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When capitalism no longer works - a profit warning

De Koning, Kees (2012): When capitalism no longer works - a profit warning.

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Both the United States and the United Kingdom publish data on the balance sheet of Households and Non-profit organisations. Eurostat is studying the issue.

The time series provide a unique tool to assess whether collectively the individual households are getting richer or poorer. They allow to establish the collective profit and loss account for a country: Its Country Profit or Loss level. The P/L data are more relevant than economic growth data as they include incomes and asset values at the same time. The P/L result is the true reflection of the interaction between assets ( financial and non-financial) and incomes -consumption spending, tax transfers and savings-.

All funding sources in a country are directly or indirectly provided by the collective of individual households (sometimes from overseas). The managers of these assets are risk managers on behalf of the households.Only in the case of a home, owned by the individual, is the individual the personal risk manager. Risk managers can make mistakes. When banks made mistakes -like in the subprime mortgage debacle- risks were spread around the world. The multiplier effect was more than 10 for the U.S. as the whole subprime market size was U.S.$1.2trillion and the 2008 U.S. Country Loss was $12.6trillion.

The collective households' reactions to these losses were to start paying off home mortgages and consumer loans, rather than incurring more debt. The effect was a relative decline in consumption levels, which led to higher unemployement levels. The banking crisis simultaneously led to sharp increases in government debt due to bail-outs.The effect was also a capital flight to safety, to preserve the principal sum of savings. A key point is that banks can force a depreciation in values of homes, which is self destructive and not in line with economic values. Investors and governments can do the same for other government bonds. On basis of these balance sheet data and the derived P/L accounts, some policy recommendations were formulated in the paper:one of a preventative nature to avoid future crises; the others to stimulate economic growth through economic easing using pension fund savings to turn such savings partially into cash and back into savings later. Also a possible solution for avoiding capital flight has been included as such actions harm Country Profit making both in the capital exporting as well as the importing country. For countries like Spain and Italy use of the European Financial Stability Fund could be a solution.

Finally capitalism no longer works if it cannot solve the excesses of unemployment as are happening in some Eurozone countries.

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