Tuesday, July 30, 2013

Businesses do not invest because the economy is weak; the economy stays weak because businesses do not invest

From Six years of low interest rates in search of some growth from The Economist.

A rare (in the general MSM) example of solid reporting addressing trade-offs and alternative scenarios. The issue they are addressing is Quantitative Easing (printing money) as a policy means of generating economic growth. Too often this is treated as a cheap policy solution when the reality is that is not cheap but rather that the costs are hidden (in longer term inflation rates). But there are many additional near term costs as well which the article covers very effectively.

What caught my eye was this simple paragraph which says with clarity that which is mostly skirted about.
Companies have to worry about a lot of factors before approving a long-term project: the balance of supply and demand in their industry, the regulatory and political backdrop, the availability of skilled employees. “Interest rates are not a significant factor in our decision-making on investment because interest expense is only a small proportion of our cost base,” says Ulf Quellmann, global head of Treasury at Rio Tinto, a mining group. Hurdle rates for investment projects change slowly. Eric Elzvik, the chief financial officer of ABB, a Swiss engineering giant, says the group has not materially altered its hurdle rate over the past three to four years.

This is no surprise to people watching Japan, where nominal interest rates have been near zero for a decade (although real rates are positive) and the absolute level of investment is no higher, in real terms, than it was in 1997. “Corporations have been caught in too many cycles where they invested in anticipation of domestic growth that never happened,” says Richard Katz, who writes the Oriental Economist newsletter. Businesses do not invest because the economy is weak; the economy stays weak because businesses do not invest.
Our political class propose policies which too frequently are discussed and approved and implemented absent any real consideration what impact those policies might have on the decision-making environment of business. The goose laying the golden eggs is treated as a given.

Reminds me of that old Heinlein quote from Time Enough For Love:
Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as "bad luck."

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