are making so much money that they do not know what to do with it all.
Even for Krugman, this is idiotic stuff. While Krugman does admit that he does not know the reason for the higher savings rate, he ought to know. While I doubt he reads this blog, I will still endeavor to inform the Nobel laureate about a few rather obvious points regarding savings.
a) The savings rate around the world went up dramatically beginning in 2008 when the financial crisis hit. This is a normal reaction to a financial crisis brought on by too much debt. Individuals and companies are reducing their leverage. In other words, people across the globe are cutting back on the levels of borrowing that they have undertaken. Since it was high debt levels that led to all the problems, there is no question why folks wanted to reduce those debt levels. It is called the will to survive.
b) Since the recession began in 2008, the world has not seen a robust recovery. Europe is currently in a recession. The USA had negative GDP growth last quarter and has yet to see even one quarter where a strong recovery was evident. For companies, this means that the profit prospects of new investments have been dramatically reduced from what they were prior to the recession. Companies will not invest in new plant and equipment if they do not see the likelihood of strong profits resulting from those investments. Slow growth or further recessions will not indicate much likelihood for profits, so the companies hold their funds rather than investing them.
c) For international companies with headquarters in the USA, the tax code contains the incentive to keep profits earned abroad in accounts there instead of bring those funds home for investment here or even for payment of dividends. While this may not sound like much, American companies are approaching two trillion dollars of funds held abroad in order to avoid the 35% American corporate tax on these amounts. Various proposals have been offered in congress to incentivize the American companies to bring the funds home, but president Obama and the Obamacrats have instead opted to oppose the incentives and instead denounce the corporations for following normal economic behavior by keeping the funds where they will not be taxed.
There are a few other reasons which could be added to this list, but the foregoing are the principal ones. It make me wonder? Should I get the Nobel Prize for being able to educate Paul Krugman.
(No need for those email telling me the answer is "no". I truly understand."
2 comments:
Does Krugman have a B.S., M.S. & P.H.D.. Sometimes these stand for Bullshit, More Shit & Piled Higher & Deeper!!!
Common sense explains the rates of SAVINGS, both Corp. & Individuals----IMHO
You get my vote for THE Next PRIZE!
Fastcarken:
Thanks, I will forward your comment to the committee that awards the prize.
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