Low Interest Rates and Business Investments : Update August 2017

Low Interest Rates and Business Investments : Update August 2017

 

From  Explaining Low Investment Spending

USINVEST

globalinvest

 

Please see my earlier posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

The Decline in Long Term Real Interest Rates

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks Profitability: Update – December 2016

 

Since my earlier posts on this subject there has been several new studies published highlighting weakness in business investments as one of the cause of slower economic growth and lower interest rates.

Other significant factors impacting interest rates are demographic changes, and slower economic growth.

I argue that there is mutual (circular) causality in weak business investment, slower economic growth, and lower interest rates which reinforce each other.

 

Decreased competition, increased concentration, corporate savings glut, share buybacks, paying dividends are also identified as factors.

Number of public companies have decreased significantly in USA since 1996 due to M&A activity.   See the data below.

Increased Mergers/Acquisitions, Increased Concentration, Decreased Competition, Decreased Number of Public Companies, Share buybacks, and Dividend Payouts are multiple perspectives of same problem.

 

From The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

USNUMUSSTAT

 

Key sources of Research:

The Low Level of Global Real Interest Rates

Remarks by
Stanley Fischer
Vice Chairman
Board of Governors of the Federal Reserve System

at the
Conference to Celebrate Arminio Fraga’s 60 Years
Casa das Garcas, Rio de Janeiro, Brazil

July 31, 2017

The Low Level of Global Real Interest Rates

 

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

German Gutierrez Thomas Philippon

Working Paper 22897

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue
Cambridge, MA 02138

December 2016

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

 

 

Explaining Low Investment Spending

The NBER Digest
NATIONAL BUREAU OF ECONOMIC RESEARCH

February 2017

Explaining Low Investment Spending

 

 

The Secular Stagnation of Investment?

Callum Jones and Thomas Philippon

December 2016

 

The Secular Stagnation of Investment?

 

 

Is there an investment gap in advanced economies? If so, why?

By Robin Dottling, German Gutierrez and Thomas Philippon

 

Is there an investment gap in advanced economies? If so, why?

 

 

The Disappointing Recovery of Output after 2009

JOHN G. FERNALD ROBERT E. HALL

JAMES H. STOCK MARK W. WATSON

May 2, 2017

The Disappointing Recovery of Output after 2009

 

 

Declining Competition and Investment in the U.S.

German Gutierrez and Thomas Philippon

NATIONAL BUREAU OF ECONOMIC RESEARCH

July 2017

 

Declining Competition and Investment in the U.S

 

 

Real Interest Rates Over the Long Run : Decline and convergence since the 1980s

Kei-Mu Yi   Jing Zhang

ECONOMIC POLICY PAPER 16-10 SEPTEMBER 2016

FEDERAL RESERVE BANK of MINNEAPOLIS

Real Interest Rates over the Long Run Decline and convergence since the 1980s, due significantly to factors causing lower investment demand

 

 

Understanding global trends in long-run real interest rates

Kei-Mu Yi and Jing Zhang

Economic Perspectives, Vol. 41, No. 2, 2017
Chicago Fed Reserve Bank

 

Understanding Global Trends in Long-run Real Interest Rates

 

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

CAMA Working Paper 19/2017 March 2017

M. Ayhan Kose

Franziska Ohnsorge

Lei Sandy Ye

Ergys Islamaj

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

 

 

Are US Industries Becoming More Concentrated?

Gustavo Grullon, Yelena Larkin and Roni Michaely

October 2016

 

Are US Industries Becoming More Concentrated?

 

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

Robert Fay, Justin-Damien Guénette, Martin Leduc and Louis Morel,

International Economic Analysis Department

Bank of Canada Review Spring 2017

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

 

What Is Behind the Weakness in Global Investment?

by Maxime Leboeuf and Bob Fay

2016

Bank of Canada

 

What Is Behind the Weakness in Global Investment?

 A Structural Interpretation of the Recent Weakness in Business Investment

by Russell Barnett and Rhys Mendes

 The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

Gruber, Joseph W., and Steven B. Kamin

International Finance Discussion Papers
Board of Governors of the Federal Reserve System
Number 1150 October 2015

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

 

The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

March 22, 2017

GLOBAL FINANCIAL STRATEGIES

http://www.credit-suisse.com

 

The Incredible Shrinking Universe of Stocks The Causes and Consequences of Fewer U.S. Equities

 

 

They Just Get Bigger: How Corporate Mergers Strangle the Economy

Jordan Brennan

2017 February 19

They Just Get Bigger: How Corporate Mergers Strangle the Economy

 

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Jordan Brennan

March 2016

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Low Interest Rates and International Capital Flows

Low Interest Rates and International Capital Flows

Mendoza and Quadrini had proposed in 2009 that Financial Globalization is one of the cause of Financial Contagion and crisis.

