Investment rises as opportunity cost of money increases, Part 2

I posted this graph yesterday which has 234 data points from 1954 to 2016…

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The graph implies that as profit rates come easier over the nominal cost of money the percentage of gross private investment to GDP tends downward.

I tweeted this graph to Miles Kimball who is in favor of negative nominal rates. Negative rates would tend to move the data points to the right implying weaker investment.

He replied that the x-axis has too much inflation in it. He suggested that inflation be added back into the x-axis. So I added core inflation into the x-axis and got this.

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Same data here but showing trend line and patterns connecting points.

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Still a downward trend is apparent. So even adding in core inflation to the x-axis did not dismiss the pattern.

This graph would be a problem for those who call for negative nominal rates in face of high after-tax profit rates. The graph implies that investment may not pick up at all.

It goes back to what Stan Fischer said…

“I think we’d be better off if there was a price for using money, or for not investing, in terms of monetary returns”

The red circle marking 2016 data shows that the price of using and getting money is very low by historical standards. Why invest when your returns come so easily? Why invest when creative destruction is weak because weak companies are given a life line with low nominal rates?

UPDATE: Just want to add a graph that shows the % of data points within a certain distance vertically from the trend line in the 3rd graph above. This graph implies that it is less likely to be farther away from the trend line.

For example,

  • 35% of the data points are within plus or minus 0.6% from the trend line. …
  • 50% are within plus or minus 1% from the trend line.
  • 10% of the data points are farther away than 2.5% from the trend line.

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