Record Corporate Profits and Inflation

Record corporate profits are caused partly by a depreciating dollar

Media pundits like to point out that in spite of record corporate profits, many of these corporations are hoarding on to their cash rather than making capital investments or raising the wages of their workers. This leads to their argument that the federal government, whether it be through regulatory or monetary means, must intervene in the market in order to incentivize spending and investing. Of course,  stagnant wages raise the ire of the working class, thus enabling politicians who play the role of Santa Claus via social programs to retain and consolidate their power. The most common retort to the reasoning behind the cash hoarding in spite of record profits is that these corporations also have record debt on their books. While this is true, many people are ignoring the fact that most of these record profits are not adjusted for inflation.

Let’s look at this situation in more detail. A good portion of corporate profits are derived from foreign jurisdictions. These foreign corporate profit numbers are therefore converted into US dollars based on the exchange rate of a certain point in time. But keep in mind though, if the US dollar is depreciating against a certain currency, such as the Australian Dollar (AUD), then the profits reported in US dollars will increase due to the currency devaluation. To illustrate this point, let’s say the ACME Corporation records significant profits from Country A. In Year 1, ACME’s profits in Country A was 10 million A dollars. Let’s assume that during Year 1, 2 USD = 1 A Dollar. So in year 1, ACME’s corporate profits from Country A is equal to 20 million US dollars based on the exchange rate. In year 2, ACME once again records 10 million A dollars in Country A. However, the exchange rate is now 5 USD = 1 A Dollar. In year 2, ACME’s corporate profits from Country A is equal to 50 million US dollars based on the exchange rate. US media pundits see this and scream at the camera about record corporate profits even though ACME’s profits, when adjusted for inflation, stayed the same. Moral of the story: take what media pundits say with a grain of salt.

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