07 January 2016

The Stag Party

So, today's version of the what and why of 'secular stagnation'. It's not too bad, but as all of the others I've seen, ignores the three underlying causes/drivers of the condition:
1) stagnation, whether called panic/depression/recession, is always caused by flagging demand. Demand need not diminish, in need only slow its expansion. The CxO class does not invest in physical capital without certainty that there exists unmet demand.
2) there has been a kind stagnation since the 1990s. The dot.bomb was followed by the housing mania, and both were driven by the same force: demand for high returns on risk-free instruments. There was a time when the CxO class brayed that Treasury interest rates were depriving them of capital. These days the CxO class is demanding Treasury interest greater than they can, or will, generate with organic growth of their businesses with hard assets.
3) moreover, in the example, the piece doesn't mention the distribution problem: as more of the national income concentrates, demand slackens simply because the few can eat only so many carrots or send so many tweets.

The answer is that $10,000 in saving gets turned into investments through financial markets. This is one of the main functions of financial markets: to find a way to turn saving into productive investments.
At which point the text should distinguish between hard assets and fiduciary instruments, but doesn't. Bad juju. Both the dot.bomb and housing mania were, mostly for the former, and entirely for the latter, just fiduciary. Despite attempts to 'impute' value to consumer durables, particularly housing when prices are skyrocketing, there isn't any marketable output from such 'investment'.

Classical economists did not believe this could happen. They argued that financial markets would always find a way to equate saving and investment.

They also didn't conceive of such things as credit default swaps. They always assumed that investment was ultimately physical. Again, physical capital and fiduciary instruments are *not* interchangeable. Especially instruments disconnected from underlying assets. Financial engineering?

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