Investment rises as opportunity cost of money increases
Stan Fischer: “I think we’d be better off if there was a price for using money, or for not investing, in terms of monetary returns”
— Matthew B (@boes_) September 27, 2016
Red circle is 2nd quarter 2016.
I had a few posts way back when looking at how the Federal Gov’t’s response to the Great Recession was more “follow GW’s lead” than “do what worked under FDR” and how that would result in GWish and not FDRish outcomes. I didn’t give enough thought to monetary policy – now, with this post and info like it, it seems to me that between the Fed and Federal Gov’t, the combined response couldn’t have been better designed for producing the slow, lousy recovery we are seeing.
Pulling out the WABAC machine.
See my answer to Arne… The concept of Creative Destruction makes sense of the graph. With low interest rates and high profit rates, there is little destruction, thus less investment.
How does the data warrant an assertion of causality? It could be that more money invested means that some of it is chasing projects with higher probability of failing to produce returns. Or the more obvious – whatever has changed impacts both profits and investments.
Think of the graph as showing Creative Destruction… when interests rates are low, many zombie companies are being given a life line. In a normal interest rate environment, they would be in trouble. Then you have stronger companies who can take better advantage of the low rates and profit rates increase on average. In this environment, there is little destruction due to the life line of low rates to marginal companies. Destruction implies investment to recapitalize.
So in a normal interest rate environment, there is more destruction, thus more investment.
I’m not sure what I am looking at, but if the connected dots are adjacent in time, it looks like private investment has increased from 12.5% of GDP to 16-17% of GDP while the ROI has been high.
EL – You are worried about Zombies again?
Please help us. Name a Zombie. Just one.
The last time we did this you came back with Walgreens, a company with an $86B market cap and solid earnings. What company will it be this time?
Zombies are living when they should be dead… You cannot tell them apart from other living entities. But if the economic environment starts to get tough, they will be the first to die. You now see banks showing weakness. Some oil companies are having difficulties. and corporate bond defaults are rising.
EL I asked for names. You have no answer. If you had provided a NAME I would have shown you that higher interest rates would not make a difference to that NAME. If you think that a 1% increase in the Fed rate would change the default rate then you just don’t understand corporate finance.
Banks around the world (especially Deutche Bank) would have a much better future if interest rates were higher. Financial institutions have been pushing the Fed and other CB for years to raise rates so they can increase profitability. You have that relationship backward.
You should not worry about the High Yield market. I don’t think you understand how it works. Go to HYG and you will see that the High Yield market is doing just fine.