Sunday, February 12, 2012

The jobless recovery.




The geniuses who run the West’s economies continue with their hair-brained attempts at stimulus: QE continues, while fiscal stimulus according to these geniuses is near irrelevant.

The result is that employers are encouraged to invest, at the same time there is little increase in demand for the products that such investments produce. No one with any common sense would invest in more capital equipment knowing that demand for their products was likely to remain flat. But then the above geniuses do not have the common sense of a convenience store owner or whelk stall proprietor.

Incidentally there is of course the point that investments are an injection which will presumably raise aggregate demand a bit, by why go for the above daft way of raising demand? Darned if I know.


Low interest rates encourage LABOUR SAVING investments!

Having said that no one would invest to the extent that demand for the relevant product will remain flat, there is an exception: where interest rates drop. That drop is an inducement to borrow and invest in labour saving capital equipment: extra profits can be earned that way.

And wouldn’t you know it: investment (both physical and in software) has held up nicely over the last two years as have profits. And corporate borrowing is in full swing (although it was not in full swing two years ago).

And the real “bonus” of the above hair-brained form of stimulus is that I would imagine it requires relatively skilled labour to produce capital equipment (software in particular). That means that demand for skilled labour rises which causes a shortage of skilled labour at a higher level of aggregate employment than would other words be the case. I.e. the above “genius” form of stimulus raises NAIRU.

And wouldn’t you know it: inflation remains stubbornly high despite high unemployment levels.

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