Has America’s Capital Gone To Galt’s Gulch?

In Ayn Rand’s epic novel, Atlas Shrugged, John Galt and other who believe in free market capitalism become fed up with the ever more intrusive government, which has destroyed the free market system, so they create their own secret capitalist paradise and one by one they disappear from the American scene.

While doing some research on the dollar as the world’s reserve currency, I came across this graph, at Financial Sense,  which left me staring at it with my mouth open for what seemed to be about five minutes. It is a graph of Net Domestic Investment produced by the US Department of Commerce.

net domestic investment

To be honest, I don’t know what this graph is telling us. The note inside the graphic says it is a plot of Gross Domestic Investment Minus Consumption of Fixed Capital as a percentage of GDP. But, I am pretty sure that when net domestic investments falls to zero or less, it can’t be good for America.

Two things stand out in my mind. One is that the trend has been going on for a long time. The other is: what the hell is consumption of fixed capital? So, I decided I needed to read that part of the Financial Sense article a bit closer. Remember that this article is about the dollar as the world’s reserve currency. Here is what the author was saying that led up to him introducing the above graph. The “bold” was done by me.

In the case of an unbacked reserve currency, the ‘benefits’ of lower borrowing costs accruing to the issuing country appear to result in overborrowing and overconsumption relative to the rest of the world, eroding the domestic manufacturing base over time and widening the rich-poor gap to levels that are socially destabilising….

For those who think that a capitalist, free-market economy would never consume its own capital, outside of wartime, you may be right. But what of an economy that merely pretends to be capitalist and free market, but in fact sets the price of money by decree at an artificially low level so that there is little incentive to save?…

So, the author is saying that artificially low-interest rates cause overborrowing and over consumption and less savings and that is what is ment by consumption of fixed capital. It makes sense that people would decide not to save and instead spend when banks interest are likely negative when adjusted for inflation. But, that graph must include the net investments of businesses too. Still confused,, I decided to ask the opinion of my friend at the American Chronicles blog, who just happens to go by the handle of “John Galt”, about this graph. This was his reply:

Net domestic investment is low due to the diminishing savings rate and the growth of the current account deficit. Depreciation of capital assets need higher replacement rates that it is not keeping up due to lower economic growth.

John also suggest that I might find an article by Michael Mandel, an economist for the Progressive Policy Institute, of interest. And, I thank him because the Mandel article uses a similar graph that net investment by business and household shown as separate lines. Let’s take a look:

Okay. Now we know that it is not just individuals who are using up their savings. Businesses also are not investing in America. Do you think this might explain why we have been see the workforce participation declining for years? I think so. But, Mr. Mandel has a third line on his graph. The green line represents government net investments. What does Mr. Mandel have to say about these results?

This chart, which runs through the third quarter of 2011, displays several disturbing patterns:

  • Despite rebounding from its recession valley, net business investment as a share of net domestic product is still far below historical levels.
  • Household and institutional net investment as a share of net domestic product  is at a 40-year low.
  • And perhaps most disturbing, government net investment is only 1% of  net domestic product, a 40-year low.

And, what does Mr. Mandel, a progressive conclude?

Let me repeat that: Government net investment as a share of net domestic product is at a 40-year low. I had to check this last one a couple of times to make sure it was really true.  This is a true failure of national economic policy. Government is punking out, just at the time when a public investment surge is needed to make up for the private investment drought.  As a country, we should be investing more, not less.

Of course! Like any good progressive the answer is more government spending investment. But, here is what I want you, my dear readers, to consider. Mr. Mandel correctly pointed out that government, household and business net investments are at a forty-year low. Does it ever occur to people like Mandel and the idiots we send to Washington to ask WHY? By idiots in Washington I mean those with a D or a R after their names. Over forty years, both parties have had more than ample opportunity to address this problem.

To Mr. Mandel, I would like to ask hom if he ever considered that the reason government” investment” is at a forty-year low is that 60% of the government’s budget is for the so-called entitlement programs. When you add the debt service cost and national security, that doesn’t leave much for government “INVESTMENTS”, does it Mr. Mandel?

