17 May 2013

Not An Ouroboros

What happens to an economy when the payback period of real, physical investment no longer meets the product life cycles that investment is built to support? That is, when payback is longer than life cycle? Who invests in such a circumstance?

The rational answer: monopolists who can, at least, command sufficient market share to amortize; at best, keep out competition to restore life cycle length. Who wins? Not the consumer, who ends up paying monopoly prices.

To review: the payback period is an estimate of an inverse (not *the* inverse, since there are other factors) of rate of return, or interest rate. So, if payback period increases for an industry or sector or entire economy, the implied rate of return (surrogated by interest rate) declines.

There are reports/studies of late that the payback period in "high tech" is increasing, while life cycles are decreasing. The end result is lack of motivation to invest; plant and equipment, that is.

This would explain, to some degree, why monetary policy of Bernanke/ECB doesn't seem to have much impact on employment or growth. If corporations see no a) no increase in demand and b) little chance of recouping investment, they'll sit on the cash. Which is what they're doing. That and massive amounts of re-financing of old debt.

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