Monday, November 03, 2014

Monday Forum - why is there an investment strike?

On the 29 October, the US Federal Reserve announced the end of Quantitative Easing in the US. More precisely, I guess, it announced the end of additional QE.
The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
The Fed also indicated that it intended to keep interest rates low for the present. Again, I quote:
 To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
Sorry for the long quotes. I thought it worth quoting at length to give you a feel for Fed thinking.

Meantime here in Australia, on Thursday 30 October, the Australian Bureau of Statistics released the latest price indices for Australia's exports and imports. The overall export price index for the September quarter fell by 3.9%, down 9.5% from the September quarter last year. Import prices were down too, but only by 1.1% as compared to a year before.

This deterioration in the Australian terms of trade would normally be associated with a fall in the value of the Australian dollar. The dollar has fallen, but by less than many expected. Part of the reason for this is, I think, that the world remains awash with money. The US monetary expansion may have come to an immediate end, but both the European and Japanese central banks still have their own versions of QE in place. That money has to go somewhere. The fact that Australia still has positive interest rates is still attracting funds even though the risks of currency decline are perceived as significant.

Looking around the world, low interest rates and freely available funds have, so far at least, failed the break the investment drought that has been infecting the private sector for some considerable time now.

This earlier chart shows the decline in global investment, with the fall most pronounced in the developed world. While I don't have later stats, business investment has not strengthened.

In Australia, both the Governor of the Reserve Bank and the heads of some of the banks have almost been pleading for business investment, while investment analysts have been warning that high dividend payments and capital management through things such as share buy-backs are effectively mortgaging future growth for immediate return,

 This brings me to the point of today's forum. Why is business investment so low? Is it just that we have reached the point in developed countries that savings have out-run local investment opportunities? Structurally we have seen this before. The British Empire comes to mind. But surely it can't be just that?

 What do you think?


A purely local perspective - The need for a New England investment bank.


Evan said...

I suspect uncertainty esp. re fossil fuels and renewables.

Jim Belshaw said...

You may well be right about uncertainty, Evan. Not sure about the second point. It seems to be a general concern about opportunities,

Scott Hastings said...

In a third world country a new investor can rig the game by bribing the relevant people. Whereas in a country like ours the game is already well and truly rigged against any newcomers, courtesy of the incumbent businesses having already built up a mass of legislation and regulation of their design over the course of two decades, aimed at the exclusion of all others.

Two tanners said...

I suspect that globally there are a number of factors. Developing countries are both high risk and in any case can absorb relatively little profitable investment. Middle income countries can be pretty restrictive in terms of foreign investment, bearing the scars of prior colonial exploitation and perhaps the development of self-interested elites. Finally nearly all developed countries are either recovering from economic disasters, pursuing austerity policies or both. I have not seen an economy capable of making a marked difference which is primed for investment flows.

Jim Belshaw said...

Hi Scott and 2Ts. Sorry for the slow response.

Scott, I agree that regulation and legislation protects the established and especially the big. I have traced the impact of this at local and regional level.

I am sure that you are right 2Ts in terms of multiple factors. A low growth environment of itself restricts opportunities in developed countries. However, the strike began when growth was quite high, so other factors are at play as well.

One could argue that all this is part of global economic re-balancing,that investment flows go to developing countries where opportunities still exist. In a way, that was what I was referring too with my references to the British Empire - a capital surplus that could not be profitably invested in Britain.