Corporations Hoarding Loot

Our Blindness towards Hoarding

Today I listened to an "economist" on Bloomberg talk about the slow US economy and how "neither fiscal nor monetary policy" could spur more growth. For him and the businesses he serves this is 'caused' by excessive "government regulation." We've been hearing this claim since the late 70s and from the 80s to about 2008 policy makers bought it. It is not true. But nobody debated him when he started. Now that the Trickle Down Crowd ideas have been refuted, they claim nobody knows what to do. None of that is true! What causes recessions and depressions is looting and the hoarding of that loot!

Why Bloomberg is Wrong

My friend Kimball Corson was talking about the same subject earlier this year on facebook and I copied some of what he says. I've understood it viscerally for a long time, but explaining it and dealing with counter arguments has required years of study. I started this post with the bloomberg argument, but my friend Kimball Corson explains why Bloomberg is very wrong clearly enough that I wrote down what he said. Even so I started this post as part of my self study,...

...but with the GOP economic proposals I'm publishing it now because the current Republican tax bill will make our hoarding problem worse, not better! Giving tax breaks to people who don't need them and have no incentive to do anything useful with them is wrong headed.

The best solution for wealthy individuals hoarding loot, is to tax a portion of it. That means estate taxes, progressive income taxes and keeping the exemptions reserved for labor and productive investment. This "tax reform" is anti tax reform.

Liquidity Traps as a Special Case of Hoarding

My friend Kimball Corson's argument for why they are wrong is based on his lifelong understand of both Keynes and Friedman. He wrote on Facebook during the summer. This is compiled from a number of posts he made on Occupy Economics facebook page. I didn't record the exact date and time.

“It occurs almost to next to no one that the core reason for our economy being held back and stuck in a rut of very slow growth is our excessive income inequality and the high liquidity preferences of the rich and wealthy.” [Corson]

Now I know the folks on Wall Street don't want to hear that! But the argument is very clear. When John Maynard Keynes talked of the "liquidity Trap" in 1930s, the economy was more like today than the 1950s when Milton Friedman, and the Chicagoans, Virginians and Austrians were cooking up their ideas. We humans are always fighting the last war, and conservatives seem to long for economies like those of the late 19th century or the interwar period (WWI & WWII) when inequality was accepted but the wealthy and a few thousands of others, were making a lot of progress. The policies that addressed the liquidity trap of the great depression led to other issues that were poorly addressed by conservative economists, partly because they idealized the previous times and despised Keynes!

"Liquidity Trap" as a euphemism for Burying Loot

What Keynes called in his nice legalistic language a "liquidity Trap", was the result of the wealthy hoarding portable "secondary market" goods and portable wealth, out of uncertainty over the value of investing in the "real economy." What would be used as "money" otherwise, gets invested into portable treasure, put in literal or figurative treasure chests (Treasury Bonds are kind of a figurative treasure chest), and made unavailable to circulation.

The Size of the Problem

"A "Liquidity Trap" develops when people prefer hoarding these kinds of portable assets to investing in markets and market goods.

“Consider the size of the problem. Those hoarding huge sums are corporations and the rich and wealthy who control them. The top 50 U.S. companies hold $1.4 trillion just in cash. Total corporate hoarding of cash is estimated to be 2.5 trillion and that doesn't include near cash or personal hoarding by the rich and wealthy. Much of the increase in the stock and bond secondary markets is their hoarding,”... [Kimball Corson]

A Critique of Friedman’s Core Analysis on Government Spending

My friend Kimball Corson also explained why Friedman never was prepared to analyze what is going on now. Economics is a chaotic system, and the features of our economy, while similar to that of the late 19th or early 20th century, are very different from the mid fifties:

"You must understand the center of Friedman’s teaching career was in the mid-fifties when income inequality was not an issue and hoarding was much less of an issue. Friedman never focused on Keynes’ idea of liquidity preference and the liquidity trap at all in all the classes I took from him for the four years when I took all of his courses (1965-1969). He talked only about the demand for money, which I argued, as Keynes did, was really a demand for liquidity not just money. That was a close as he got. Nobel laureate Robert Mundell, America’s most articulate Keynesian (who later developed supply side economics, just as a mental exercise) was teaching at Chicago at that time and he covered those topics, but only very briefly." [Corson]

Says' Law Does not always Apply

Keynesian economics had succeeded in reducing hoarding. Money is what drives the economy, as barter fails. But now hoarding is as much a problem as it was in the 30s:

"Hoarding was not a serious problem then as it had been when Keynes wrote the “General Theory” in the thirties during the great depression. Consequently, Says’ Law came close to applying in the 50’s and 60’s so GPD = National income = Y = C + I when S = I which is what is still what is taught in basic mainstream economics courses with interest rates as the equilibrating variable on S = I."

