> >I raise a single question (and Doug your reply would doubtless be > >most illuminating--am I way off here?): > > > > Why did the drop off in investment spending *lag behind* the drop > >in profitability?
Doug writes: > The financial mania, of course. There were plenty of outside funds to > tap, and animal spirits were busily tapping them. As they say on Wall > Street, the stock market wasn't just discounting the future, it was > discounting the hereafter. So despite the dip in profitability, > expectations were for endless good times. > > The "financing gap" - the difference between capital expenditures and > internal cash flow - is very high for a recession (and got unusually > wide during the boom). Normally it comes close to 0; now it's about > 2% of GDP. even without the financial mania, personal savings, a government surplus, and the inflow of foreign funds (the current account deficit) can be tapped to allow businesses to continue to invest in fixed capital even when cash flow is insufficient. In recent experience it's the inflow of foreign funds that's been most important in allowing U.S. investment to continue after the profit rate fell. Jim Devine
