The financial sector normally acts as a conduit, channeling savings from private investors to the corporate sector. When the conduit works effectively, the injection of demand from corporate Investment is sufficient to offset the ‘leakage’ from demand caused by Savings. Savings patterns alter during a financial crisis, however, with concerned households cutting back on expenditure and using any surplus to pay down debt, rather than depositing with the bank or buying stocks. Household Savings rise but corporate Investment contracts. The resulting ‘leakage’ from demand causes GDP to spiral downward.
When Investment contracts, unemployment rises. The relationship is evident on the graph below, but it could also be said that Investment rises when employment grows — businesses invest in anticipation of rising demand. Either way, it is safe to conclude that rising investment and job growth go hand-in-hand.
Fixed Investment and Corporate Profits
Rising corporate profits also lead to increased investment. The lag on the graph below — investment growth follows profit growth — clearly illustrates the causative relationship.
This is an encouraging sign, as the current surge in corporate profits is likely to be followed by rising investment — and further job growth.
Weekly Earnings and GDP
Rising weekly earnings already point to improving aggregate demand and consequent investment growth.
All that is missing is for the federal government to increase investment in productive* infrastructure to further boost job growth.
*Infrastructure investment needs to generate a sufficient return to repay debt incurred to fund the spending. Something many politicians seem to forget when preoccupied with buying votes for the next election.
More….
The Long War [podcast]
The Impunity Trap by Jeffrey D. Sachs | Project Syndicate
RIP ZIRP | PIMCO
How much longer can the global trading system last? | Michael Pettis
Crude retraces
Gold breaks $1180 support
Itzhak Perlman: Schindler’s List (video)
There are two kinds of discontented in this world, the discontented that works and the discontented that wrings its hands. The first gets what it wants and the second loses what it has. There is no cure for the first but success and there is no cure at all for the second.
~ Og Mandino