Bruce Bartlett points us to this:
Where do these numbers come from? The Bureau of Labor Statistics asks businesses why they laid people off, and the businesses tell them.
Welcome to the reality-based community.
Charlie Hallac, a top deputy to Larry Fink at BlackRock and head of the firm’s analytical arm, BlackRock Solutions, distilled it down with precision: “Of every twenty deals, the large aggressive PE firm expects seventeen of the companies to fail under the added debt. Two have to survive and one has to hit big for the firm to have a fairly strong return on its PE fund. So that’s three out of twenty.”
So you’ve got twenty companies that are going concerns with successful operations. Those companies’ status as going concerns constitutes the bulk of their real-capital value. Call it “good will” in the purchase and sale balance sheets, or “organizational capital,” or whatever intangible noun you choose, but that “going concern” status is the thing that turns a bunch of desks and computers into, for instance, a successful IT company. Think: operational methods, management systems, employee contracts, intellectual property that only has value in the context of that company’s operations, and endless et ceteras.
But for Wall Street, a company’s real assets (very real, despite being largely intangible) are perceived as a single financial asset, one that can be manipulated along with others, and in combination with others’ used to manipulate yet other financial assets, all in a way that benefits traders in financial assets (them).
Take those twenty companies and get the banks (including shadow banks) to issue loans — to print new money that they’ll lend to the companies against promise of their future receipts. The fixed and inexorable demands to service that debt make all the companies much more fragile and vulnerable to negative market shifts — competition, downturns, technology shocks, etc. (And meanwhile, the PE firm installs management that strips away any organizational assets that don’t have immediate returns, that only provide long-term strength, stability, and resilience.)
Because the debt they’re saddled with makes them so fragile, only one of the companies does well — and it does extraordinarily well, because its bets on real-capital investment using the borrowed money happen to succeed. Seventeen crash and burn.
For the PE firm, the results are dreamy. Because they leveraged their investment in that one firm so heavily — they own rights to future profits on a billion-dollar stake, for instance, when they only invested a hundred million — they make a tidy profit on the whole portfolio. In effect — as if by magic — much of the newly printed money lent to the twenty companies is embodied in the financial value of the one successful company.
But the real assets of those other seventeen companies — their status as going concerns — disappears. Some portion of that real capital is preserved in the bankruptcy process, of course, and through fire-sale dismemberment. But a great deal of it — the organizational capital that is based on the companies’ existence as coherent, ongoing organizations — evaporates in a whisp of smoke.
Is this what proponents of capitalism mean when they talk about “capital accumulation”?
I had one of those big Aha moments earlier this year — as is so often the case, while reading one of Steve Randy Waldman’s posts. Karl Marx was a “sharp analyst”, but a “terrible futurist”, he says (emphasis mine for easy skimming; read his whole post, in fact everything he’s written).
… the story I was told in my impressionable youth was this: … Marx thought that capitalists were trapped in an unstable dynamic of capital accumulation from which they benefited, on the one hand, but which led inevitably to collapse …
I remember pride in my businessman father’s voice when he explained to me that this was wrong. Marx had underestimated the ingenuity and flexibility of capitalist societies, and particularly of the United States during the New Deal. Government intervened to solve Marx’s collective action problem, enabling capitalists [to] secure their enlightened self-interest by keeping a distribution of prosperity sufficiently broad that the predicted collapse could be avoided.
I’m prompted to reflect on this by another big Aha quotation, this from Karl Smith’s latest (I’ve reversed the order because I think the punch line lands better):
That people have money but there are no goods in the shop window is the classic failure of socialism.
That people can see goods and services in the shop window but have no money to buy them is the classic failure of capitalism.
Unfortunately I have to do some real work right now, so I can’t go on about how that failure of capitalism has its epicenter on Wall Street, how Wall Street money traders are not the intrepid capitalists who create jobs and prosperity, that they’re not at all what the Tea Party likes to think of as capitalists — even though they spend their whole lives manipulating financial capital. (Have I mentioned yet today that financial capital and real capital aren’t the same thing?)
So in my time available I’ll just ask: can Occupy Wall Street do for capitalism what The New Deal managed to do? Can it demonstrate the flexibility and ingenuity of capitalist societies, their ability to manage capitalism for the benefit of all?
Can it once again prove Karl Marx wrong?
Nice line from The New Arthurian. (Update: He reminds me that I should have included his comment, which I agree with: “Not that there’s anything wrong with that.”)
If the reserve requirement is 10%, it shaves about ten percent off the interest banks receive on their money-printing loans. If their loan rates are running at 5%, it costs them 0.5% a year. Not a bad price/privilege ratio.
See also the peanut-butter metaphor he links to as an explanation of interest on reserves.
He really said that. I guess people take their kids to annual checkups because they want to signal their high status to others.
This is totally in keeping with Jonathan Haidt’s findings: on measures that “have anything to do with compassion,” libertarians are at the very bottom of the political spectrum.
Likewise Tyler Cowen’s paean to autism, whose defining characteristic is an inability to empathize with other humans.
You’ll constantly hear libertarians claiming that their ideas and policies would be “good for the poor,” but given their measured failure of empathy and compassion, you have to wonder whether those claims might merely constitute false status signaling in a species for which empathy and compassion are hard-coded values.
I really should stop donating page views to the Koch Brothers-funded GMU/Mercatus cabal (and you’ll notice I don’t provide a link here; you can Google it if you wish). But it’s like watching a very well-choreographed train wreck: it’s hard to look away.
