Sluggish investment will hamper recovery
– John Kemp is a Reuters columnist. The views expressed are his own –
Unable to rely on the wounded consumer, the outlook for U.S. growth in the next three years depends on business investment and exports to take up the slack when stimulus programmes wind down. Ultra-low interest rates will help. But with the economy struggling to work off a huge overhang of unused real estate assets, and not much sign of investment elsewhere, investment spending is set to remain sluggish, condemning the economy to a weak recovery in the medium term.
Federal Reserve Chairman Ben Bernanke and other senior U.S. officials have already warned the rest of the world can no longer rely on over-indebted U.S. consumers as the principal source of global growth. There is no choice but to rely on investment and exports to take up more of the burden.
But investment spending outside real estate has been very depressed over the last cycle; there is no reason to expect it to accelerate much before 2013 at the earliest. So despite signs of a significant cyclical improvement in manufacturing in the past couple of months, the medium-’term outlook looks weaker.
MANUFACTURING BASE STAGNATES Between 2004 and 2008, private sector fixed-investment averaged $2.125 trillion per year (16 percent of GDP), split evenly between spending on equipment and software ($1.025 trillion) and buildings and structures ($1.102 trillion), according to the Bureau of Economic Analysis.
Manufacturers accounted for just $188 billion (8.8 percent of the total), with a higher share of spending on software and equipment (15.8 percent) but only a tiny fraction of spending on structures (2.4 percent).
Their investment simply replaced the loss of asset values due to deprecation ($187 billion) as a result of wear and tear, loss of efficiency with aging, and technological obsolescence. There was no net increase in the manufacturing sector’s capital stock.
from MacroScope:
Step aside capitalism, how about leverageism
Our recent post on the End of Capitalism triggered much interest and comment. There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?
Anthony Conforti suggested in a comment that we need a name for what is happening,:
The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?
Here's one suggestion. There seems to have been precious little capital building going on is the last few years, so even in a free market, capitalism sounds a bit inaccurate. How about "leverageism"? Borrowers of the world, unite. You have nothing to lose but your shirts.
Time to pick up the challenge. What should we call the dominant economic system?
from MacroScope:
Crisis? What Crisis?
The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.
Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.
Wealth managers at Barclays have gone as far as telling their clients to get over it.
Move past the crisis .... The past year's events were deeply traumatic for most investors, but now is the time to move on, and take a more "business as usual" approach ...."
Such bullishness may not be comforting to the record numbers of jobless in parts of the world, but it is bordering on consensus. It is left to the likes of perma-bears such as Nouriel Roubini to try to burst the bubble of optimism on which many are floating. The economist began one of his latest articles bluntly:
Think the worst is over? Wrong.
Roubini's main point is that unemployment is likely to get worse rather than better and that many U.S. jobs that have been lost will not come back.
Not only is it too soon to celebrate, we are now plunging headlong into economic catastrophe in the west, leaving the reins of true power firmly grasped in the hands of the architects of this misery – the banks.
