Saturday, July 28, 2012

Corporate Profits, Wages, and Interest Rates

July, 27, 2012
Third Time's the Charm?

Click to enlarge.

I've been thinking about this chart and it dawned on me that I had seen this shape before. I now offer a new chart for you to ponder.

Click to enlarge.

The line in red is the inverse of the 10-year treasury yield.

If this relationship has any merit, then as interest rates approach zero corporate profits divided by wages approach infinity.

There are two ways this can happen of course.

1. Corporate profits can go higher.
2. Wages can go lower.

The former is great for the 1%. The latter is not so great for the 99%.

I would like to remind everyone that correlation does not prove causation. I think a case could easily be made that interest rates are falling because wages are struggling compared to corporate profits. I might even be so bold as to make such an argument.

Source Data:
St. Louis Fed: Custom Chart


Scott said...

The three charms seem to have begun once Volcker's tenure at the FRB ended. Coincidence? I don't think so.

Scott said...

In theory, the shares of listed public companies in the US markets are largely owned by institutions; that is to say pension funds and other pools of capital contributed by large groups of relatively small investors. So theoretically, stakeholders in these institutions should demand dividend distribution or liquidation of shareholdings to make up for lack of wage growth.

Mr Slippery said...

Speaking of profits over wages, JC Penny plans to eliminate ALL check out clerks. Oh, my.

I think you've been talking about the decline of retail jobs. This is another nail.

Stagflationary Mark said...


...pension funds...

That which must not be named! Well, unless one is heckling the extrapolation of 8% return assumptions well into the distant future while simultaneously keeping inflation at 2% that is.

Stagflationary Mark said...

Mr Slippery,

I think you've been talking about the decline of retail jobs.

That which must not be named! Well, unless...

I'm having this strange feeling of deja vu. ;)