What Drives Corporate Profits?
October 21, 2012 § Leave a Comment
In a heady story over the Business Insider today Joe Weisenthal walks us through an analysis as to why corporate profits are so high right now. It generally all comes down to this chart:
It shows the various drivers and drags on corporate profitability. So for example, household savings are always a drag on profitability, since that’s money not spent to buy goods. Net investment helps boost corporate profitability, since that investment will flow to the profit line of another corporation. When the government is in a surplus, that reduces corporate profitability, since that means the government is taking in more than it pays out. When the government is in deficit, that boosts profitability.
As you can see in the chart, what REALLY stands out is the huge explosion of the red area (representing government deficits), helping to drive corporate profits at a time when nothing else is doing the work.
via Business Insider.
So what exactly does that mean? It means that those out there who are complaining about high corp. profits (which by the way drive stock prices up) are not helping the working man should take a look at the root cause of these high profits. i.e. Government debt.
What corporations know is that the current spending levels are unsustainable. We must stop spending money we don’t have. As a result of this, government deficits will go down and so will corporate profits. This is why corporations are trying to save as much cash as they can right now. Because they know that tough times are coming and today they need to save like they have never saved before.
Similarly, you should be saving. We without a doubt have inflation so it makes little sense to hold on to a lot of cash. But you should be paying down debt and getting your own financial house in order. Tough times are coming and today you need to save like you have never saved before.