Market "inefficiencies", more than risk compensation, produce all the profits on Wall Street. Theoretically, under Hayekian free market principles of price equilibrium, it should be unnecessary to chose the smart investment because all instruments are "priced" the Hayekian ways to make return on investment come out equal in the long run, risk being always fairly compensated for. When they don't come out equal, the situations are called market inefficiencies. So, by definition, all opportunities for financial profit reside exclusively on market inefficiencies.
With increasing sophistication and complexity of new marketable financial instruments, be they debt or equity or derivatives, the astute has a distinct advantage over the unaware masses. This advantage constitutes a massive, systemic transfer of wealth, greater than any government social entitlement program.
Yet, unlike traditional inventors, these groups of the financially astute contribute not at all to economic production. Often they purposely create market inefficiencies in order to capture profit within a short time frame. The recent daily volatility of stock prices represents one example of these manipulated inefficiencies. The exploitation of liquidity premium is another one. Others are less visible, such as the inverted interest rates curve that precedes recessions. The current SS proposal only highlights this pervasive arrangement. Ironically, the SS proposal will work on a sub optimization level, because, like the debacle of LTCM, when SS funds go into the equity market, it will be deemed to big to fail. It is good for the SS Trust Fund, but bad for the economy. So there is an anticipated additional US Treasury/Federal Reserve Bank guarantee that the market will not crash, which is why the market will embrace the proposal with open arms. It is a game where profits are privatized, and losses are socialized and express themselves in high interest rats and high unemployment and depreciation of local currencies. In that sense, the American/global economy is already half socialistic: the loss half. The question is: when are we going to socialize the profit half for balance.
Henry C.K. Liu
Doug Henwood wrote:
> Roger Odisio wrote:
>
> >When you say "what matters is profits", Doug, do you mean for valuation
> >purposes, i.e., to investors of capital?
>
> Yes.
>
> >Then shouldn't we be looking at
> >the profit *rate* on investment, not share, which is just a share of
> >revenue?
>
> I'm talking profits as a percentage of GDP.
>
> >Investors maximize rate of return capital advanced, not share of
> >revenue. And it is profit rates that must be analyzed to understand
> >economic growth.
> >
> >If you look at what I think is the best measure of profit rate--nonfinancial
> >corporate after tax profits plus interests payments divided by net
> >nonfinacial nonresidential fixed capital plus inventories--however, you're
> >likely to get a similar result.
>
> The profit rate so computed and the GDP profit share move pretty much in
> tandem, and the profit share figures are available just two months after
> the end of every quarter.
>
> >Maybe downward a bit since WWII, but
> >unlikely to be significant. At least that's what I found, though I last did
> >it quite a few years ago.
>
> Most (bourgeois) measures of U.S. profitability fell from the late 60s into
> the early 80s, and have risen since. Anwar Shaikh has unpublished data
> showing a similar pattern for his Marxian profitability series too.
>
> >But one large caveat. Much of US based capital's profits comes from foreign
> >affiliate operations not refelcted in GDP. Foreign affiliate data sucks.
> >Still, foregn affiliate production as a share of total corporate output has
> >been growing for about 40 years now, and it's reasonably clear that it has
> >historically produceed higher return rates than domestic production. So
> >total returns to US based capital may have actually been rising, perhaps a
> >bit.
>
> I looked at all these numbers the other day. Foreign affiliate data ain't
> so great - though I think saying it sucks is a bit too strong. According to
> the flow of funds accounts, U.S. nonfinancial firms direct investment
> abroad has averaged about 10% of their domestic capital expenditures over
> the last 15 years. Significant, but not overwhelming, and weak evidence for
> a significantly higher rate of profit available abroad. And here's a
> summary table of "investment position" (assets valued at historical cost),
> income (profits), rate of return (income divided by assets), and percentage
> of world total for position and income, for U.S. multinationals in 1997.
> Dollar figures are in millions.
>
> percent of total
> investment rate of -----------------
> position income return position income
> First World 575,708 64,522 11.2% 66.89% 64.07%
> Canada 99,859 10,692 10.7% 11.60% 10.62%
> Europe 408,964 46,728 11.4% 47.51% 46.40%
> Asia 66,885 7,102 10.6% 7.77% 7.05%
>
> "Third" World 279,482 35,805 12.8% 32.47% 35.56%
> Europe 11,970 1,141 9.5% 1.39% 1.13%
> Lat Am/Car 172,481 19,992 11.6% 20.04% 19.85%
> Guatemala 357 72 20.2% 0.04% 0.07%
> Mexico 25,395 3,969 15.6% 2.95% 3.94%
> Asia 75,819 11,223 14.8% 8.81% 11.14%
> China 5,013 810 16.2% 0.58% 0.80%
> Indonesia 7,395 1,741 23.5% 0.86% 1.73%
> Singapore 17,514 2,991 17.1% 2.03% 2.97%
> Africa 10,253 1,887 18.4% 1.19% 1.87%
> Middle East 8,959 1,562 17.4% 1.04% 1.55%
>
> Doug