Brad DeLong asks “Where are the stabilizing speculators?”
We know why people don’t turn around and become suppliers of liquid cash money when the money stock contracts: they can’t, for nobody else’s liabilities are good as payment for transactions in currently-produced goods and services. But surely Berkshire Hathaway or Microsoft or Northrup-Grumman could have sold lots of bonds at attractive values. Why didn’t they?
My answer: Microsoft is not a financial corporation. They do not borrow in order to lend again, they borrow in order to purchase productive capital. Assuming that Microsoft has purchased all the capital it needs, the question becomes one of leverage, or debt to equity ratios.
Why would a non-financial corporation lever up when its net-worth is decreasing and its revenues are declining?
Recall Jan Kregel’s maxim that the primary difference between neo-classical and Keynesian economics is the former ignores the effect of changing capital values.
Here are some charts:
- Current dollar net operating surplus (NOS) of non-financial corporations, net of corporate taxes paid, divided by the current dollar book value of non-financial corporations (taken from the flow of funds B.101 table).
- NOS divided by the current value of corporate produced fixed assets, as measured by the BEA Fixed Asset tables. Produced assets exclude land.
By either of these measures, the return on assets was not so low as to cause a cataclysmic decline in output and employment. Over the last 50 years, the economy has seen worse.
But when deciding to invest or purchase new capital goods, investors take changing capital values into account, because why would they suffer a holding loss when they can hold a treasury bill (or just cash), and wait until capital values bottom out, avoiding the loss, and purchasing capital more cheaply at a later time?
The total return takes into account holding gains and losses to book value (from the Flow of Funds R.102 table) as well as the net operating surplus after tax. One of these charts is not like the other, and can help illustrate both the zero bound as well as why this last downturn was so severe.