Ben Bernanke has proposed Savings Glut in the emerging market countries as the cause of depressed real interest rates in advanced economies.  Return to safe assets.

Larry Summers, since 2013, has proposed Secular Stagnation as a cause of depressed interest rates.  He says that the IS curve has shifted to the left.

Hyun Song Shin has proposed Banking Glut as the cause of low real interest rates.  Round Tripping of US dollars through European Banks has created depressed real interest rates in USA.

Junji Tokunaga and Gerald Epstein have proposed US Dollar based Global shadow Banking system as the cause of financial fragility.  Role of Offshore Financial Centers.

Stanley Fischer says that low productivity growth and demographic changes are also to be blamed.

We also need to look at changes in IIP (International Investment Positions) of USA over the years.  Impact of NAFTA and Trade with China also need to be studied.  What happens when a corporate borrows cheap money in USA and invests overseas lets say in China or Mexico?  What are the impacts on Real Interest rates?

Another perspective:  What is the impact of Declining Real Interest Rates on the Capital Flows?    Do declining Net Interest Margins of Banks influence capital flows?  Is the Causality other way round from Low Interest rates to Increase in Capital Flows?

 

Causes of Low Real Interest rates including capital in-flows:

  • Inequality
  • Demographics
  • Global Savings Glut
  • Global Banking Glut
  • Eurodollars In-flows
  • Weak Foreign Economic Growth
  • Low Investments
  • Increased Savings
  • Weak Demand ( Inverse Says Law)
  • Debt Overhang
  • Liquidity Trap
  • Supply Side effects

 

From The Age of Secular Stagnation

Other explanations for what is happening have been proposed, notably Kenneth Rogoff’s theory of a debt overhang, Robert Gordon [6]’s theory of supply-side headwinds, Ben Bernanke’s theory of a savings glut [7], and Paul Krugman’s theory of a liquidity trap. All of these have some validity, but the secular stagnation theory offers the most comprehensive account of the situation and the best basis for policy prescriptions. The good news is that although developments in China [8] and elsewhere raise the risks that global economic conditions will deteriorate, an expansionary fiscal policy by the U.S. government can help overcome the secular stagnation problem and get growth back on track.

From Financial Globalization, Financial Crises and Contagion

 

The global financial crisis that started with the meltdown of the U.S. sub- prime mortgage market in 2007 was preceded by a twenty-year period of substantial growth in debt and leverages, in an environment of increasing world financial integration, low real interest rates and growing U.S. external deficits. During this period of widening “global imbalances” we also observed large financial crises in emerging economies with cross-country contagion that in some cases did not appear to be motivated by fundamental forces. Some of these crises affected the capital markets of the industrial world (particularly the LTCM crisis in the aftermath of the 1998 Russian crash).

These events have generated a large body of research with well-established contributions. Until now, however, the study of global imbalances and the study of financial crises and contagion have remained somewhat separate subjects. In particular, the study of financial or currency crisis has mostly been focused on emerging economies in a small economy set-up. In contrast, this paper addresses the question of whether the ongoing global financial crisis and the process of financial globalization are related. In particular, we study two key issues. First, we study how financial globalization contributed to the buildup of very high leverages in some industrialized countries, especially the U.S. Second, we study how credit frictions can amplify the effects of credit shocks on asset prices and how these effects are transmitted across countries in a world that is financially integrated.

The motivation for this project derives from the evidence provided by Figure 1 showing that the U.S. credit boom was largely fueled by foreign lending.

The first panel of Figure 1 shows that the net debt-income ratio of the U.S. non financial sectors doubled between 1982 and 2008 (net credit market assets as a ratio of GDP of these sectors fell from -1 to about -2). A surge in net debt of this magnitude, which affected all three broad U.S. non financial sectors (households, non financial businesses, and the government), is unprecedented in the data available since 1946.

