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Awash With Cash?
by Mick Brooks
The financial press reports that firms in the US and UK in particular are sitting on mountains of money. This cash mountain must come from profits. How, then, is it possible that the crisis was caused by a fall in the rate and mass of profit?
The other question is: if firms have money coming out of their ears and profits have recovered – why is this money not being invested, leading to a sounder and broader based recovery?
Peter Taaffe put the case in ‘Socialism Today’ June 2012: “I wrote about the colossal piling up in the banks and big business of what is now $7.5 trillion of cash reserves – half the GDP of the US. It seems inconceivable that this would have been possible without a huge rise in the mass of profits and possibly the rate as well.”
An author in ‘Socialist Appeal’ agrees that business is awash with cash in Britain as well. “British businesses are sitting on a mountain of cash – some £750bn. So there is no shortage of money. Big business is loaded.” (Welcome to the ‘new norm’, September 2013)
This is part of a widespread scepticism as to our explanation that the underlying cause of the Great Recession was a fall in the rate of profit. This occurred because of the law of the tendential fall in the rate of profit identified by Marx.
The facts about the evolution of the rate of profit in the USA, the best attested case, are as follows: there was a collapse in the rate, and also the mass of profit after the 3rd quarter of 2006, a year before the onset of the Great Recession. Profits recovered after the end of 2008 but still remain below the level of 2007. Michael Roberts’ blog gives an authoritative assessment of profit rates from a Marxist point of view. Roberts’ most recent comment at time of writing on the rate of profit is http://thenextrecession.wordpress.com/2013/08/28/down-in-the-jackson-hole/. Official figures from the US Bureau of Economic Analysis show the same trends over time.
‘Socialism Today’ and ‘Socialist Appeal’ are talking about cash reserves. How are cash reserves related to the rate of profit? Reserves are a sum, a stock, accumulated over years. They are not an indication of current profitability. The rate of profit is a flow measured over time.
More importantly, we need to look at the net asset position of companies – not just their pile of cash and other assets but also their underlying debts, and balance the two off against each other.
Companies can pay for investment in two ways; by directly investing their own profits or by borrowing and going into debt. These loans ultimately come from the surplus accumulated by other capitalists. Capital investment comes from surplus value, and historically there has been a close link between the rate of profit and the rate of accumulation.
In recent years, in Britain and the USA, there has been a tendency for corporations to become more reliant on debt finance. The reason why the ‘credit crunch’ in 2007 (when bank lending suddenly stopped) had such wide and rapid repercussions on the ‘real economy’ was because firms were head over heels in debt.
The drive to use debt for accumulation is often for practical scams, for instance to minimise tax. These decisions have little to do with Marxian economic categories such as interest and profit of enterprise, and often make applying these categories to understanding economic processes very difficult.
For instance Apple has $100bn in cash parked abroad, out of the way of the US tax system. At the same time the company has entered the US bond market to borrow $17bn in order to distribute the money to shareholders as dividends. It does so because it gets a tax break on borrowing. This does not change the amount of surplus value generated by Apple, but just distributes it differently to take advantage of the tax regime. In the case of Apple these are monopoly profits to be made and handed out.
The leverage (debt dependence) of UK corporations has increased in recent years for several main reasons:
· The accounting practice known as ‘marking to market’ has allowed firms to virtually name the price of their capital assets. So they can inflate the value of the firm, enabling them to borrow more on the basis of this collateral.
· Because of the process known as financialisation, more and more of corporate profits are attributed to financial firms. Financial corporations are growing faster than manufacturing industry and are much more highly leveraged than the others because their core business is playing around with other people’s money.
· Nonfinancial corporations have also been holding a bigger proportion of their assets on their balance sheets as financial assets and commercial property. Financial assets, exotic pieces of coloured paper, are fictitious capital, that is to say they represent no value in themselves yet entitle the holder to a slice of surplus value. As fictitious capital much of their value melted away during the Great Recession with catastrophic results. Likewise titles to land are fictitious in that they have a price without a value, since they entitle the bearer to claim rent.
