Posts Tagged ‘investment’

The Next Bubble?

Gennaro Zezza | December 2, 2013

Is the U.S. economy heading towards another bubble? Since last week, the number of commentators on this subject has been growing, from Robert Shiller to Nouriel Roubini (on housing markets).

In our first chart we report the Standard & Poor’s 500 stock market index, normalized by a consumer price index to remove the common trend in prices. Our measure has increased by 105.6 percent from its most recent bottom in March 2009. In the previous rally, which started from a bottom value in February 2003, the index increased by only 63 percent before the start of a rapid descent in July 2007.


Is a buoyant stock market justified by expected profitability? In the next chart, we report gross saving of non-financial corporations – that is, undistributed profits gross of capital consumption – scaled by GDP, along with gross investment (which includes changes in inventories). All figures are computed from the Integrated Macroeconomic Accounts published by the B.E.A.

The chart clearly shows that profits have reached an all-time high at 11.5 percent of GDP, compared to an average of 9 percent over the 1960-2007 period. If current profits are the basis for expected future profitability, our data suggest that the stock market rally is justified. But is this trend stable and sustainable?


The chart also shows what we may call an investment gap. While profits and investment have usually moved in line, it was usually the case that investment exceeded retained profits. But since the second half of 2008, profits have soared while investment dropped, opening a gap which is currently over 2 percent of GDP. A low level of investment is not a good sign for future growth.

What are companies doing with such exceptional profits? In the next chart we add U.S. foreign direct investment (FDI) made abroad to domestic investment in our previous chart (while at the same time switching to moving averages to reduce the volatility of quarterly FDI).


The new chart is suggesting that foreign direct investment is a major destination for retained profits, and that FDI did not suffer the same downturn seen in domestic investment during the last recession.

Data from the B.E.A. on the composition and direction of U.S. FDI show it is difficult to evaluate where U.S. foreign direct investment is directed. While data for FDI in manufacturing show the emerging role of China as recipient of U.S. FDI, its weight is still below 5 percent of total FDI in manufacturing. Besides, the share of manufacturing in total FDI in 2012 is only 14 percent, while multinational companies, classified as “Holding Companies (non bank)” in B.E.A. statistics, account for almost 44 percent of total FDI in 2012. Countries receiving FDI in this grouping seem to be financial centers: the Netherlands (25.6 percent), Luxembourg (15.5 percent), Bermuda (11.2 percent), and the U.K. (10.7 percent).

Summing up, our findings suggest that U.S. non-financial corporations are in a healthy state – as measured by their net profits – but that this will not necessarily imply stronger U.S. growth and job creation. On the contrary, the data are coherent with a further increase in the concentration of income leading to financial speculation, in the U.S. as well as in foreign financial markets.

Restoring jobs and prosperity in the U.S. does not seem to be what U.S. corporations are working towards, and yes, the soaring stock market may change course very quickly, if “financial markets” make this decision.

Restoring sustainable growth in the U.S. (and elsewhere) requires a reversal of the trend in income distribution, since, as Stockhammer reminds us, “rising inequality has increased the propensity to speculate as richer households tend to hold riskier financial assets than other groups,” and “higher inequality has led to higher household debt as working class families have tried to keep up with social consumption norms despite stagnating or falling real wages” – a fact we already investigated a few years ago.


A New Modest Proposal for the Euro Crisis

Michael Stephens | July 18, 2013

Yanis Varoufakis and Stuart Holland have come out with a new version of their “Modest Proposal” for resolving the euro crisis (an earlier version of the Proposal appeared as a Levy Institute policy note in 2011). The latest iteration (4.0) adds a new co-author in James Galbraith and an additional “sub-crisis” to the original three: the eurozone, they say, faces a banking crisis, a public debt crisis, a crisis of under-investment, and now, after five years of policy failure (due in part to treating the situation as only a debt crisis) Europe faces a social crisis.

The “modesty” of the authors’ policy approach hinges on avoiding what they describe as a false choice between “draconian austerity and a federal Europe.” They argue that we can make substantial progress on addressing these multiple crises without resorting to things like national guarantees, fiscal transfers, or treaty changes. For instance, here is the outline of their proposal for dealing with sovereign debt:

The Maastricht Treaty permits each European member-state to issue sovereign debt up to 60% of GDP. Since the crisis of 2008, most Eurozone member-states have exceeded this limit. We propose that the ECB offer member-states the opportunity of a debt conversion for their Maastricht Compliant Debt (MCD), while the national shares of the converted debt would continue to be serviced separately by each member-state.

