Thursday, August 27, 2009

Where's the Investment?

I have heard from a number of readers that the lack of consumption in the current environment is not as troubling as one might expect. The thought is that rather than consume, individuals are increasing their level of savings, which is just a form of future consumption (and the opportunity to consume MORE later outweighs the benefit of consuming LESS now).

Which makes sense, except the data does not support this theory. Looking at the data, we see a HUGE decline in investment (and thus a HUGE decline in savings if you assume I = S). How large? Investment is down massively from its 2005 peak across the board and is now below the level of investment seen in Q2 1997.

Twelve years of growth in investment gone? What is happening? Well, the savings that has been reported is not occurring as the numbers imply. Savings is calculated as the difference between income and consumption. What is missing is interest payment / debt repayment. As described by reader Angry Saver in a previous post:

The C+I... formula is simplistic and rests on flawed assumptions. It is an accounting identity that does not always reflect the facts in the real world. End demand by consumers is the key. When end demand shrinks, so does the pie. When future income shrinks, so does the pie. Adding gov't debt will create false demand and may keep the debt system from imploding, but it will also limit future end demand.

(We've) spent too much based on misperceptions of future wealth (wall street lies). Much of the so-called investment/savings were borrowed from abroad and were actually malinvestments as they exceeded ability to pay and were not based on end demand. The bills for all that excess/mis-spending are now due. A rude awakening. Debt repayments and debt defaults at the household level will accelerate.

Despite propaganda to the contrary, U.S. consumers are now realizing that their future incomes will be less than previously thought. Lower savings/investment is to be expected as our economic future will be smaller than previously assumed.

Source: BEA