At the G20 in Washington (Thursday 18 and Friday 19 April 2013), there was talk of a three-speed world: the emerging countries are back to growth; America is doing better than expected; while Europe suffers. All the latest data confirmed this scenario, which we can therefore consider the basic scenario for this year.
In its sphere, there are several problems and some risks (just remember the monetary excesses of Japan on the one hand and the postponement of the US debt reduction maneuver on the other). But there is one point which, at first glance, surprises, but then arouses more doubts than hopes. And it is a problem for which reliable explanations are still lacking. We refer toAmerican corporate accounts, which are now characterized by two aspects:
1. the return to high rates of profit (with a reduction in the cost of labor per unit of product, i.e. allocating all productivity gains to profits);
2. a significant increase in liquidity in the balance sheet data of the companies themselves: profits are not invested in production, but kept in liquid form.
Two alternative explanations are possible for this second aspect – which has assumed increasing importance in recent years, but for now no rigorous analysis has been published (in reality, the issue had already been tackled by the IMF – see IMF 2006 – with reference to the past, and also Brussels a year ago – see EC 2012 – had discussed corporate portfolio adjustments).
The first explanation – reassuring – concerns precautionary management of “stocks”: it is a trend that has lasted for years and leads companies to reduce physical warehouses (of raw materials, components, finished goods), recovering the necessary flexibility with equivalent liquid assets. All this also means more profitable management: stocks once held were only a cost, today's stocks have a positive return, albeit low.
The second – worrying – explanation is this: companies hold liquidity because they don't know when, how, and where to invest. In other words, they forgo financing the necessary future growth, and therefore they will not have it.
At this point, it is clear that since there are clues for both explanations, the truth will probably be given by some (weighted?) average of the two. It is not indifferent to have an answer, because the consequences that derive from it are different: not only do the long-term growth prospects of the economy change, but also the size of the exit strategy of the Fed. If we want more liquidity, …we need a bigger Central Bank (in terms of the size of its balance sheet).
However, the contrast with the Eurozone is striking. Here we have no average data comparable with those in the USA. Monetary policy is permissive, but the average profitability of firms has not increased much. And more than "excessive liquidity" there is still talk of “poor credit” (a problem we have dealt with several times on these pages, such as in the analyzes of the 15st January and 13 March 2013, and in the article “A Finance for Development” posted on the bulletin board).
Of course, there is a lot of variance, and successful businesses have returned to investing rather than adding to their cash reserves. But for the eurozone as a whole, it doesn't appear that excess liquidity has built up. Probably because the ECB limited itself to restoring what the Eurozone "lost" against the rest of the world. Too bad the rest of the world doesn't reciprocate… by financing our SMEs!