Starting in the mid 1980s, the integration of world capital markets that resulted from the removal of capital controls and innovations in financial markets produced significant changes in gross and net foreign asset positions worldwide (see Lane & Milesi-Ferretti (2006)). In the United States, both gross and net foreign borrowing rose sharply. Regarding net foreign credit, about half of the increase in the net debt-income ratio of the non financial sectors mentioned above was financed by a rise in net credit assets held by the rest of the world (see again the top panel of Figure 1), and this was also an unprecedented phenomenon in the post-war period. Before the mid 1980s, the U.S. fitted well the definition of financial autarky: The net debt of the domestic non financial sectors was almost identical to the net credit assets of the financial sector, with a zero net credit position for the rest of the world.2 In terms of gross positions, the second panel of Figure 1 shows that the foreign credit claims on U.S. non financial sectors grew sharply since 1985, while U.S. lending to foreigners (i.e. claims of the U.S. non financial sectors on foreign agents) experienced a relatively modest increase. As a result, net credit assets held by the rest of the world grew by 50 percent of U.S. GDP since 1982.  
The above trends identified in net credit assets are even more pronounced for net total financial assets and net Treasury securities, as shown in the bottom panel of Figure 1. The plot shows the net asset positions of the U.S. vis-a-vis the rest of the world as a ratio of the corresponding net asset positions held by the domestic non financial sectors for three asset categories: credit market assets (as in the top two panels), total financial assets, which include non-credit assets like equity, and U.S. Treasury bills. The ratios for credit assets and total financial assets hover near zero before the mid 1980s, reflecting again the fact that before financial globalization the U.S. was effectively in financial autarky. By the end of 2008, however, net credit assets held by the rest of the world amounted to 1/5 of U.S. net credit liabilities of the non financial sectors, and for total financial assets the ratio was even higher at about 1/3. For T-bills, the rest of the world increased its positive net position sharply with the collapse of the Bretton Woods system in the early 1970s, but even that increase dwarfs in comparison with the surge observed since the mid 1980s. By 2008, the rest of the world was a net holder of about one in every two T-bills held outside of the U.S. financial sectors.  
The fact that a large fraction of the credit expansion experienced by the U.S. economy was financed by foreign borrowing raises a key question: Did the globalization of financial markets contribute to the current crisis? In particular, we are interested in understanding how financial globalization contributed to the surge in debt in the United States, how it might have influenced the volatility of asset prices and the spillover of the crisis across countries.

 

 

From The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach

Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.

 

Key Sources of Research:

 

Financial Globalization, Financial Crises and Contagion

Enrique G. Mendoza

Vincenzo Quadrini

March 25, 2009

 

http://www.carnegie-rochester.rochester.edu/april09-pdfs/mendozaquadrini.pdf

 

Global imbalances and the financial crisis: Link or no link?

by Claudio Borio and Piti Disyatat

Monetary and Economic Department May 2011

 

http://www.bis.org/publ/work346.pdf

 

Global Imbalances and the Financial Crisis: Products of Common Causes

Maurice Obstfeld and Kenneth Rogoff

November 2009

http://eml.berkeley.edu//~obstfeld/santabarbara.pdf

 

U.S. Monetary Policy, ‘Imbalances’ and the Financial Crisis

Pierre-Olivier Gourinchas

http://economics-files.pomona.edu/colloquium/gourinchas.pdf

 

The Global Saving Glut and the U.S. Current Account Deficit

Remarks by Governor Ben S. Bernanke

At the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia

March 10, 2005

https://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

 

International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007

Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin

2011

https://www.federalreserve.gov/pubs/ifdp/2011/1014/ifdp1014.pdf

 

The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach

Junji Tokunaga and Gerald Epstein

2014

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.634.4485&rep=rep1&type=pdf

 

Global Banking Glut and Loan Risk Premium

Hyun Song Shin

Princeton University hsshin@princeton.edu

January 2012

 

https://www.princeton.edu/~hsshin/www/mundell_fleming_lecture.pdf

 

Global Banking Glut and Loan Risk Premium

 

Hyun Song Shin

 

Mundell-Fleming Lecture

IMF Annual Research Conference November 10-11, 2011

 

https://www.imf.org/external/np/res/seminars/2011/arc/pdf/hssslides.pdf

 

Global liquidity: where it stands, and why it matters

Speech by Jaime Caruana

IMFS Distinguished Lecture at Goethe University Frankfurt, 5 March 2014

http://www.bis.org/speeches/sp140305.pdf

 

Global savings glut or global banking glut?

Hyun Song Shin

20 December 2011

http://voxeu.org/article/global-savings-glut-or-global-banking-glut

 

Financial Globalization and the Crisis

 

Philip R. Lane

Trinity College Dublin and CEPR July 2012

 

Persistent unusually low interest rates. Why? What consequences?

 

Claudio Borio

 

http://www.bis.org/speeches/sp150628a_presentation.pdf

 

Three BIS research themes in the Annual Report

Hyun Song Shin

BIS Annual Report 2014/2015
Global Liquidity and Drivers of Cross-Border Bank Flows

 

Eugenio Cerutti, Stijn Claessens, and Lev Ratnovski1

June 1, 2015

 

Cross-border banking and global liquidity

by Valentina Bruno and Hyun Song Shin

http://www.bis.org/publ/work458.pdf

 

Trilemmas and Tradeoffs: Living with Financial Globalization

Maurice Obstfeld

June 28, 2014

http://www.bis.org/events/conf140626/obstfeld_paper.pdf

 

Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence

Hélène Rey

Issued in May 2015

http://www.nber.org/papers/w21162.pdf

 