Update: I find that some obvious googles don’t turn up Kling’s post, so here’s a link with a “nofollow” tag so the post doesn’t get any Google juice from it.
Three updates on this topic:
1. I’m pleased to receive at-least partial support for the notion bruited in my previous post on this topic (“Savings Equals Investment Equals…Zero?”) in comments from Nick Rowe, whose knowledge of economic theory and Economics history exceeds mine as Jupiter exceeds Mercury:
Why *should* we define “saving” as “Y-T-C”? We (economists) define it that way, but we don’t have to. Is this the best way to define it? It’s not obvious that it is.
2. In comment discussions with Nick, I managed to crystallize in brief why the NIPAs’ S=I identity and definition of “Savings” don’t make sense to me:
According to the NIPAs, fixed investment is both spending and saving. If that’s not contradictory enough in itself, think about it: if you take $10,000 out of the bank and buy ten computers for your employees, is that “saving”? Not, it seems to me, by any known understanding of the word. Exactly the opposite, in fact: it’s spending out of accumulated savings — dissaving.
You can only make it make any kind of sense if you 1. think in national aggregates, which is reasonable, and 2. assume that all savings are instantly (within-period) intermediated into fixed-investment spending (none into consumption, and none stored away in financial assets), which is both unreasonable and false.
Update: Or: all withdrawals/dissavings used for fixed investment spending are instantly (within period) and exactly deposited as savings by the recipients, but this is not true of consumption spending: that money never touches ground as “savings,” but simply recirculates in infinite regress. IOW, consumption spending never touches the banking system. Plausible? Useful?
3. In a passing reference by Randall Wray, I came across Lawrence Ritter’s 1963 “An Exposition of the Structure of the Flow-of-Funds Accounts” (PDF). These accounts, first published in 1955 (20+ years after the NIPAs), finally did for the financial economy what the NIPAs did for the real economy. Ritter sought to explicate them so economists would start actually using them in their work.
But I thought I noticed a big problem in the exposition, and it seems I’m not alone. Roland Robinson points it out in a Discussion note on the article in the same issue of the journal: “The Flow-of-Funds Accounts: A New Approach to Financial Market Analysis” (sorry, gated). And Ritter acknowledges Robinson’s issue in the article proper.
Here three paragraphs from Robinson’s note that lay out the problem (emphasis mine for easy skimming):
Assets in the flow-of-funds balance sheets are shown at market value. This procedure is both logical and convenient. It leads, however, to a mixed character in other segments of the accounts. If the flow accounts are derived from the balance-sheet accounts by changes in asset levels, these changes include a composite of true new flows of funds and of capital gains and/or losses. If the “saving” account is residually derived from such changes, it includes a great deal more than the difference between receipts and consumption expenditures on current accounts; it also includes the effects of capital gains and losses.
Saving and investment could be derived from the national income accounts, in which case the flow-of-funds accounts would not balance. Since I feel that this procedure would have little merit, let me concentrate on an alternative treatment of the first choice outlined above.
Economic incentives and behavior are probably deeply influenced by capital gains and losses. [Gee -- ya think? SR] The Goldsmith wealth estimates have shown capital gains to have been as important as saving in terms of current dollars as a source of wealth. Estimation of capital gains and/or losses and assignment of them by sectors would produce greatly improved accounts and would create the possibility of far more meaningful economic analysis. The process of introducing capital gains and/or losses to the accounts, however, would involve a number of sticky technical problems.
This pretty much echoes what I said in various other ways in the previous post. It’s always nice to feel validated.
But I’m still hoping that some of my gentle readers will be able to blow holes at the waterline of my thinking here…
A Lean, Mean Fighting Machine: Radical Plan for Cutting the Defense Budget and Reconfiguring the U.S. Military
This is not some limp-wristed notion from a coastal-elite dressing-gown blogger. (That would be me, caricatured uncharitably but not completely inaccurately.)
It’s from the man who one Army National Training Center official described,* in 1997, as “the best war fighter the army has got.”
Douglas Macgregor thinks we can cut the defense budget by $280 billion over ten years (above and beyond the $450 billion already in the cards), while maintaining our influence in the world and increasing our homeland security.
But the message for Republicans and Democrats alike should be that cutting defense doesn’t mean going defenseless. It means reducing America’s commitments overseas — the latter-day version of “imperial overstretch” — and changing the way the United States thinks about warfare. There’s a way to do this, one that will allow for deep spending cuts, but in a manner that will preserve and enhance the U.S. military’s competitive advantages while improving American national security.
For your delectation:
Hat tip (and further discussion): Mike “Mish” Shedlock.
*Sorry, this U.S. News and World Report article (07/28/97, Vol. 123, Issue 4) only seems to be available through a gated source. You’ll need university affiliation or some such to get at it. Why doesn’t USNWR post their archives?
I find the following graph singularly depressing. It shows the chances of becoming unemployed (red), and the chances of exiting unemployment (blue), since 1967.
The odds of becoming unemployed today are basically identical to 1967.
The probability of exiting unemployment — the “escape rate” — has plummeted over that period. (Though it was roughly flat to slightly declining — with large variations — from the mid 70s to the mid 00s.)
Anyone — Keynesian or otherwise — paying attention to the last thirty years of empirical macro never expected much crowding out of financial capital in the first place.
Two words explain all you need to know about our national economic debate.
I think you know what those two words are, and what the rest of the article says.
Try it yourself at home. For extra fun, try adding “Mitch McConnell,” “John Boehner,” or any other Republican to the search.