the visible hand

it is the theory which decides what can be observed – einstein

perspective: finance vs non-finance performance

Posted by ecoshift on May 14, 2009

These charts from bizzXceleration provide a bit of perspective on where we stand now and how we got here. There has been much talk about the details of securitization, poor risk analysis and innovative investment mechanisms as root causes of the crisis, but few charts such as the one below showing the role of financial markets in the composition of overall corporate profit.

According to these charts corporate profits ex finance have consistently grown below GDP since 1980 and finance has been the primary driver of corporate profits for a number of decade with a huge bubble in financial profits in recent years. No surprise, but with important strategic implications as we attempt to rebuild the real economy.

Here’s bizzXceleration on the topic:

The Real Story on Profits: Finance vs Non-Finance Performance

Take a look at the accompanying chart which breaks down real (inflation-adjusted) corporate profits between the Finance and Non-Finance parts of the economy going back to 1950. In some ways we consider this one of the most important charts we’ve ever posted for many reasons, starting with the bottom sub-chart. It shows cumulative growth in GDP, Finance and non-Finance profits over that period, which we consider startling. There was indeed a bubble in non-Finance profits but the more important stories are the under-performance for decades of the non-Finance businesses, the HUGE bubble in Finance profits and their relative sizes. There a lot of strategic implications here. Look at the top sub-chart now…between 1950 to 1980 Finance had about 30% of the profits but after de-regulation there was a major structural shift where it grew to 50%. Stop and think about that – the Finance sector between 1990 and now generated 1/2 of all corporate profits ???!!! Say what ? And we got what for our money ? Returning to the 3rd sub-chart you’ll notice that the non-finance businesses under-performed GDP ever since. We think the hypothesis is not only did the Financies use leverage and liquidity to maximize their gains at the expense of the rest of us and then to threaten the viability of the economy (of society ?) but they damaged the rest of the real economy in the process. That probably needs some more investigation before we assert it but on the surface a good starting point. We’ll come back to these points in future posts but two points: 1) if anybody thinks tomorrow’s Finance industries will bear any resemblance to yesterday’s we beg to differ and 2) the leadership of the sector appears to be in a complete state of denial, worse than the management of the “real” businesses.


6 Responses to “perspective: finance vs non-finance performance”

  1. Marinkina said

    Качество друзей тоже надо учитывать. Дональд Трамп, например, на двадцатку потянет.

  2. Gavrilin said

    Качество друзей тоже надо учитывать. Дональд Трамп, например, на двадцатку потянет.

  3. Ferinannnd said

    Подписался на RSS, буду следить =)

  4. Dave said

    It is unclear to me what these charts are attempting to map.

    If the conclusion is that non-financial profits are declining, then the measure should be EBIT, not net income. Is this the case?

    Otherwise, these charts could simply be reflecting increased use of leverage (borrowing) to improve shareholder return.

  5. Not A Native said

    Wouldn’t GDP have been substantially lower absent the disproportionate financial profits and perhaps non-financial profits would have exceeded “real” GDP? In other words, GDP is highly dependent on profits and can’t absolutely be compared to categories of profits.

    The question of what proportion of economic activity should be devoted to financial transactions is a good one. Just like what proportion should be devoted to public spending, taxation, military, charity, or whatever.

    At this juncture, economic growth seems to be the only metric most people are concerned with. Where the growth comes from matters little to most people.

    I hope Obama isn’t “most people” and will truly make structural changes in pursuit of sustainability rather than maximum immediate growth. Most leaders and voters want to put highest nitrogen fertilizer(immediate stimulus) on the economy to get “green shoots” up as fast as possible. I’ve heard that high nitrogen will result in fast growing but weak plants that don’t do well and it also will “burn” plants that are healthfully growing at their natural rate.

  6. […] Posted by ecoshift on September 1, 2009 This discussion is a good companion piece for an earlier post linking to information on the growth of the financial services sector… […]

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