The ECB, faithful to the non-monetisation constraint (a) above, would not seek to buy or guarantee sovereign MCD debt directly or indirectly. Instead it would act as a go-between, mediating between investors and member-states. In effect, the ECB would orchestrate a conversion servicing loan for the MCD, for the purposes of redeeming those bonds upon maturity.


End of Week Links

Michael Stephens | June 14, 2013

Boston Fed’s Eric Rosengren on the risk of financial runs and the implications for financial stability*  22nd Annual Minsky Conference (video)

*(Link has changed:  see below the fold of this post for Rosengren video)

Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt  New York Fed

‘Financialization’ as a Cause of Economic Malaise  NY Times

The Cash and I  J. W. Mason

A Blogospheric Taxonomy of the Fiscalist vs Monetarist Debate  FT

The Biggest Economic Mystery of 2013: What’s Up With Inflation?  Atlantic

How Schlubs Get Taken By Wall Street Pros  Forbes

Fiscal Implications of the ECB’s Bond-buying Program VoxEU

continue reading…


Legends of the Greek Fall

Dimitri Papadimitriou | February 21, 2013

Why has the world’s premiere deficit-reduction laboratory produced such a dismal failure? European leadership still expects the painful über austerity measures imposed on Greece to result in a dramatic improvement of its debt to GDP ratio. But the experiment in endurance is not succeeding for an important reason: Austerity programs have been rooted in myths about what caused the crisis in the first place.

The popular notion that government overspending is the basis of Greece’s deficit woes is simply wrong. Evidence doesn’t support what seems to be a never-ending scolding about profligate spending.

Greek national expenditures were at about 45 percent of GDP in 1990, long before the crisis. That share remained stable through 2006. Proportionally, its size was well below that of France, Italy, or even Germany. While Greece has a reputation for a nasty, historically oversized public sector, in the lead up to the crisis it behaved no differently than its neighbors, and its rate of spending didn’t prevent it from catching and surpassing affluent eurozone nations in growth. Rapid spending increases weren’t notable until the 2008 recession. The timeline reinforces the conviction that long-term government extravagance hasn’t been key to the Greek meltdown.

Its debt picture was also steady. For years, Greece ran a deficit of 3 to 5 percent of GDP, and roughly a 120 percent debt to GDP ratio without any market upheaval. In 2000, just before it joined the euro, its deficit was 3.8 percent, where it more or less remained through the early euro years. Government borrowing didn’t explode until the sovereign debt crisis surfaced in 2009, which indicates that its record of national debt wasn’t the primary cause of Greece’s deficit crunch, either.

Other trends were more worrisome than government spending and borrowing. Revenues, for one, had been a creeping problem. Even before Greece joined the euro, it lagged considerably behind other European economies in tax collection. A Levy Institute analysis shows that by 2005, revenues from income and wealth taxes in particular, were still well below other European countries. The notable increase in government revenue, from 9.8 percent of GDP in 1988 to 2005’s high of 13.5 percent (before stabilizing at a slightly lower level), was mainly from an increase in social contributions. Tax evasion was rampant in the robust shadow economy.

In the late 1990s another danger emerged. continue reading…


Outside the Bubble, Public Investment Is Disappearing

Michael Stephens | January 3, 2012

These two stories need to get together in a room and talk:

1) Demand for US debt is really high.

2) Government (net) investment is at a 40-year low.

Notice that neither of these facts plays any noticeable role in the policy debates that dominate the US political scene.  There we’re offered a choice of competing visions between radicals who claim that current levels of government spending and investment represent the collapse of free civilization, and conservatives (only, we don’t call them that) who seem to think that we have the share of public investment more or less right (give or take a few dollars for green energy).


Better treatment for R&D?

Thomas Masterson | July 1, 2010

A post in the Wall Street Journal’s Real Time Economics blog notes that counting research and development as investment rather than as an expense would have increased gross domestic product by 2.7 percent between 1998 and 2007 (they refer to new numbers from the BEA). If this were standard national accounting practice, then measured GDP would have grown 0.2 percent faster, or an average of 3 percent annually. It makes some sense to treat R&D as an investment, but this item begs the question: would anyone have been better off if we did?