Financial Globalization and Monetary Policy

Steven B. Kamin

2010

 

https://www.federalreserve.gov/pubs/ifdp/2010/1002/ifdp1002.pdf

 

Trilemma, Not Dilemma:
Financial Globalisation and Monetary Policy Effectiveness

 

Georgios Georgiadis

Arnaud Mehl

January 2015

https://www.dallasfed.org/assets/documents/institute/wpapers/2015/0222.pdf

 

Financial Globalization and Monetary Policy

Michael B. Devereux and Alan Sutherland

https://www.imf.org/external/pubs/ft/wp/2007/wp07279.pdf

 

Low long-term interest rates as a global phenomenon

 

Peter Hördahl, Jhuvesh Sobrun and Philip Turner

 

http://www.bis.org/publ/work574.pdf

 

Globalization’s Effect on Interest Rates and the Yield Curve

by Tao Wu

 

https://www.dallasfed.org/assets/documents/research/eclett/2006/el0609.pdf

 

Impact of Globalization on Monetary Policy

Kenneth S. Rogoff

https://www.kansascityfed.org/Publicat/Sympos/2006/PDF/19Rogoff.pdf

 

A primer on ‘global liquidity’

Eugenio Cerutti, Stijn Claessens, Lev Ratnovski

08 June 2014

http://voxeu.org/article/primer-global-liquidity

 

GLOBAL LIQUIDITY—ISSUES FOR SURVEILLANCE

2014

 

http://www.imf.org/external/np/pp/eng/2014/031114.pdf

 

Global Liquidity: Public and Private

Jean-Pierre Landau

 

http://www.jeanpierrelandau.com/wp-content/uploads/2013/05/Jackson-Hole-Print.pdf

 

CAPITAL FLOWS AND GLOBAL LIQUIDITY

 

http://www.g20.org/English/Documents/Current/201608/P020160811536051676178.pdf

 

The Age of Secular Stagnation

The Age of Secular Stagnation

 

Why are interest rates so low?

Ben S. Bernanke

Monday, March 30, 2015

Why are interest rates so low?

Why are interest rates so low, part 2: Secular stagnation

Why are interest rates so low, part 3: The Global Savings Glut

Why are interest rates so low, part 4: Term premiums

 

Low Interest Rates

 

Why Are Interest Rates So Low? Causes and Implications

Stanley Fischer

October 2016

 

https://www.federalreserve.gov/newsevents/speech/fischer20161017a.pdf

 

Longer-Term Challenges for the U.S. Economy

Stanley Fischer

November 21, 2016

 

https://www.federalreserve.gov/newsevents/speech/fischer20161121a.pdf

 

The Eurodollar Market in the United States

Marco Cipriani and Julia Gouny

http://libertystreeteconomics.newyorkfed.org/2015/05/the-eurodollar-market-in-the-united-states.html

 

The FR 2420 Data Collection: A New Base for the Fed Funds Rate

Marco Cipriani and Jonathan Cohn

http://libertystreeteconomics.newyorkfed.org/2015/04/the-fr-2420-data-collection-a-new-base-for-the-fed-funds-rate.html#.VUktby7Godl

 

The New Overnight Bank Funding Rate

Marco Cipriani, Julia Gouny, Matthew Kessler, and Adam Spiegel

http://libertystreeteconomics.newyorkfed.org/2015/11/the-new-overnight-bank-funding-rate.html

 

Eurodollar banking and currency internationalisation

Dong He and Robert McCauley

 

http://www.bis.org/publ/qtrpdf/r_qt1206f.pdf

 

Segmentation in the U.S. Dollar Money Markets During the Financial Crisis

James J. McAndrews

May 19, 2009

 

http://www.imes.boj.or.jp/english/publication/conf/2009/Session2.pdf

 

All about the eurodollars

Izabella Kaminska

https://ftalphaville.ft.com/2014/09/05/1957231/all-about-the-eurodollars/

http://www.marketoracle.co.uk/Article26216.html

http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/viewFile/12872/12675

 

 

LONG-TERM INTEREST RATES: A SURVEY

 

https://www.whitehouse.gov/sites/default/files/docs/interest_rate_report_final_v2.pdf

 

 

Low Equilibrium Real Rates, Financial Crisis, and Secular Stagnation

Lawrence H. Summers

 

Global dollar credit: links to US monetary policy and leverage

by Robert N McCauley, Patrick McGuire and Vladyslav Sushko

 

Low Interest Rates and Housing Booms: the Role of Capital Inflows, Monetary Policy and Financial Innovation

 

Filipa Sá

Pascal Towbin

Tomasz Wieladek

April 2011

http://www.dallasfed.org/assets/documents/institute/wpapers/2011/0079.pdf