Sunday, August 25, 2013

Fixed Private Investment

Random Eyes showed me Fixed Private Investment relative to GDP:

Graph #1: Fixed Private Investment relative to GDP
Low in the early years, then three humps in the middle years, then a significant decline corresponding to the decline in total debt growth, 1986-1992. Then a couple high points that I don't recognize. But the pattern reminded me of total debt growth. So I compared the growth of Fixed Private Investment to the growth of total debt:

Graph #2: Growth Rates of Fixed Private Investment (blue) and Total Debt (red)
Low together in the early years... Rising together... Humping together... And declining together. There even seems to be similarity in the years after 1990, though the red line rides a little higher on the blue.

Definitely noticeable in the hump years, 1970-1985, the blue peaks lead and the red peaks lag. Investment seems to spike up, dragging debt along behind it. But maybe that lag was related more to inflation than to investment, for in the years before 1970 the lag is less obvious. Or maybe the debt humps were just smaller, in the early years.

I can use a little multiplication to make the up-and-down variations in the red line bigger... And then a little subtraction to bring the whole red line down and position it atop the blue line again:

Graph #3: The Red Line from Graph #2 (Debt) Scaled Up and Shifted Down for Comparison
No finesse was involved; "3" and "20" were the first numbers I tried. But multiplying to scale things up, and subtracting to line things up, are the same techniques used by Lars Christensen for his market index calculation, which I looked at here.

In the early years on Graph #3 debt (the red line) runs low relative to Fixed Private Investment (blue). They run neck-and-neck through the first two humps but in the third hump investment peters out early while debt continues to increase to the mid-1980s.

When debt growth reaches a low in the early 1990s, investment rockets up and stays relatively high for most of the decade.

In the late 1990s debt (blue) spiked up to meet investment, then fell, then investment fell. In the 2000s again debt growth rose to meet investment -- and both collapsed.

I realize that rates and levels are not the same thing. A low level of debt and a high level of debt, both growing at the same rate, may have significantly different effects on the economy. However, a low level of debt becomes a high level sooner at a high rate of growth. So rates and levels are related. We've been looking at growth rates in the graphs today, and now I will conclude by talking about levels. They're related.

What I think is, creating debt creates new money which lets spending expand; this is necessary for growth, at least under existing policy.

But creating debt also adds to the total accumulation of debt and increases the cost associated with that accumulation. This cost can hinder growth.

So we see that when debt is relatively low, economic growth (or in this case, Fixed Private Investment) is relatively high. But when debt is relatively high, investment doesn't run higher, and sometimes it runs low.

Related posts:


jim said...

Hi Art,
Graph#1 is interesting. It shows that usually in periods of good growth FPI grows faster than GDP and in periods of poor growth the ratio of FPI to GDP declines which means GDP declines less than FPI.
This does not seem natural to me. Is this the effect of economic stabilizers?

The recent downturn is no exception. The fall in FPI relative to GDP was faster and greater than ever and the last 4 years FPI/GDP has been the lowest in memory. Is that good? Low FPI/GDP didn't seem to hurt in the 50's and 60's.

Also interesting:
That FPI/GDP graph follows the percent change in total debt fairly closely.

Jazzbumpa said...

I've got to give Jim's observation some thought.

But: " in periods of poor growth the ratio of FPI to GDP declines which means GDP declines less than FPI.
This does not seem natural to me."

It seems natural to me. FPI can get cut with a hatchet, and corporations generally have very short sight lines.

Art -

I think you're looking for cause and effect between FPI and TDMCO.

Try taking a step back and think about common cause. Both decline in recessions. TFI rebounds sharply early in a recovery. Since 1990, debt has gone more to financial tail chasing and less to investment. The relationship to TCMDO blows up in the GR aftermath as people delverage.

My first thought, anyway.


The Arthurian said...

Jim: "This does not seem natural to me"

I was taught (in the 1970s) that investment (Gross Private Domestic Investment) is subject to greater change than any of the other components of GDP (consumption, government, net exports). If that remains true it could account for the behavior shown on the graph. Could still be a result of economic stabilizers as you suggest.

Jazz (as you can see from the above paragraph) I am not quick to draw conclusions. But I have already concluded that excessive debt is the cause of our troubles, and so I tend to compare everything to debt. I wouldn't say I'm looking for cause-and-effect. But I am always looking for evidence related to the conclusion i have drawn.

Jazz: "Since 1990, debt has gone more to financial tail chasing and less to investment."

Since 1990? Wait till you see tomorrow's graph!

(I think I'm gonna spend all week on Fixed Private Investment.)

Jim: "That FPI/GDP graph follows the percent change in total debt fairly closely."

Ah, so I was right: "the pattern reminded me of total debt growth." And those two "high points that I don't recognize" after 1990 -- that's the least similar part, it looks, by your graph. Bur for some reason I skipped comparing the first graph to the debt numbers. I'm glad you had the presence of mind to make that comparison.

jim said...

You guys are right. I was thinking fixed investment was the total value of fixed capital not the investments made in an accounting period.

Art: if you're interested in the relation of investment to total debt, look at this chart:

For 30 years the total debt to investment ratio stayed fairly constant at around 8:1. Investment was growing as fast as debt was accumulating so the ratio remained the same. Then the next 30 years the growth in debt was much faster than growth of investment.

The Arthurian said...

That's it, Jim, that's my graph for tomorrow, except I got it other side up. There is a remarkable, distinct change around 1980 due (I think) to three factors:
1. slowdown of FPI growth
2. increase of flow into TCMDO, and
3. disinflation.

#3 takes some of the fun out of the analysis. But TCMDO growth slowed more than FPI from 1986-1992 and in that period TCMDO cannot have been responsible for the uptrend your lN3 graph shows.

The Arthurian said...

in that period TCMDO growth cannot have been responsible for the uptrend.

it was the erosion of existing debt, relative to the inflating flows, that contributed much to the uptrend since 1980.

Jazzbumpa said...

just about everything of financial and/or economic significance changed within a few years of 1980

it's really quite remarkable


geerussell said...

FPI seems like an interesting series to stare at and your post made me want to see it in a slightly different context, shown in this chart.

I kept your colors, blue for total debt, red for FPI. Everything relative to GDP with some multiplication and subtraction on FPI to make its movements more visible and place it near the lines I was interested in seeing it juxtaposed with.

The difference in context here is federal debt (green) and tcmdo minus federal (black).

I'm not entirely what it is but the movement of FPI relative to those broken out components seems to suggest some nuance not readily visible when compared just to tcmdo.

geerussell said...

Similar chart here with fpi:debt ratios that I keep looking at unsure if it's interesting or not.

The Arthurian said...

Yeah. I'm thinking of changing the name of the blog to "Graphs To Stare At"
(Just kidding.)

That "some multiplication and subtraction" thing fascinates me.

As many graphs as I've done, as much as I harp on private debt, your first graph still caught me by surprise. The Federal debt really is low, isn't it.

Your second graph, 1950-1980, shows FPI stable relative to Total debt, rising relative to Federal debt, and falling relative to Non-Federal debt. Reminds me of an insight somebody had -- that the relative decline of Federal debt helped keep Total debt stable in those years while the Non-Federal debt was increasing rapidly.

Those changes in debt are what I see in the first half of that graph.

Also, there is a pretty strong family resemblance between the green line on that second graph and Total/Federal (and also NonFederal/Federal) debt -- except after 1980 the green line is tilted downhill, presumably because debt grew so much faster than FPI since 1980.