Saturday, November 3, 2012

Demand is all that matters.

Some of us have been pointing out for a long time that the confidence fairy is hogwash and that interest rate adjustments are near irrelevant. I.e. all that matters is demand.
Demand ITSELF creates jobs, thus the question as to what proportion of any additional demand funds investment is not desperately important: it’s something that can be left to businesses and the free market to sort out.
However, there are those with a fetish about investment spending. It tends to be those with a “toys for boys” mentality: multi-million pound, high tech  investment projects turn them on. So for the benefit of the “toys for boys” brigade, the chart below (from a recent Bank of England paper) will be of interest. It shows that demand (the blue line) is much the most important determinant of investment spending, rather than "inability to raise external finance", "cost of finance", etc.

Amazing that, isn’t it? Businesses invest when they see customers coming thru the door. That point will be obvious to the average convenience store proprietor, but it seems to be beyond the comprehension of many a self-appointed sophisticate: politicians, economists and so on.

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