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:

• Gimmie Some Slack (4 Feb 2010)
• Credit Efficiency (21 March 2010)