Sadder still, dear friends, is what our Big Government Democrats and our Big Government Republicans have done to this country. It never occurs to them that if Americans and American businesses are not investing in America, that just maybe it has something to do with the asinine fiscal policies they have pursued for the last forty years? Does the word “growth” ever  occur to the Democrats or Republicans in Washington? Has anyone heard that word bantied about during the “sequestration” debates of the last few weeks? I’ve not heard it, if it has.

Maybe the reason everyone is headed for Galt’s Gulch is that no one in Washington gives a damn about our country. They only care about being reelected.

Well, that’s what I’m thinking. What are your thoughts?



16 thoughts on “Has America’s Capital Gone To Galt’s Gulch?

    1. The bankers have killed every other form of investment- bonds, CD’s, they suppress competing commodity markets and interests. Banks are using free FED money to drive up the price of the stock market. That is the over consumption this article speaks of. Pretty soon- the whole thing is going to cave in- because nobody has fixed anything in this country. It’s not a matter of if- simply when. They can’t do QE forever. Putting frosting on shit and calling it cake has worked for five years- lets see if they can make it work another five.

    2. The stock market is ONLY a product of the supply and demand of available capital (AC -very important factor) in relation to its alternatives. That is why the phrase, “don’t fight the Fed”, when it comes to the stock market alone. At this point, both, the supply of capital and its alternatives, favor stocks. Eventually this equation will change. The key word here is “eventually” (those that can time ‘eventually’ will make a lot of money)

      1. I wish I could cite a source, but my understanding from an article I read is that, because of QE and the threat of inflation (combined with other factors such as Jim mentioned regarding savings actually becoming a net loss at this point, and one that would REALLY become a net loss in the case of greater inflation… or hyperinflation), smart money is going where there is a shield against inflation: stocks (which should rise in price with inflation to some degree) and gold. So he rise in the stock market in this strange case is actually not a show of confidence in the markets, it’s a sign of fear of inflation. Now… does that make sense? John? Jim?

  1. All our beloved elected leaders stand for one thing: bigger government. Intrusive government. “Compassionate” socialism, which by the way is not compassionate since it just lowers the standard of living for everyone (except for the knighted political class and the bureaucrats of course.)

    And why should the average citizen save anymore? It’ll just be wiped out in the next bailout.

  2. Fantastic article, Prof.

    I have said before that you are a brave soul. This time I say it again because you tackled a very esoteric and complicated economic issue – that of NET Domestic investment. I capitalized ‘Net’ because the difference from ‘Gross’ Domestic investment is where we can find the source of the problem.
    As you noticed in the Mandel Graph, the “government” share has always been low. That is because of what we already know – that Government investing has very high depreciation rates (where ‘Net’ comes in), in some cases one or two years, or even zero. That is because like you said, it is not really investment but consumption.

    I have pointed out before that paying a laborer to dig a hole makes for a “good” investment only and until the hole is finished. The depreciation of capital invested in the hole is 100% because there is very little demand for holes which makes for a 0% of GDP in NET Domestic Investment (not counting the demand for holes coming from the heads of our Congressmen). It is a fascinating subject but a long and complicated one. Nothing that our Congressmen can understand or act upon.

    Great article, (and thanks for the mention, I wasn’t sure you were aware of my answer to your question).

  3. People seem to like a little stability when they make investments. When’s the last time we knew what the tax rate was going to be, and we didn’t have to fear new regulations that were going to cost more in compliance and possibly render our plans obsolete? When is the last time we could have faith in the dollar? Do you think those things might have an impact on the willingness to invest?

  4. At some point, going Galt becomes inevitable — when investors realize that they have the government butting into everything and confiscating wealth.

    We are rapidly approaching the point of worldwide dystopia.

    1. One needs to be very suspecious of why people like David Rockerfeller, Warren Buffet, and George Soros are in favor and even promoting these government actions. They have a plan to come out on top; that is for sure.

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