Stimulus versus Investment
There's no doubt that the general crisis of confidence in the American economy -- most clearly manifested by the seizing up of even the most normal lending activity --- will translate to a downturn in the GDP and a sad increase in unemployment.
There's no doubt also that in the short-run some federal spending in support of ready-to-go infrastructure and state and local budgets will make for a less cold winter economically than would otherwise be the case.
But the fundamental structural problems of the American economy can't be addressed by a stimulus package. Instead we will need, and the next President will want to show the way to, very large scale and very broadly scoped investment activities. We will need to show the world of investors sectors in which they can obtain attractive returns. To do that, they will need to get some reasonable leverage on their equity investments.
For the 1990s and even on past the market boom and bust of 2000-02 the primary sector for new investment was TMT -- technology, media and telecommunications. For telecommunications, including all sorts, alone the incremental investment from 1997 through 2007 was $850 billion.
The financial sector was an unsteady and dubious successor as a magnet for investment, because money poured into financial stocks did not so well translate into non-residential fixed assets that would sooner or later be used productively, as has been the case with virtually all of technology & telecommunications investment. (We are watching YouTube today on assets invested in at the height of the dot.com boom.) The housing boom similarly was a shaky and unreliable basis for productivity gains.
The obvious sectors for new investment -- far beyond anything that can or should be part of a stimulus package -- are energy and transportation, where the benefits will be reaped for decades and the new assets will be noteworthy as having high fixed costs, low incremental costs, high productivity gains for the whole economy, and large job creation potential.
that's a good point. Do you think the 800 pt. rise in the Dow today was unsustainable stimulus(government replenishing bank capital) or actual growth?
October 13, 2008 4:01 PM | Reply | Permalink
It is neither. The stock market is largely driven by people guessing how other people will guess. Today, most people guessed the other people will guess that other people will be willing to pay more for stock tomorrow than today.
It is utterly inconceivable that the value of stocks actually increased 11% today. The stock market is always more of a gamble than anything else, but in today's climate it is exclusively a gamble.
October 13, 2008 6:44 PM | Reply | Permalink
My stock market guru is hoppycalif2.
My question: Is Reed correct when he asserts that the 1998-2000 boom in TMT stock prices resulted from "investment" in that part of the economy?
I would argue that the stock market is a shell game and that the "boom" in TMT prices was generated by an increase in the money available to buy TMT stocks, principally, from three sources -- "funds loaned" (buys on margin), "corporate profits" (used for stock buybacks), "proceeds of sales of other stocks" (for example, Warren Buffet's company*).
Trend following and loads of money (Greenspan's easy money regimen) explain the boom in TMT stock prices. "Investment" was the farthest thing from anyone's mind.
* 7/1998 - 3/2000 NASDAQ up 166%; Berkshire Hathaway down 45%
October 13, 2008 8:07 PM | Reply | Permalink
Problem with a term like 'crisis in confidence' is that it implies that the current market turmoil is a psychological problem. It most certainly is not.
The credit market is in trouble for one very simple reason: total outstanding loans are backed by insufficient income streams to pay the interest. If anything the a pathological confidence existed 18 months ago when investors still had confidence in teetering bond market.
The stock market is supposed to anticipate declines in dividends. If we are moving into a severe recession lasting 18 months then a rational value for the Dow is in the 8000 - 9000 range.
October 13, 2008 7:47 PM | Reply | Permalink
You're such an optimist!
October 13, 2008 8:16 PM | Reply | Permalink
Yes, I remember when I mentioned 9000 ten days ago you corrected me to say it was headed to 7000. Last week I was beginning to think you might be right but today I am vindicated-- we are back to 9000! Hooray for today.
I see you preserved that interchange with this link. Also interesting in that thread is the criticism launched against us those who thought we were being unrealistic idealist calling for the nationalization of the banks instead of naked bailouts. But, of course, I am not one who says I told you so. You listening Dan K?
October 13, 2008 9:46 PM | Reply | Permalink
Gimme some time, please.
And that comment -- she said with an uncharacteristic expression of deserved pride -- preceded Friday's bounce by hours.
October 13, 2008 10:57 PM | Reply | Permalink
The dividend paying stocks future dividend value in present dollars Vs. the Growth stocks that no longer have buyers should be an indication of the real value of the total market with out the exuberance bubble included.
Those that that use EBITDA to support their stories and have not paid their loans of the past have little actual value as their prospects for profits have been or will be eaten up by interest on their debt.
There has not been multible bubbles of the stock market, the market has sold itself as ONE bubble that always floats up.
If anyone thinks things the market will inflate back to normal and the “gaming” wheel will spin again like a casino is a target to be scammed or the scammer of the deluded fool.
We have shipped our manufacturing overseas and have relied on the stock market and banks charging usery credit card rates to claim our future in this country and the business of the future has been shown to be fraud and abuse of the Citizens.
I think the buying (rolling) up of undustries and shipping the production overseas will be looked upon the same as GM and FireStone tire buying up the mass transit of the past to be replaced by busses. A tragic if not criminal mistake.
October 13, 2008 10:18 PM | Reply | Permalink
Reed,
It may be time for major contributors to expound a bit on basic economics, which gets summarized as "the real economy" and "jobs" while all the chatter is often in terms of finance and money.
For example, "stimulus" tends to mean something like the tax rebate. Most of the last tax rebate went to pay off debt or was saved. It did not fund any economic activity. These investments directly fund economic activity. As far as increases in GDP goes, a dollar spent on stimulus increases GDP $0.30 while an dollar invested increases GDP $1.30. That means some of the money comes back as taxes almost immediately.
More generally, we hear all these concerns about Social Security and Medicare. The truth is that those working support those who are not working, e.g., children, students, retirees, etc. The funding mechanism does not change this aspect of reality. Funding approaches like Social Security and Medicare have very low overhead, are reliable and provide a stable planning horizon for businesses and those planning their careers. What we are seeing now that these do-it-yourself approaches are costly, unreliable and do not provide a stable planning horizon. We need to get past the distortions created by all the propaganda of the past few decades. This has nothing to do with ideology and everything to do with good economic policy.
As far as investment in infrastructure goes, the estimate is that two trillion could be productively invested in the type of areas you mention. I noticed that Congress is putting together an immediate bill for about 10% of that. This makes sense because there is probably only that much that can be funded now. These kind of investments have long lead times and it will take time to queue them up. Business investment will follow the opportunities.
October 13, 2008 11:57 PM | Reply | Permalink
Sen Obama is calling for BOTH stimulus (short term) and investment in energy and transportation/infrastructure (long term). Thank you for making the point that his economic plans are sound!
October 14, 2008 10:34 AM | Reply | Permalink