· Firms have an increasing tendency to borrow to go on a merger and acquisitions spree – they buy up other firms. This does not increase the total capital available but just transfers it into other hands.
· Private equity companies characteristically load their victims with debt in order, as they put it, to sweat their assets in search of higher returns.
It might be useful to look at the leverage (debt-dependence) of UK nonfinancial corporations since the recession struck. McKinsey Global Institute issued a report in January 2012 called ‘Debt and deleveraging: uneven progress on the path to growth’. Here are their conclusions for the UK:
“The United Kingdom: Deleveraging has only just begun
Total UK public- and private-sector debt has risen slightly, reaching 507 percent of GDP in mid-2011, compared with 487 percent at the end of 2008 and 310 percent in 2000, before the bubble...
While the largest component of US debt is household borrowing and the largest share of Japanese debt is government debt, the financial sector accounts for the largest share of debt in the United Kingdom.” (British banks are bigger in relation to British GDP than is the case of Japan or the USA – MB.) “Although UK banks have significantly improved their capital ratios, nonbank financial companies have increased debt issuance since the crisis... Nonfinancial companies in the United Kingdom have reduced their debt since 2008.”
Despite this comforting final sentence, McKinsey still assesses the debt of UK nonfinancial corporations as 109% of GDP. Total UK debt is 507% of GDP. Of the countries surveyed only Japan is more indebted, at 512%.
So, despite the talk of cash mountains, (a figure of £750bn for all firms in Britain was mentioned in ‘Socialist Appeal’) nonfinancial corporations are lumbered with more than twice as much debt as monetary assets. In the wake of the Great Recession they face a crushing debt burden.
To you and me £750bn in cash sounds like a lot of money. Indeed it is half of Britain’s national income in a year. Bear in mind though that the UK’s total debt is equivalent to more than what 63 million British people earn and spend in five years.
The McKinsey Report is more positive about the USA, running the headline, ‘A light at the end of the tunnel’. All the same total debt was 279% of National Income at the time of the Report. US companies are reputed to have a cash mountain of $2trn with another $2trn offshore, according to Edward Luce (Stuck in the mud, ‘Financial Times’ 13.05.13). This is for both financial and nonfinancial corporations. But, to put this in perspective, America’s National Income is around $15trn. And the corporate debt for nonfinancial corporations alone in the USA is 72% of GDP. Once again cash assets are weighed in the balance against corporate debt and found to be relatively insignificant.
Perhaps what is more relevant to our enquiry is not the total indebtedness of a country, or that of its nonfinancial firms, but how the total debts of nonfinancial firms stack up against their assets.
A ‘UK Economic Outlook’ report for 2010 called ‘Red ink rising: how worrying is the UK economy’s total debt burden?’ deals with the issue. It states that actual nonfinancial corporate debt at the time was £1.7trn (actual GDP was £1.4trn at the time). The Report measures gearing of nonfinancial companies as debt divided by debt + equity, when equity means share prices [debt/( debt + equity)]. The gearing ratio is seen as a measure of the affordability of debt. It is strongly influenced by the rise and fall in share prices. According to the Report it peaked at 50% in 2008. In other words debt grew to become equal to assets as measured by the share price.
Gross debt of nonfinancial corporations is then compared with corporate income in the Report. It peaks at five times income in 2008. The net debt figure is the most suitable measure for our purposes. Net debt is total debt minus money holdings and bank deposits (the famous cash mountains). Net holdings peaked at three times income in 2008. In other words nonfinancial corporations had three times as much debt, minus monetary assets, as income. This is a scary situation. British nonfinancial corporations face a debt mountain, not a cash mountain.
The latest information for the advanced capitalist world as a whole comes from the Bank of International Settlements in their June 2013 report. Nonfinancial corporate debt continues to rise. “The average non-financial debt to GDP ratio for the major developed markets is currently 312% compared to 280% in March 2007. While the household debt ratio has declined from 97% of GDP to 88% now, non-financial corporate debt has risen from 101% to 105% now and government debt has rocketed from 83% to 120%.”
The destruction of capital was identified by Marx as a central aspect of the healing process after a downturn. He meant not just the physical rusting and decomposition of capital but the destruction of capital values, in particular of fictitious capital. The debt mountain is a measure of the build-up of fictitious capital. Capital destruction lowers the organic composition of capital, raises the rate of profit and prepares the conditions for a new boom. Clearly the destruction of capital has a long way to go yet.
The weakness of British capitalism at present can be seen in the case of the zombie companies, neither really alive nor completely dead. The ‘Financial Times’ suggests that 1 in 10 British firms fit the bill (perhaps 146,000 companies). See their survey ‘The rise of the zombie’ 09.01.13. These zombie firms are just ticking over, generating enough money from their activities to pay the interest on their debts, but not to wipe out the loans themselves. The banks for their part are reluctant to write off these debts on account of the dent it will make in their balance sheets.
These zombie companies are kept in this half-life only by the unprecedentedly low interest rates provided by the Bank of England, desperate to prevent the economy slipping back into recession. The recovery is artificial so far and the main beneficiaries of this cheap money have been the banks. It seems that small and medium companies are effectively locked out of access to this free cash.
Why no investment?
The second question posed at the outset of this article was - why doesn’t this cash pile get invested to produce a healthy recovery? As we have tried to show these apparently enormous sums of money are more than counterbalanced by the overhang of corporate debt.
Secondly a recovery is actually under way. It is a very slow revival but all the signs point upward. Its recovery is slowed by the crippling level of corporate debt, representing fictitious capital that has not yet been destroyed.
The Bank of England complains about the zombie firms retarding the recovery. Yet the Bank’s policies of cheap money and quantitative easing (printing money) help keep the zombies alive. It they were to cease suddenly thousands of struggling firms, and their workers, would face disaster. Would that speed up the recovery? It is a dilemma for them.
World capitalism is also in a dilemma. The very ‘threat’ of making an end of quantitative easing (‘tapering’ it off) has put countries like India, Turkey and Brazil in a spin. Since the onset of the recession in 2008 such emerging markets have grown much faster than the metropolitan heartlands of capitalism. Profits have been healthier. Capitalists in the advanced countries, thwarted by the low profit rates at home, have been putting their money abroad. This inflow of credit is now at risk, as it was generated by quantitative easing in the advanced capitalist countries. They now threaten to cut it off.
Take the case of India; the economy has been slowing down for some time. As India, Brazil and Turkey grew faster than capitalism in the West they all sucked in imports, but their currency appreciated as money flowed in. Exports became more expensive and, as the money kept flowing in, it began to blow up a speculative financial bubble. The fear of an end to capital inflows, and possibly a panicked and disorderly outflow of foreign funds, has put the Rupee in a tailspin. This is causing a devastating spike in the price of imported food, hitting the poorest hardest.
The Turkish Lira and Brazilian Real are on the slide for the same reason. This poses the prospect of a panic like that of 1997 when Far Eastern countries, starting with the Thai Baht, came under siege. Governments in India Turkey and Brazil will be forced to retrench, inevitably at the expense of the working class. Indian economist Jayati Ghosh states, “It is a crisis. This is the big one. But it has been building up for a while due to many reasons: the current account deficit, the industrial slowdown, the lack of infrastructure development, the negative investment in the economy.” She could be right.
The backwash effects from the Great Recession go deep and wide. This shows the shallowness of the recovery and the depths of the continuing crisis. It also shows that movements in the rate of profit are critical to the development of the capitalist economy.
(Thanks to Michael Roberts for drawing my attention to some of the statistics in this article.)