Tuesday, November 20, 2007

Flow of Funds Fun! v.4

This chart shows the total profits (before tax) of the domestic financial corporations divided by the profits of the domestic financial, farm, and non-financial corporations as seen in Table F.7 Distribution of National Income in the Flow of Funds Accounts. The red trend line is a rather useless 6th order polynomial to show the trend my eye seems to see (and biased somewhat by the recent headlines my eyes seem to read).

This chart shows the total profits (before tax) of the domestic financial, farm, and non-financial corporations divided by the total compensation of employees. That's rather unprecedented. It's almost like we were printing our way to prosperity as a reaction to our dotcom bubble bursting. Yeah, well, like that was going to work. Rather than take the medicine we deserved, we opted instead for the "something for nothing" malinvestment stew. Yum, tasty.

The first thought that goes through your head when looking at this chart is probably "Greedy corporations!" However, that's not the thing driving this chart in my opinion. If so many profits were being made and it was sustainable, there would be extra incentive for other corporations to make profits too. Eventually competition within a capitalistic society would rebalance things (paying more for workers and/or having profits come down to more reasonable levels).

Picture a coffee chain. Let's say you are making a lot of money selling coffee. What do you do? You get caught up in the wave of high profits and you expand. More businesses see your success and start making coffee products too. At some point, the nation is engulfed in coffee chains. As long as profits are so high in relation to wages, there's no reason to stop expanding. Right? So what can go wrong?

At some point the market becomes saturated and profits revert to the mean.

Starbucks Earnings: Not Grande
The traffic decline may be a sign that the Seattle-based company is starting to feel the effects of heightened competition and oversaturation, with a Starbucks seemingly on every other street corner.

I'm not going to end it here though. As seen in the first chart, I think we've got way too many banks. How many times do you open up your mail to see a credit card offer? Just how many more credit cards do we really need? I think we've also got too many houses, which is becoming all too apparent. These are just symptoms though (rather nasty ones at that).

By using unprecedented cheap money in the aftermath of the dotcom bubble, we've created one heck of a malinvestment stew. I once read (and I wish I could quote the source) that in the beginning of a great monetary inflation everyone wins and nobody pays. In the end nobody benefits and everyone pays. I think we're well past the nobody pays point.

This is once again not investment advice. I'm just a random anonymous blogger on the Internet trying to make some small sense of how we got here and where we are headed.

See Also:

Flow of Funds Fun! v.3
Trend Line Disclaimer

Source Data:
FRB: Flow of Funds Accounts


Anonymous said...

So, if I'm reading your chart correctly, since 1952 domestic domestic financial, farm, and non-financial corporations have become steadily less profitable - ignoring the recent liquidity pump. Is that the case and to what is that attributable?

Stagflationary Mark said...


As purely anecdotal evidence, I would probably point to the airlines and ever increasing competition.


Will we look back at Micron in ten years and think the same thing?


Another way to look at it might be that the low-hanging fruit has already been picked from the prosperity tree and companies are reaching (leveraging) ever further for the fruit that is left.

How's that for pessimistic?

Anonymous said...

What is included in wages (health benefits, pension contributions, fica, suta etc.) ?

Anonymous said...

What is included in wages (health benefits, pension contributions, fica, suta etc.) ?

Stagflationary Mark said...


What is included in wages (health benefits, pension contributions, fica, suta etc.) ?

Wages and other labor income
Employer social insurance contributions
Wage accruals less disbursements

It looks to me like anything paid to the employee or paid on the employee's behalf. I'd like to dig deeper but...

A Guide to the Flow of Funds Accounts is available. The 1,200-page Guide, published in two volumes in January 2000, explains in detail how the U.S. financial accounts are prepared and the principles underlying the accounts. The Guide can be purchased for $20.00 from the Board’s Publications Services. Publications Services accepts orders accompanied by checks as well as credit card orders.

I think I'd probably spend much of my life trapped in that guide and/or I'm too cheap to spend the $20!