Another sign that we’re in a depression

great_depression_2008Industrial capacity utilization is at its lowest level since 1982 (when we had double-digit unemployment), and down 11% from a year ago (when we were already in a recession).

Calculated Risk has the story; data are from the Federal Reserve.

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2 Responses to “Another sign that we’re in a depression”

  1. Richard D. Says:

    My logical response to such statistics is that the markets are self-correcting for a period of low-savings, high-investment, which is by definition impossible to sustain.

    Note that the personal savings rate (which would provide capital–i.e., past production–to stimulate current investment) dropped dramatically during the period of late 2004 to early 2008. See http://www.bea.gov/briefrm/saving.htm .

    Why would this occur? Well, if interest rates are kept artificially low (and by this, I mean lower than what they would be in a laissez-faire financial system), then less “real savings” will be supplied to the market (i.e., people will save less).

    At the same time, during this period, business investment soared. See http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s%5B1%5D%5Bid%5D=GPDIC96&s%5B1%5D%5Brange%5D=10yrs . This data helps to demonstrate a possible disequilibrium between real savings and private investment over the period.

    On the other hand, the money supply did not increase in any dramatic amount over the period. See http://mises.org/content/nofed/chart.aspx?series=TMS . The TMS held relatively steady, though the slight rise undoubtedly created some fictitious savings. However, we do have the period of 2000 to 2004 to contend with–during this period, the TMS rose dramatically, and the effects of this rise possibly could have been felt between 2004-2008 with the disequilibrium between investment and savings we saw earlier (which then lead to this current so-called “overcapacity”).

    If the interest rate was kept artificially low over the period, then this causes less real savings to occur, since savers are not compensated enough for staving off present consumption in favor of future consumption; it also causes investment to increase, since, well, the interest rates are so low so it seems as though there’s plenty of real savings, i.e., plenty of capital to be invested. It is a disequilibrium, a shortage of real savings, caused by fictitious supplies of savings (that is, an increase in the money supply), and can be analyzed quite simply using supply and demand curves for “real savings.”

    Perhaps this isn’t the only causal factor, but it is definitely one to keep in mind. Right now, it is possible that industrial capacity use has slowed because businesses invested “too much,” relative to what future demand would be. In other words, the capital which was available made it seem as though consumers were saving a lot, so businesses invested a lot (since capital was cheap), and their investments would have paid off had consumers really had large amounts of savings for purposes of future consumption (consumption after the investment was complete). But expansionary monetary policy, though it looked good in the short-run, can go a long way to creating this type of disequilibrium in this market.

  2. Richard D. Says:

    Ah, silly me putting erroneous links up. The business investment graph can be found here.

    http://research.stlouisfed.org/fred2/fredgraphfile?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s%5B1%5D%5Bid%5D=GPDIC96&s%5B1%5D%5Btransformation%5D=lin&s%5B1%5D%5Bscale%5D=Left&s%5B1%5D%5Brange%5D=10yrs&s%5B1%5D%5Bcosd%5D=1998-10-01&s%5B1%5D%5Bcoed%5D=2008-10-01&s%5B1%5D%5Bline_color%5D=%230000FF&&s%5B1%5D%5Bmark_type%5D=NONE&s%5B1%5D%5Bline_style%5D=Solid

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