aedens wrote:The cheerful and village have turned Japanese and never seen the script IMO.
His main thesis is that S&P 500 corporate profit margins are the highest in history at 7.8 percent (75-year average is only 4.9 percent), having been goosed higher by unprecedented government economic stimulus that is unsustainable given public debt levels. As the stimulus is withdrawn, corporate profit margins will be hurt and revert back towards the mean of 4.9 percent, yet analysts are expecting profit margins to continue higher!
http://www.investingdaily.com/15002/are ... ns-peaking
Let's examine this further. First of all, it won't revert toward the mean; it will slam down under the mean. John can tell anyone who doesn't know why that will happen.
The US GDP is about $15 trillion and if we assume for simplicity (in order to get a maximum number) that all of the GDP is created by corporations, then corporate profits are about $1 trillion per year.
The US federal deficit is about $1.5 trillion per year. How ever you slice it or dice it, that excess gets spent into the economy and in general there a two main beneficiaries - large corporations by way of government contracts, bailouts and subsidies and poor people who can't save money. When poor people spend a government handout, of course the corporations only take their cut because they also have to provide something in exchange. Let's say a poor person goes to Wal-Mart with a food stamp card to buy a hunk of Kraft cheese. Kraft gets their 7.5% of wholesale (probably higher), Wal-Mart gets their 7.5% of retail (probably not that high), the media conglomerate that Kraft pays to advertise gets their cut and so on down the line. The poor person gets very little value of cheese and as that money gets circulated around in the economy virtually all of it that is not consumed ends up back in corporate coffers as profit with the exception of the little that wage earners can save out of their cut. To be specific, someone who is employed by one of these corporations will in all likelihood be able to save some of their wage, which then doesn't circulate back into the economy so the corporations can siphon it off.
Bottom line, a very high percentage of excess government spending in the form of government contracts, bailouts, subsidies, and aid for the poor winds up as corporate profits. I don't know what the percentage would be. My gut says it would be at least 1/3 of the $1.5 trillion. That's over $500 billion, or over half of all corporate profits using my simple assumption that maximizes an estimate for total corporate profits.
So now let's say the goverment balances the budget. Now we can see where this is going. We can see how the academic "expert" Village Idiots and assholes will stand behind the corporate Village Idiots and assholes who are part of this scam and pay their wages and consulting contracts, and declare, according to their phony expertise of which they have none, that deficit spending is absolutely necessary.
Balancing the federal budget would force gigantic, overstretched, money siphoning, unprofitable dinosaurs to get profitable without lobbying and sucking at the goverment teat when their idiot managements have NO IDEA how to get profitable, NOT A CLUE, without doing just that. And that's where the vicious spiral of deflation can begin to take hold.
So what I'm positing is that without government deficit spending there would be very little profit in this economy, on average. I believe from looking at the numbers that if the government were to balance the budget or already had, that perhaps 1/3 to 2/3 of the corporations in America would not be able to operate at a profit and would go bankrupt.
Let's say, though, that the government does not balance the budget, but keeps deficit spending until their credt rating is ruined. I would say, in that case, we've reached close to the end of the line anyway because the bond market is only going to take so much before an even worse crisis takes hold and the US credit rating is ruined, hyperinflation takes hold, and the entire world monetary system is destroyed, which will then probably bankrupt even more corporations than if they stop deficit spending now. Further bolstering that view would probably be what Buffett was saying when he interviewed with Alan Simpson and Erskine Bowles on CNBC the other day, though he can't say it explicitly.