“Grow or die” is one of the corporate mantras of the late 20th century. The peculiar shape that corporations now take, courtesy of the perversion of capitalism that is modern finance-driven corporatism, requires constant growth. Rather like great white sharks, which must keep swimming to avoid suffocation, modern corporations have had to keep growing to avoid seeing their stock prices punished by an increasingly avaricious Wall Street.
From 1948 to 1985, the financial sector accounted for around 12 percent of American corporate profits, never reaching 20 percent nor dipping below 5 percent. After 1985, however, the profits of the sector rose dramatically, going from 19 percent in 1986 to 41 percent in 2000. That meant that more than 40 cents out of every corporate dollar of profit was paper profit, not generated by actual wealth-generating activity, but by monetary inflation and corporate gambling. Simon Johnson of the Atlantic provides a very useful chart here in company with his excellent article on what he describes as having been a quiet coup.
Since paper profits cannot generate real wealth, but can be exchanged for it, this had the result of creating a monetary illusion of national wealth and economic wellbeing that was first reflected in the tech equity bubble, and then again in the real-estate bubble. But none of the profits in those sectors were ever genuine, which is why the financial corporations that recorded them were not able to make use of them to generate additional profit and why they are in such dire straits today.
Complicating the problem of the paper profits of the financial sector is the fact that due to the bizarre incentive structure created by a stock-option driven reward system, many of the non-financial corporations evolved into quasi-financial corporations themselves in search of these inflated profits that would drive up their stock prices, and as a result, their executive compensation. For example, GMAC, the financial operation that GM partially spun off to Cerberus in 2007, recorded profits equal to one-third of GM’s total profits before the fall 2008 financial crash began. Even worse, many large companies increased their sales through mergers and acquisitions funded by taking on corporate debt, a risky action made all the more easy by the Federal Reserve’s relaxed monetary policy.
Debt for corporations is rather like steroids for athletes. It pumps the company up and provides it with enhanced capabilities in the short term, but is extremely detrimental to the long-term health of the corporation. Many otherwise perfectly healthy companies have been forced into bankruptcy, not because they had no customers or were not able to sell their products at a reasonable profit, but because they could not do so while simultaneously paying off the debt with which they had previously expanded.
The $1.1 trillion plan announced by the smiling leaders of the G20 nations is similar to the attempt of corporations to grow through leverage in that: a) it is an attempt to solve a problem by growing larger, and b) nearly all the money that is to be spent will be borrowed. This vast increase in government spending will have an economic effect, indeed, in the technology sector the effect of the previous stimulus plans can already be seen due to increased orders and action plans from government agencies. However, this is not a sign of a positive foundation for future economic growth; it is instead the very misallocation of resources problem that is always created by Neo-Keynesian-based economic stimulus.
This means that any benefit from the global stimulus package will be short lived and concentrated in a few very specific areas, while the effect of further increasing what is already a staggering amount of government spending will have widespread negative ramifications that will last for many years into the future. The G20 plan may buy the world some time before the ongoing recession is transformed into what can be recognized as another great depression, but in doing so, it is likely to extend and exacerbate the long-term economic doldrums.
In truth, the phrase “grow or die” is somewhat of a misnomer. “Grow and die” is a more realistic expression which unfortunately encapsulates the probable fate of the G20’s plan to “save the world” by putting it on financial steroids.
