it seems to me highly premature to assume we know what is going on with short-term negative real rates
Let me try to tell the disinflation story again. Suppose that most capital goods these days have computing devices built into them. Consequently, there is rapid improvement in capital. This in turn means that:
1. Today’s capital goods are much more productive then yesterday’s.
2. The real price of capital goods is falling over time.
3. Depreciation of existing capital goods is rapid. What you buy today is obsolete in a few years.
I teach students a basic formula for the profitability of buying a durable good:
profitability = rental rate + appreciation – interest cost
Suppose that the rental rate on new capital is very high. That is, it is very productive. However, the appreciation rate is very negative. You may need a negative interest rate to convince you that it is profitable to obtain capital.
What else would be true if this were the story? Assets that do not depreciate would be very attractive. So if you believe that real estate does not depreciate, you want to invest in it. If you believe that corporate “brand value” does not depreciate it, you want to buy shares in firms that have a lot of brand value.
More needs to be worked out.
“Suppose that the rental rate on new capital is very high.”
Do we know that this is true? If the real cost of capital goods is decreasing over time, then we would expect people to buy more of them. But as more are bought, don’t the returns to holding them fall? For example, if the cost of an MRI machine falls and a bunch of new MRI clinics open in town, doesn’t that drive the economic profits from operating the machines down near zero? And yes, I know using healthcare services is a terrible example due to the 3rd party payment and physician referral systems, but you get my point.
I’m attempting to apply your formula to a decision I made a few years ago. I bought the vacant building lot across the street in order to preserve my view of the mountains and valley. I assume the “rental rate” is the subjective benefit I enjoy by not having my view blocked? The appreciation and interest (opportunity cost of having my money tied up in the vacant lot) components of the formula are easy to apply to my case.
Increasing liquidity across a broad range of non-money asset classes as a source of deflationary pressures. http://jpkoning.blogspot.com/2015/10/how-i-learned-to-stop-worrying-and.html
The problem with a lot of cheaper capital expenditures that depreciates quickly is it does not take a lot of borrowed money to be invested. (Nor do banks like to lend on fast depreciating capital either as it is worthless to repossess.) So while the globe is richer and has significantly more savings to invest, the need for long term investments is dropping.
So everybody could be increasing IT investment but: 1) Prices deflation with IT shows investment decreases the last 10 – 15 years. 2) IT investments need fast depreciation schedule which minimizes the need borrowed money.
In reality, this started occurring in 2001 but the excess investment went into housing bubbles.
Capital goods actually depreciate in three different ways.
1. They wear out. For things other than vehicles this seems the least important.
2. They cease to be effective in competitive markets – that is, the 2015 CNC screw machine can make left handed spark plug fasteners more cheaply than the 2010 machine.
3. The market they serve fades away – so you had the world’s best machinery for making rabbit ear attennas for analog TV. What is it doing now?
I suspect #3, and fear of #3, is a big issue right now. If real margins are poor, and real length of utility short, then the wise will not be spending heavily on capital goods.
And always remember – debt is debt. Even at *negative* interest rates, it mostly has to be repaid, is a liability, a source of risk. The return on the use of debt needs not to just exceed the cost of borrowing, but also be high enough to offset the *risks* of borrowing.
The problem we are debating is when it is best to replace a capital good, say AutoCAD software (better and cheaper versions appear every year) or the last CNC lathe. As a freelance design engineer it is obvious to me that it is compulsory to have the latest equipment in order to be compatible and to compete. The whole thing reminds a lemming herd running frantically off the cliff. No one can make a profit anymore. The solution to disinflation is disproduction, that is, is a good war. Preferably far from my home.
” Assets that do not depreciate would be very attractive.”
Sure. But in the post 2008 economy is there widespread confidence that any asset class is beyond depreciation? If there is such an asset class, does it have the capacity to absorb the investment dollars attracted without producing a bubble?