https://thenextrecession.wordpress.com/2021/10/25/stocks-profit-margins-and-the-economy/ The US stock market went back to record highs last week. This was despite media talk that the recent rise in goods and services prices inflation in the major economies may continue for some time ahead. This led to further hints that not only would central bank injections of credit money (quantitative easing) be tapered back soon; but also central banks would soon start to hike their policy interest rates. The Bank of England chief economist, Huw Pill, a follower of the hard-line ‘orthodox’ German economist Otto Issing, emphasised that the central banks’ task was not to boost the economy but to control inflation. Financial markets took that to mean that the BoE would be hiking rates very soon – even at the next November meeting of the policy committee. As a result, bond yields (the rate of interest on government bonds purchased in the bond market) rose to levels not seen for some time.
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Indeed, if we look at profit margins ie profits per unit of output, then margins appear very high indeed, at around 14%, up sharply from the pre-pandemic. Corporations in the US and Europe have been registering huge profits this year that comfortably compensate for any reductions during the pandemic slump.
And yet the rate of profit itself is low
So then, the question is what is driving profit margins above water? The answer is extraordinary government subsidies.
And yet, investment and tangible benefit to the overall health of the economy is at an all time low.
Capex/depreciation here measures how much of machinery, equipment, and land utilized is being used to produce things. It’s consistent decline is heavily due to a lack of investment in the economy in actually existing stuff and not fictitious capital.
And onto final predictions
The fantasy world of rising stock market prices can continue further, but the market is based on foundations of shifting sand. Sure, profit margins in the tech sectors in the major economies are still strong but outside of that sector, margins are tight. With inflation rising, central banks are increasingly having to consider ‘normalising’ monetary policy and hiking rates. If that happens, then the costs of debt servicing will rise. And if the shortage of labour in key sectors continues, then wages could also move up. Profit margins will then contract and the great stock market pandemic rally will reverse in 2022.
A necessary call to decouple government policy and people’s investments and savings away from the stock market or else we’ll all tank with it.
At this point, the government would get a better return on its investment, and subsidies here are investments, if they nationalized all these industries so as to improve accountability and ensure ample investment back towards reality.
