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Stephen Herrington

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Wherefore Art Thou, Capital Investment?

Posted: 06/26/2012 4:08 pm

According to Moody's, American corporations are holding $1.94 trillion in cash. That's equivalent to 15 percent of U.S. GDP. If it were captured by the U.S. economy, that would pay for 25 million jobs for one year. It would boost the economy by, well, 15 percent if spent overnight. It would pay for the Pentagon budget for 3.2 years. I would pay every medical bill in the nation for a year. It's almost equal in size to the Social Security Trust fund. It's enough money to alter the course of global economics. So what's it doing? Is it just sitting there in a bank drawing 1.1 percent interest in a CD?

Seven hundred billion dollars is offshore waiting for Congress to grant a tax holiday before it will come home. If it comes home it will join the $1.24 trillion already here that is hanging out at the hedge fund bar and casino waiting for some delicious shapely 20 percent ROIC investment opportunity to walk in. It's convinced it can get 3 percent gambling in markets. And why not, the only risk is that some Black Swan will come along and wipe it all out. The only problem is that the more money there is in hedge funds, the more likely it is that they will create their own Black Swans with all that money sloshing around piling into commodities and stock future bubbles/busts.

There's enough corporate cash lying around to either save the world economy outright or so distort economies through gambling that governments fall from Madrid to Beijing. The derivatives market defies understanding of what is at risk. The sum of $160 trillion is bandied about as the amount of money, equity and commodity future values leveraged by derivatives. One can imagine that means that if everything goes bad for every derivative at once that the world would be indebted to counterparties for 2.3 times the GDP of the Earth. Can that happen? There's no more AIG, Lehman Brothers and was almost no BofA or Freddie/Fannie or even GM. In 2007-08, Americans lost $11 trillion dollars. It all happened because Wall Street wanted to play with the impossible, risk-free high return investments in the form of derivative based hedging.

The nation's notion of capital needs to be updated to the new reality, no matter how much we once loved thee. Capital is no longer formed, saved up, and then invested in the economy. We have been jilted by capital.

George Bailey's Bailey Building and Loan Association is no longer the business model of America, or the world. Citizens can no longer expect to deposit their money in the bank and have that money loaned out to their neighbors to start a business or build a home. Their deposits are no longer recycled into the economy but may instead end up financing a factory in east Asia, or worse, betting on derivatives in a hedge fund as many American pension funds did in the run up to the 2008 crash.

The reinvestment of private capital in local economies is all but dead. Investment has fled the country for bigger profit margins exacted from labor cost disparities or even fled the real economy in preference for the effortless if insanely unknowable risk of derivative markets. Money accrued by multinational corporations is simply not, with some exceptions, reinvested where Americans need it to be invested -- in America.

Adding to the hoard of corporate cash is not only pointless in this new capital investment reality, it's actually dangerous.

More accumulation of wealth means more money actually taken out of the economy, the exact thing that conservatives unquestioningly and mindlessly accuse the U.S. government of doing. Government revenues, taxes, are spent and are a component of GDP, used to buy product from the private sector directly or indirectly through the wages paid to and spent by government workers. There is no magic government hole into which taxes disappear out of the economy -- with the possible exception of defense. Hedge funds are the magic hole casinos, into which accumulated wealth is poured with the promise of high return and no risk -- no risk like AIG counterparties and ultimately taxpayers enjoyed. Basically, private wealth, what used to be nominally capital, is now a hole into which the public wealth of our and other nations is being poured with every dollar of profit they accrue.

The more wealth there is floating around without a job, the more it's free to chase casino profits. Commodities futures trading used to be the exclusive province of sellers and consumers of the products whose future price is bet on. Participation was limited to those who were actually selling and consuming commodities and a small minority of speculators until the GOP Congress deregulated it in 2000. Globally, the effect has been inflationary in commodities and has set off the fall of mid-East governments and caused unprecedented short-term spikes in gas prices. All that wealth, chasing a return, has caused booms and busts on a scale and frequency that the world has not seen since before banking and commodity regulations were put in place in the New Deal era.

Sure, it's big party for those that have leveraged and raided corporations and won big on big bets. But the pity is they will lose it all eventually. It will be worn away by the very boom and bust cycles its speculations cause. There is no perfect hedge to make profit whether the roulette wheel comes up red or black. You have to pick at least the percentage of times it will be red or black and go more heavily on it. Anything else is just hedge fund salesman fantasy. The profit came from us, our work and our consumption, and to see it pissed away by the cleverness of Wall Street instead of reinvested in the economy is, to understate it, perturbing.

The world, it seems, can only countenance just so much wealth in high concentrations. All the capital this nation needs for a spectacular recovery is leaning on its shovel and waiting for the foreman to come along and tell it what to do. Money, it seems, has developed a poor work ethic. It needs the American public to tell it what its job is, what we expect of it. If it refuses to then do its job, then there is no point is even having it around, much less create more of it. To paraphrase Romney, I like to fire money that's not providing services for me.

If corporate money doesn't get off its ass and start participating in the economy, doing the job for which we collectively created it, we might just as well tax it all back and put it to work ourselves.