On Dec 17, 2007, at 11:49 AM, Seth Ackerman wrote:
> bhandari at berkeley.edu wrote:
>
>> Yes there are always periods in which capital is exported or
>> caught up in
>> frenzied speculation but these are usually short lived before capital
>> finances a new upsurge in real production. That is part of the normal
>> functioning of capitalism, and perhaps the drop in the dollar will
>> chase
>> out destabilizing speculative capital flows and abet US mfg capacity.
>> Don't see the confidence for that at present.
>> Yours, Rakesh
>>
>>
>
> I think this analysis needs closer scrutiny.
>
> By my calculation, while the bubble was going on (1996-2006), fixed
> investment in the real economy rose by 55%. This rather robust capital
> accumulation yielded a 20% rise in output per worker and a 36% rise in
> total output. That includes a 46% increase in manufacturing
> production.
>
> So the frenzied speculation did absolutely nothing to dampen real
> investment and production. Nor should it. I don't know where the idea
> comes from that speculation somehow crowds out real activity (at least
> in any direct way).
It comes from the wishful thinking of stagnationist Marxists!
To be fair, the 1996-2006 period consists of a boom, a bust, and the one of the weakest expansions in modern U.S. history. Nonresidential fixed investment rose from 9.7% of GDP in mid-1993 to 12.6% in late 2000; equipment and software (which excludes nonres structures), from 7.3% to 9.3%. Both measures fell hard in the bust - to 9.8% and 7.2% respectively in 2003. The broader measure recovered some of its decline - it was 10.7% in the third quarter of this year, but equipment and software, after rising to 7.6% of GDP in 2005, is now back to 7.2%. Meanwhile, residential investment rose steadily, from 3.9% of GDP in 2003 to 6.3% in late 2005; it's now back to 4.5%.
So the dot.com bubble was accompanied by a sharp rise in real investment, heavily concentrated in computers and communications equipment - which isn't a surprise, given all the high-tech hype. But since the bust, that sort of investment hasn't recovered. But housing kept rising for the entire 10-year period.
Or, looking at real values (rather than shares of GDP), growth in nonres fixed investment averaged 7.8% a year during the 1990s boom, vs. 2.0% during the current expansion; equipment and software, 10.1% vs. 3.0%; and residential investment (new housing, not turnover of existing housing), 4.4% in the late 1990s, vs. 7.3% from 2003-2006. It's falling hard now, though - off 16% for the year ending in the third quarter of 2007.
You could argue that the housing bubble got a new lease on life after the stock bust because people thought "at least real estate is solid!" But it's just tangible. Values can collapse, just like stocks.
Doug