The Financialization of Everything

By David Stockman  |  September 17, 2018

Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes.

– Thomas I. Palley, Financialization: What It Is and Why It Matters (2007)

On the one hand, President Trump is correct that our multiple deficits are huge problems.

After 40-odd years, they add up to about $19 trillion in present-day purchasing power. By now, they’re mere facts of American economic life.

How can we afford our rock-and-roll lifestyle? Well, by endlessly borrowing from the rest of the world, mostly China…

The Donald, simply, has the sequence wrong.

These deficits are not the result of bad trade deals or bad intent of the World Trade Organization.

They are products of bad money.

Let’s start with the pillar of modern monetary central planning.

The Federal Reserve’s ridiculous 2% inflation target drives relentless inflation of domestic prices, wages, and costs. And it’s created an ever-widening gap versus operating burdens in dollar-pegging developing economies like China and Mexico.

So – inevitably – production moves to the lowest points on the global cost-wage curve.

As we noted on Friday, the answer to what is a structural problem is “higher interest rates.”

As we also noted on Friday, that dog will not hunt for the Tweeter-in-Chief.

And that puts us on a perilous path.

…a “more perilous path,” I should say.

The Donald’s disruptions are the Donald’s disruptions. But it’s all relatively new. And – whether you like it or not – it’s short-term.

In combination, the Donald’s preferred easy-money policies and his inflationary tariffs would actually worsen U.S. trade deficits.

It would inflate domestic costs and wages even further. It would make U.S. production even more uncompetitive.

It would run right into the Fed’s belated “normalization” campaign.

There is something else underneath all that – a deeper rot – that has nothing to do with the Donald.

Let’s look at the matter of the booming profits of Wall Street’s increasingly corrupted collective mind.

It’s hard to know where the put the scare quotes, around “booming” or around “profits,” because both are ex-itemed-ad-nauseam nonsense in this context.

The chart below shows the combined profits of all U.S. corporations reported to the Internal Revenue Service on penalty of criminal prosecution.

These figures are the basis for corporate income taxes owed. And no CEO or CFO in their right mind would exaggerate pre-tax income for the bragging rights, only to subject the company to higher tax payments to Uncle Sam…

Where’s the boom?

Focus on the blue line. It represents pre-tax profits reported to the IRS. It’s not subject to the one-time impact of the recent corporate tax cut from a statutory rate of 35% to 21%.

Pre-tax corporate profits were an annualized $2.21 trillion during the second quarter of 2018.

That’s the same as they were in the second quarter of 2017.

And that’s the same as they were in the first quarter of 2012.

They’re up only marginally from $1.99 trillion 12 years ago, at the pre-crisis peak in the third quarter of 2006.

All told, we’re talking about 1.3% annual profit growth over the past decade-plus. It hasn’t even kept up with inflation.

Profit growth has flat-lined.

And, rather than use the de facto interest holiday of the last decade to deleverage their balance sheets, Corporate America loaded up on more debt.

They did that to buy back their own shares and to fund other unproductive financial engineering schemes.

So doing, they satisfied Wall Street and shifted profits from the future to the present on a one-time basis.

Since 2008, members of the S&P 500 Index have spent $5 trillion on share repurchases.

Some were re-issued to management as stock options. But much of them went into an outright reduction of the share counts outstanding. For the S&P 500, the share base has shrunk by 7% since 2011.

That kind of stuff fuels illusory per-share profit growth. But it’s just math.

It’s not a sign of economic health.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR