[OPE] A profit squeeze in Germany? A study in punk economics

Certainly I think the longterm trend will be a "centralization of credit provision". That's simply because, to sustain all the debt obligations, you need a larger and larger asset base (actually, Keynes himself argued for a gradual "socialization of credit provision").

For the moment, given the amount of economic uncertainty, the global volume of mergers and acquisitions has declined somewhat. "The total volume of worldwide mergers and acquisitions reached $3,280bn in the year to date, down 29 per cent from the full year 2007 as financing difficulties, volatility in valuations and widespread risk aversion saw deals pulled. Companies abandoned 1,309 transactions valued at a total of $911bn, according to Dealogic, the financial data provider. In 2007, there were 870 withdrawn deals valued at $1,160bn." (Lina Saigol, "Record Number of M&A deals cancelled in 2008", FT 22 December 2008).
The problem however is that, in aggregate, the private sector in most countries owns or controls far more capital than the state does, and thus - apart from the fact that it is unable to control and regulate credit provision in the private sector anyway - the state is, in most countries, unable to gain any effective "monopoly of credit provision", even if it wanted to.

It does not help much either, if large chunks of state operations have been already been privatized. In addition, there are limits to how much you can tax the population. If you tax the wealthy more, you just get capital flight and tax evasion/avoidance. And you cannot tax workers more, if more and more of them are unemployed or earn low incomes. Obviously the more you tax, the more it reduces the incentive to invest. The only real solution is to provide heavy disincentives for asset speculation, capital gains and rent-seeking, but that is exactly what the political class is not prepared, or unable to do - the balance of power has shifted strongly in favour of the rentier class - in the end, those who own the most assets, hold sway financially.

In Japan, incidentally, the government largely controlled credit provision for years, but it did not prevent deflationary stagnation (the US managed to torpedo the formation of an East Asian trading bloc to a large extent so far).

As I've argued before, like Michael Hudson, the problem with Western society is that it is increasingly biased in favour of asset speculation, capital gains, property transfers and rent-seeking, it's effectively increasingly anti-labour and anti-entrepreneurship in an economic sense of personal rewards for creative effort, yet the latter two are precisely the mainsprings of economic growth, since they create the net additions to wealth. Jim O'Neill, research chief at Goldman Sachs, said on BBC radio the other day that "It is in the nature of finance, that if the rewards appear unending, you are going to chase after them". The point of the BBC story was that there did seem to be an end to it, but the real issue they ignore concerns the source of those "rewards".

The current bias of the capitalist system explains precisely why real GDP growth stays flat even although a massive redistribution of income and wealth has occurred. Indeed, that creates the moral problem, that it's not even clear anymore why people should be entitled to income anyway, it even erodes the "work ethic". Which means that people with some justification just go for what they can get, aiming to extract an income from any source; and, that the very origin of wealth is mystified theoretically.

In fact, the share of "operating surplus" (a measure of gross profit from value-adding production) as percentage of GDP strongly increased in almost all developed countries from 2001, the main European exceptions were France and Italy, even although (1) real GDP growth stayed rather flat, and (2) the labour force increased numerically http://www.bis.org/publ/work231.pdf. In the case of Germany, real GDP growth over the last half decade or so averaged 1.3% or 1.4%

Jurriaan

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Received on Thu Dec 25 09:09:05 2008