There are a couple of correlations between nonresidential and residential investment and the stock markets and housing starts, respectively. Also, changes in inventory have their own correlation with change in GDP.
 |
Private nonresidential investment (blue) and the Dow Jones Industrial Average (red).
|
 |
A second look at nonresidential investment with a different stock index. Private nonresidential investment (blue) and the S&P 500 index (red).
|
 |
Year-over-year change in both private residential investment (blue) and housing starts (red).
|
 |
Change in private inventory (blue) and year-over-year change in GDP (red).
|
Changes in inventories are the smallest component of the GDP, usually less than 1% of GDP but they are much more important than their absolute size. In fact, large changes in inventories signal changes in aggregate demand and, thus, are indicators of future economic activity. As the change in inventories is a flow equal to the change in the stock of unsold goods, they are a form of investment, often referred to as involuntary investment.
"As the change in inventories is a flow equal to the change in the stock of unsold goods, they are a form of investment, often referred to as involuntary investment."
ReplyDeleteI can't find the reference, but somewhere in the General Theory, Maynard said this quantity, the change in inventory, is the quantity that creates equality between savings and investment.
You know every dick and harry on the internet writes of the equality between savings and investment like it was some kind of magic principle. But the magic is no more than sleight-of-hand.
When saving increases spending decreases.
When spending decreases inventory increases.
The change in inventory is counted as investment.
Therefore, saving equals investment.
Saving equaling investment makes sense in a closed system (in which money is neither created or destroyed). What about an open system in which money is created and destroyed? Even in such an open system, in which money is created, that new money must be saved or invested - something has to happen to it, right?
DeleteSo saving, according to Minsky, is a source of demand for inventories and capital investment. I think what Minsky says about investment, is that it must produce some useful output, so therefore low interest rates do not necessarily create more investment. And in regards to change in inventory, when people feel the need to save (for whatever reason) the change in inventories declines.
Just because interest rates are low does not mean people will invest - it just means borrowing costs are low and it is not a risk factor. In fact, the Fed Funds rate is at .16 and yet the credit crunch continues.
"in such an open system, in which money is created, that new money must be saved or invested - something has to happen to it, right?"
ReplyDeleteYeah, saved or invested, or spent or hoarded, I guess that about sums it up.
"So saving, according to Minsky, is a source of demand for inventories and capital investment."
Dunno what Minsky said. But to me, saving is not a source of demand for anything. Saving is an alternative to demand.
I don't follow the rest of that paragraph. When people save more they are spending less, so inventories accumulate. A bigger increase in saving would mean a bigger increase in accumulated inventory. You have to change my words around so I get what you are saying...
"Just because interest rates are low does not mean people will invest"
Agreed. Keynes said there is no "nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption".