A few months ago, an entity I’ve been associated with was contemplating a major purchase to replace an older piece of machinery. The current asset was certainly usable and far from obsolete, but the “research” undertaken to evaluate the cost-effectiveness of a new model proved a bit startling. The scrutiny to purchase fell to a simple analysis: that there was enough money available to make the purchase sitting in cash-equivalent accounts, and that most importantly, those accounts were earning next to nothing. Available cash that’s earning 0.0% apparently masquerades as today’s version of a cost-benefit analysis.
When economic cycles get long in the tooth, and especially ones where low interest rates have been the impetus to drive capital from safety nets into alternatives, these attitudes evolve into a determined consensus. “Work begins on new speculative warehouse…” reads the Minneapolis Star Tribune headline detailing yet another major project built without tenants. Build it and they will come whispers the sparse return on your cash. But at the same time, rest assured that this time is completely different says seemingly everyone making these types of decisions.
Which brings me to my economic takeaway and a question for you as we’ve now entered our 7th year of ZIRP (zero interest rate policy) – How much GDP has been pulled forward from future years due to Federal Reserve monetary policy? According to the Bureau of Economic Analysis, the second estimate of 2014’s 3rd quarter real GDP (gross domestic product) increased at a very healthy 3.9% annual rate. It’s simply unquantifiable how much 2014 GDP has been stolen from the wallets of 2015, 2016, 2017, et al but based on simple anecdotal evidence we can all provide, it’s obviously an important part of the equation.
My hypothesis? We’ve pulled an enormous amount of GDP from future years. An uncomfortable amount. Also, at this very moment we may currently be seeing an unprecedented capitulation in cash which has driven the economic engine hotter and faster than it would have ran without being stoked with fuel set aside for future growth. There is the smell of burnt furniture in the air.
Perhaps a minimal amount of recent GDP has been pulled from future years though, and there lies enormous pent-up spending waiting to be deployed. In that case, the unknowable would be wildly bullish and could set the stage for years of future growth. I don’t know how that meshes with the consenus’ certainty that interest rates will reverse higher, but that’s a topic for another day.
It’s unlikely a computer model will help you decipher how much current GDP is attributable to spending confiscated from future years, but just because something is unknowable, it doesn’t directly translate that pondering and hypothesizing about it is a futile exercise. Over a longer period of time, our thirst for continued GDP growth may very well start to butt up against constraints born from past spending to keep the engine going.
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