Says' Law may have worked in the 50s, because the economy had been engineered in that direction. But:

"Later, as now, with hugely excessive income inequality, hoarding by corporations and the rich is a huge problem so GDP is not equal to Y and Y= C - H where H = S – I."

"Apple alone holds 181 billion in cash. And again, income hoarded is all income not spent on current consumption or current real, new investment, what we must have for GDP to = Y. The rich have so much money they can’t spend it all while those much poorer spend every cent they can get (and sometimes more, using pay day loans). Hoarding occurs, as Keynes explained, when people, mainly the rich, have a high preference for liquidity and stick hoarded money in secondary financial markets and cash where they can get it to cash very quickly."

Real investment ties money up in business expansion and new plant and equipment and does not satisfy high liquidity preference. So a high preference for liquidity decreases both C and I." [Corson]

Income hoarded is loot. It is turned to treasure or wasted. More importantly it is not available either for consumption (C) or Investment.

"Next, we must keep in mind, Friedman’s political biases. He hated for the government to interfere in the economy and its markets and publicly espoused the view that markets worked correctly and mostly flawlessly. However, he told his graduate students he knew markets made mistakes, but he believed regulators could not correct or prevent them because they were captives of their industries – namely, bought off. So Friedman was at heart and mistakenly, a core enemy of Keynesian stimulus spending and economic intervention, EXCEPT, he conceded the Fed had to interfere and intervene to keep the economy on track by regulating the money supply. This is the background needed to understand Friedman." [Corson]

Pirate Loot

The result of such hoarding is slow economic growth, unemployment. Corporations use such hoarded wealth to buy back stocks to increase their face value, but they don't invest in plants, stores, equipment, raw materials, all the things that constitute actual capital...

... “plus cash saved in banks, a small portion of which gets loaned out for real investment but later, with delays. Just world billionaires are hoarding $1.7 trillion and that is just in cash only and the US has over half of them. Total mostly cash hoarding is on par I suspect with total QE and open market operations toward the same end probably about $5 trillion mostly in cash and much more if we include much of the increases in stock and bond secondary markets as near cash. People don't understand the scope of the problem.” [Kimball Corson]

The Scope of the Problem

The scope of the problem is that all these privateering corporations are loaded with cash, with no customers to buy anything, and not willing to invest it in anything that won't generate immediate profit. And since the economy is lackluster, they'd rather put it in their treasure chests and bury it for later retrieval. Think of them as Pirate Captains looking for a place to put their loot. And hoarding is usually in cash, cash equivalents, cash substitutes or portable wealth:

“Clearly mega bucks are involved, but most think just cash can be hoarded and that is not true. What is hoarded is what is not spent of current income on current consumption and current real investment and those hoards build up over time as part of accumulated wealth so I suspect my educated guesses are mostly for cash recently. Value that can be quickly liquidated to cash.” [Corson]

Liquid Assets Are Treasure

Treasure includes paintings, artifacts, high value art in general, expensive homes are not portable treasure, but they usually invest in them to store their loot and live in. Kimball put it in mathematics:

“Because so few understand Keynes, as I explain him here, useful data are not gathered and are only kept partially and then often just for cash. One way of estimating current hoarding would be to go the other way and estmate Y - C - real I - net exports. Work for someone.” [Corson]

Y is GDP (or Gross income).

C is consumption.

I is Imports (in this case).

“An notable exception to this national and partially willed blind side is Larry Summers who, seems to have turned over a new leaf, and is tip-toeing up to these issues, knowing they are political hot potatoes. Now that he has been allowed back into Harvard's economics department, after a period of banishment to the Kennedy School of Government for his many, earlier sins, he faces the threat of a research funding squeeze for the department if he become as loud and clear about these matters as I am, but I can tell he wants to be.” [Corson]

Note, the Austrians, Virginians and Chicagoans still dominate funding for economic research and teaching.

“Most others remain out to lunch or effectively silenced. Yellen and the Fed are clueless. So is Obama. So is our austerity loving congress. There are very few wrinkles on the horizon for the controlling oligarchy, but Summers is twitching.” [Corson]

Conclusion

Point is that the implication of hoarding is that circulating more money when the economy is dominated by pirates, just leads to more buried caches of treasure.

The other point is that Government printing money only works when that money is spent either into Investment, to free up or generate resources or consumption of available resources. It also only works when the measure of value of those goods is in sync with the total value of all those goods. Too little money and people are frozen out of markets. Too much money compared to the goods available and the price of the goods inflates.

The final point is that giving more money to people who aren't going to put it to work in the real economy is a recipe for disaster.

I have a lot more to say, but that is enough here.