Wednesday 10 June 2015

The Real 'Malinvestment'

FT today carries a well written piece by John Plender on excess capacity being created in China by accumulated domestic savings and the cons of an over the top investment led strategy which he classifies as 'malinvestment'. Point well taken. But what I do not understand, is that other than attacking Mandarin economic Policies, which by the way, Bernanke did famously last week by tearing into the AIIB (very uncalled for if you ask me), why none of the Western school of famous economists(save Krugman and his rare breed) are complaining about the lack of investments in the Western world where near zero real rates can actually be taken advantage of by Governments not immediately fiscally challenged to jump start their respective economies. Isn't that oversight a better candidate for the epithet 'malinvestment' rather than the one Plender is complaining of? For example-malnourishment is the same as undernourishment ,so why not use the term malinvestment for underinvestment? 

I can hear you say - But there's deflation already on in major economies, and higher investments at this stage will create more of the excess capacity and recreate stronger deflationary headwinds. Not if real unemployment is already in double digits and if the investment is likely to draw the pool of the unemployed or underemployed folks back to a decent job- which it will. These extra jobs/work that the investment creates will fuel demand immediately while the capacity creation comes only with a time lag - think 'Golden Gate bridge'. Since capacity creation comes only with a time lag post demand creation , as described above- the two are mutually reinforcing and there is no deflationary impact as is being feared by the Austrian school. So coming back to China- Is the investment cycle over the top there? plenderFT 

Quite likely. But the underinvestment in most of the Western world is even worse and Chinese over-investment is a kid in size relative to the chimpanzee of the underinvestment pogrom that the 'Austrian' guys are doing to the great detriment of their respective economies. 

I am not sure whether what people like Krugman are saying is reaching it right to the likes of Giants like Bernanke and his ilk. These Monetarists are treading the path of fruitlessness and will ultimately cause pain to their own nations where they unfortunately hold great sway over policy making.