Capitalism Is Broken If Record Profit Margins Don’t Revert

“Profit margins are probably the most mean-reverting series in finance. And if profit margins do not mean-revert, then something has gone badly wrong with capitalism.” – Jeremy Grantham

While there are certainly many complaints that “capitalism” is broken, such is not the case. Yes, there are problems with economic inequalities, the majority of which can be directly traced to monetary and fiscal policies and a rise in “corporatism.” However, that is a discussion for another article.

In the economy today, capitalism is alive and well. The reason we know this is due to both the surge in inflation and corporate profitability since 2020. If “capitalism” was broken, as the economy was flooded with $5 Trillion in fiscal stimulus, inflation would not have resulted. Such was a point previously discussed in“Corporations Are Causing Inflation.”To wit:

“The following economic illustration shows such taught in every ‘Econ 101’ class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases by providing ‘stimulus’ checks.”

Record profit margins, Capitalism Is Broken If Record Profit Margins Don’t Revert

With the economy shut down and an inorganic surge in demand due to “free money,” the selling prices of a restricted supply of goods rose. The basic economic function of supply and demand proves capitalism is functioning properly. Furthermore, as shown, corporate profits surged with labor costs greatly reduced due to the shutdown and higher prices due to artificially stimulated demand.