"Record Profits"

A lot of people are angry about companies making "record profits."

-Company A is one of the largest private companies in the world and sets records in the dollar amount of profit that it earns, but the industry is capital intensive and the profit margin is only 10%. That is, for every dollar in sales the company makes 10 cents and the rest goes towards expenses and taxes.

-Company B is a smaller company than Company A and makes less dollars in profit, but it has a lesser investment in capital. The profit margin is 30%. For every dollar in sales, the company makes 30 cents.

Which company would better deserve accusations of "price gouging" and application of a windfall profits tax?

Is it fair to apply a windfall profits tax to Company A without doing anything to penalize Company B?

Want to know which companies these really are?

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Company A, with a profit margin of 11.23%, is Exxon-Mobil.

Company B, with a profit margin of 29.29%, is Microsoft.

Some others for comparison:
McDonalds, 10.51%
Apple Inc., 15.37%
General Electric, 12.69%
Home Depot, 15.67%
Time Warner, 9.44%
AT&T, 10.05%

"The profit margins of large U.S. companies have ranged between roughly 5.5 percent and 7.5 percent through most of the period shown. During the mid 50's and early 60's companies enjoyed healthy profitability spurred by strong economic growth. From their peak in 1965, margins generally declined through 1983. During the 1990's they climbed back to their previous highs of 7.5 percent (although a chunk of those earnings would evaporate over the next few years after they were found to be fraudulent). Following the earnings plunge of 2001-2002, the recent economic rebound has put net income at about 8.5 percent of revenues, a 50-year record."
http://www.hussmanfunds.com/rsi/profitmargins.htm

Why aren't people more outraged about Microsoft's profits than Exxon's? Or Home Depot, or GE?

Second in the series of economics posts

This was the most informative video I watched in 2007:

I don't necessarily agree with this guy's solutions, but the explanation of our current monetary system and why it is unsustainable is great.

First in a series of economics posts

Just moving a few older things over here...

No Social Security for you, or you, or you!

So... you all know that the Baby Boomers are going to retire en masse pretty soon, right? And they're all going to be lining up to collect their social security payments. In the 80's, there was a Social Security Trust Fund [hereafter SSTF] created to set aside the surplus money needed to finance the Boomers' retirements. Workers pay their FICA taxes, part of which goes to funding current benefits for the elderly and another part to the SSTF.

If you read the Wikipedia entry on the SSTF, you'll get the feeling of being displaced into multiple metaphysical universes. "Does the SSTF exist?" "Are there any assets in the SSTF?" "Are the assets in the SSTF worthless?" "SSTF balances are available to finance future benefit payments and other SSTF expenditures – but only in a bookkeeping sense..."

Wikipedia - Social Security Trust Fund

Confusing? How about we explain it a different way...

In 1985 there was a crisis in the Treasury. Ronald Reagan needed the debt limit raised and Congress wasn't willing to do it. The government risked going into default from the interest payments owed on bonds (Treasury Securities). Going into default is very bad when you're a government. So Reagan's Treasury Secretary started selling "special" Treasuries in the SSTF until the crisis passed.

What does that mean? The government went over to the SSTF and exchanged a bond for cash. The bond is an IOU for the money, plus interest. The money was spent on non-social-security issues and the IOU sits in the SSTF. When interest comes due, another IOU is issued for it. These IOU's can't be marketed elsewhere.

Now, this practice was only supposed to be temporary until that crisis in '85 had passed. But the door had been opened, and lo and behold every president since has been siphoning off the cash put in by working Americans and replacing it with an IOU until today about $1.8 trillion in IOU'S is sitting in the SSTF and the money it has replaced has been taken and spent elsewhere. This is why there is the alternative reality of the Wikipedia article... nobody knows whether those IOU's have any worth or value! Sit back and think a minute about what this means for the Boomers. Who's going to be the one left holding the bag?


The special beauty of all this is that the money was being taken out and counted as government surplus on the books.

A helpful website which explains it all so clearly.

Back, maybe

After a long haitus, I've decided to update this blog and try to contribute new things once in a while. The last time I posted I still had one kid, now I have two. Here's the baby being cute; he just loves to dance:

More to come.