Thursday, September 27, 2012

Business Reinvetment verses New Investment

It seems that business reinvestment is not dead, the problem is that it is being done to reduce the amount of workers needed. A lack of growing demand for most products means that business has shifted its focus from growing and producing more, to cutting cost. Increasing productivity is a good thing in that it allows profits to grow and can reduce inflation, but this is a double edged sword in that it also reduced employment. Reinvestment should thus not be confused with new investment, new business start-ups tend to be far more job creative.

Today the government cut its calculation of U.S. growth in the second quarter to 1.3% from 1.7% in its third and final review, citing less consumer spending and business investment than previously estimated. Consumer spending rose 1.5% in the previous quarter instead of 1.7% as initially forecast. Business investment, excluding residential housing was revised down to a 3.6% increase from 4.2%. This trend should continue, expect consumers to spend less as business spends money in ways that reduce the numbers of high wage workers needed. 

On Sept.8th 2012, I posted a blog about how demand drives investment. When will policy makers begin to understand that demand drives investment, it is not about confidence, it is about lack of demand. Call it want you want, CEOs are unenthusiastic and banks have little incentive to loan money on half backed ideas for which their is little demand. It is becoming apparent to many that the financial system has become distorted and dysfunctional.  People are loaning money to governments and banks for five years with negative interest.  This is at a time that there is little demand for loans even at zero interest rates.

Those that have saved for years and had planned to retire on the interest are being forced to receive meager and historically low interest returns on their savings while inflation lowers their buying power. When it comes to the supply and demand part of the economy,  you would be surprised to the amount we can cut demand. Americans are so wasteful that often many of these cuts have little impact on their quality of life. Sometimes by cutting back people discover that "less is more", and that life is less cluttered. Till true demand increases do not expect the economy to move forward.

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