Alex Raffe suggested that “you seldom sit at a crossroads and know its a crossroad”. Yves Smith, author of the blog Naked Capitalism and “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism” along with Rob Parenteau, the head of a global financial advisory firm and the editor of The Richebächer Letter think we are at the juncture and wonder if we realize which choice will bring the best choice for our future. The choices are simple, at least on the surface and once they are made, the result will trickle down into your retirement plan.
Mr. Smith and Parenteau think this crossroad decision has already been made. Corporations they argue in a New York Times guest Op-Ed are squirreling away huge amounts of cash. For you and me, on a personal finance and economic level, this seems like a good choice. We haven’t saved that much over the last decade and the recoil from meeting face-to-face with our financial futures has prompted us to rethink our strategy. But when big business does this, the results do not justify the reasons.
When businesses stop spending, the investment model breaks down. 
” The fundamental principle defining growth is to seek new markets, develop new products and by putting money to work, they grow. Hoarding cash does not accomplish any of this. As the authors point out, the recent focus on short-term profits is only to appease anxious shareholders. In a robust capitalistic scenario by avoiding the long-range possibilities, they write: “they avoid investing in future growth.” They need instead “to develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.”
And this they see as the most troublesome aspect of our current economic situation. This dismal outlook is unfounded. Corporate profits are almost where they were before the world seemingly melted before our eyes. Economies we hardly knew existed prior to the demise of Lehman are now part of our financial lexicon. So why exercise corporate austerity when it seems as though it is a self-destructive stance?
To Smith and Parenteau, this shortsightedness will do more harm than good: “Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation.” Capitalism exists on the ability of a business to want to grow, not to retrench. But they have no incentive to do so and when they realize the folly of their plans, it might be too late to fix the problem.
The most recent jobs number points to a reduction in hours worked. If corporations weren’t hiring because they didn’t want to take the chance, then the current batch of workers are going to spend less. Those workers are already trying to that and as the authors pint out, paying off debt is another form of saving.
Let’s add this up: Companies (both domestically and internationally) aren’t spending, the consumer isn’t spending, and the government is under pressure to stop spending equals a fall in company profits, stalled income growth which means a lessened ability to service debts which will lead to “defaults and bankruptcies [which] cascade through the financial system, [and] credit becomes tighter still. Ultimately, there is a danger that deflation — falling wages and prices — will snowball into a depression.” A harsh outlook but extremely possible.
In terms of your retirement plan, which hinges on these factors – profitable companies, stable economic growth and consumer spending – it is in for a relatively rough ride. The knee jerk reaction of personal retrenchment, which we saw just a few short years ago, will result in fewer or lesser contributions to plans like 401(k)s and IRAs.
Smith and Parenteau see a solution in taxes. Not for you and me but for those hoarded profits. They suggest that if it is on the books for two years, it should be taxed – or spent. Or perhaps a “tax on the turnover of corporate financial investments that would raise the cost of speculating with profits, rather than putting them into the business.
If you are bearish, this shouldn’t have any affect on your retirement investments. Your feeling of doom and gloom is not without merit but if the profit picture for companies is any indication, they are far from disaster. Any fall in stock prices will be seen as a potential for buying as others sell. This however is a long-term (over ten-years) outlook.
If you are bullish, you will be convinced that the folks in Washington will keep on doing what they are doing – and even add to the incentives already in place. You will be among the few who understand that “there needs to be a large trade surplus, a large government deficit or some combination of the two. This isn’t a matter of economic theory; it’s based in simple accounting.”
To read the Op-Ed by Smith and Parenteau, click here.
Related posts:
- Retirement Inelegance: The Problem Facing Sponsors, Participants and 401(k) Plans
- 401(k) Plans offer Danger and Risk – When You Don’t Expect It
- Two Plans in Retirement as You Invest Towards It
- Perhaps Something SIMPLE: Small Business Retirement Plans
- Mutual Fund Investing: It is what You Believe It is