Q: How can companies continue to make great profits in a lousy economy?
A: The government
One of the least understood aspects of this recession has been the degree to and the manner in which the suffering has been absorbed by the lower and middle classes, while the corporate elites have continued to operate as if nothing has changed.
The quick and dirty version (which will be expanded on below) is that the proceeds of the new debt run up by the government (at the rate of $125 billion a month) have been flowing directly and indirectly to the wealthy class - and not to those that need help the most.
First the wealthy were able to recover their losses suffered in the meltdown by charging them to the national credit card and second they have continued to add to this wealth by sucking up the proceeds of new debt.
Let's start with some simple stuff:
A) Government stimulus is spending in excess of revenue (and for these purposes let's exclude social security). By that definition the government has been stimulating the economy every year for decades. What has changed now is the scale.
Stimulus is not just the "stimulus package". Stimulus is also the government continuing to spend the same as before, even after tax revenues decline. Each dollar of debt is actually a form of stimulus - spending now, paying later.
B) Deflation: We are now in deflation (a reduction in credit outstanding) which is being fought tooth and nail by the Fed (by printing money). One of the key things to remember about deflation is that it is very hard to make money in times of deflation. The best most can hope for is to keep what they have.
Deflation is crippling because as incomes stay flat or decline, but interest payments mount (from increased debt), it becomes harder and harder to continue to service the debt. It is like a big weight pressing down on you that just gets heavier and heavier. Horrible - and that is why the Fed is fighting it.
C) National Debt: Because the recession has cut tax revenues and increased the need for social spending the deficit has grown. At the current time (the last 12 months) the debt load has been rising at about $125 billion a month. That means the Federal government has been pumping $125 billion an month into the economy.
So far the debt has been manageable because interest rates have also been kept low. (You can better afford 1% on $1 million than 5% on a million). However the US is now heavily exposed to any move up in rates because most new debt is short term (5 years or less) and so would have to be refinanced at higher rates - like an adjustable rate mortgage with a teaser rate.
So back to the main issue at hand ... how can companies continue to make money?
To answer this consider what would have happened if the government would have kept its "deficit" at the same level as prior to the crash (about $40 billion a month). that would have meant $85 billion a month less money pumped into the economy ... $85 billion per month less demand for companies.
Now if you are like most folks $85 billion a month is simply a "lot of money". You probably have little idea about how much demand, how much in sales, this would actually mean to companies, how much they would suffer if this demand were not there.
Consider this:
New car sales are now running at about 1 million a month. If we assume $20,000 per car, it would cost us only $20 billion to buy all those cars!
New home sales are running at about 25,000 a month nation wide. At $250,000 per house it would cost us only $6.25 billion to buy everyone of those houses.
WalMart sells a ton of stuff. Here is what the WalMart CEO said recently
"In the hour before midnight each month, shoppers load their carts with baby formula and other basics like milk and bread and then line up at the checkout, ready to pay as soon as the money becomes available," Simon says.
"If you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it and they've been waiting for it," said Simon.
In fact WalMart sales in the US are $25 billion a month. You could buy everything sold at WalMart in a month for $25 billion. Or to put it another way, the US federal government is putting extra stimulus into the economy equal to almost 3.5 times WalMart's sales.
Now we can add a few more retail names. To buy everything sold at Target in a month would cost $5 billion. To buy every Apple product sold each month would also cost you around $5 billion. To buy every product sold by Dell in a month we have another $5 billion. To buy every product sold at Best Buy add another $4 billion. To buy everything sold at McDonald's add another $2 billion and another $2.5 fro Amazon.
So add it all up ... every new car, every new house, everything sold at/by WalMart, Target, Dell, Best Buy, Apple, McDonald's and Amazon ... and you only get about $75 billion!
Let me repeat that. The Federal stimulus to the economy is more than the cost of buying every new house, every new car, everything sold at WalMart, Target, Best Buy, Amazon, Dell, Apple, and McDonalds. And this is happening every month!
Now let's go the next step ...
What happens when a sale happens at WalMart ... and someone buys baby formula at WalMart at midnight? The money is a sale for WalMart on which they earn a profit. The maker of the baby formula gets a sale, and they make a profit ... and so on. Companies are making profits because demand has not collapsed as much as in previous recession. Their continued sales are the direct result of government stimulus. Without the sales their profits would plummet.
On top of this add the additional benefits they receive. Companies can now borrow money at record low rates. Even companies that should by all rights be bankrupt can borrow (at low rates to boot). They get a direct benefit from the Fed's ZIRP (zero interest rate policies) in lower funding costs. It has even got so ridiculous that companies like Microsoft are borrowing money at record low rates so that they can pay bigger dividends to their shareholders. Think about it, money is so cheap thanks to the Fed, that companies borrow to give income to their shareholders. Shareholders benefit while those in the lower income brackets face record high credit card costs and fees.
In past recessions companies failed when times got tough. This time though, with the exception of some banks and the car companies, few larger companies are failing ... because they still have demand for their products and interest rates are so low they can borrow to cover and losses. It is only the smaller companies without access to cheap funds that are really suffering.
The net result: The net result is that there is an ongoing transfer of money borrowed by the federal government through the economy and ending up in the pockets of the capitalist class. The rich get to keep and add to their wealth, while the country as a whole takes on the debt. The wealth transfer is enormous ... and quiet.
The next time you see a talking head on the business channel talking about how well corporate profits are holding up despite high unemployment... think ... it's only thanks to spending by the federal government. It is all artificial. It is NOT real. The economy is still sick. It is still on life support.
One final point. It is not necessarily that the rich are getting that much wealthier. It is that they are being able to "maintain" their wealth (remember that is the goal in deflation) while the rest of us fall farther and farther behind, plus burdened with our share of the country's rapidly expanding and crushing debt.