Furthermore, over the past decade the demand on businesses to increase profits, from shareholders and Wall Street, has driven productivity higher and wages lower. Real wages are well below the long term trend due to the large, and available, labor pool which keeps wages and salary levels suppressed. Lower wages are double edged sword for businesses. In the short run lower wages increase profitability. In the longer term, as wages fail to keep pace with inflation, consumers struggle to maintain their standard living which forces them to cut back on consumption eroding end demand on businesses. The cycle, which is deflationary in nature, is very difficult to break.
While it is enticing to want to force corporations to deploy the cash and create jobs - the unfortunate situation is that it is the very demands to maintain profitability that keeps them on the defensive. Secondarily, let's not forget that we live in a free market economy and businesses are in the "business" of making profits.
As Bernanke stated, in his recent testimony to Congress, it is imperative that Congress acts with fiscal policy changes that promotes real, organic, economic growth. Corporations will not increase hiring, and ultimately wages, until end demand substantially increases. Consumers can not increase demand until they have more money to spend. This "chicken and egg" syndrome is indicative of the problem that faces an economy trapped in a deflationary cycle. Fiscal policy that leads to productive investment, removes uncertainty about future regulatory and tax implications, and provides an environment that allows cash to be invested at profitable rates of return will ultimately break the blockade the economy currently faces. However, until then, businesses have no incentive to release their "cash hoards" as long as "poor sales", as shown in the recent NFIB report, remain their primary concern.
For investors, the continued increases in profitability, at the expense of wages, is very finite. It is revenue that matters in the long term - without subsequent increases at the top line; bottom line profitability is severely at risk. The stock market is not cheap, especially in an environment where interest rates are artificially suppressed and earnings are inflated due to "accounting magic." This increases the risk of a significant market correction particularly with a market driven by "hopes" of further central bank interventions. This reeks of a risky environment, which can remain irrational longer than expected, that will eventually revert when expectations and reality collide.
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