I ran across an article on Seeking Alpha by Andy Sutton about a concept that often gets overlooked in discussions of GDP and macroeconomics in general – potential GDP and growth in capacity. The article starts out talking about Qatar and its recent bond issuance:
This past week, this small country, known primarily for its exporting of natural gas, managed to garner $28 billion in orders for a $7 billion bond auction. Given the still partially fractured state of global credit markets, this level of interest borders on remarkable. The $28 billion bond sale is the largest by an emerging market player to date.
Holy bid-to-cover, Batman! That’s a 4:1 ratio. Impressive. He goes on:
What is not so remarkable, however, is why this level of interest was present in this bond auction. The small nation state listed among its purposes for proceeds from the auction infrastructure projects, international oil and gas investment, and the purchase of stakes in companies such as Volkswagen (VLKAY.PK). Perhaps we in the Unites States should take notice as the seats at our own bond auctions continue to empty and we edge further down the dangerous path of overt monetization.
This situation shines a good deal of light on the proven economic principle that capital formation comes from the foregoing of consumption and the resulting investment. Even though credit has gotten a bad name recently, it plays a vital role in any healthy economic system. Borrowing money to build productive capacity and to make strategic acquisitions that will produce cash streams to pay for themselves is a wise use of credit. This is where the US has departed from the tenets of economic common sense and descended into the depths of absurdity.
I have no quarrel with his conclusions. He’s dead-on. Capital raises are a lot easier to achieve when you can tell potential debt buyers you expect an IRR/RAROC/RAROI of X percent. What’s the RAROC on the stimulus plan? Ok, just checking. You get back to me when you figure out that one.
In the meantime, I’ll just bore you with another chart:
This is year-over-year change in real private non-residential fixed investment. The idea behind Sutton’s article of course, is that a build-out of productive capacity is a great use of capital. Whether the capital is physical, intellectual, or some other form, the fact that capital is expanding is usually a good indicator of an optimistic outlook for a country and its economy. This isn’t looking so good.
Back to the article:
Still, adapting the old saying, a lousy hotel investment is still better than a good US Government debt obligation, apparently. If these recent developments don’t demonstrate the ongoing metamorphosis of the global financial structure, then nothing will. Maintaining reckless fiscal behavior here at home will continue to have a deleterious affect on our currency, our ability to finance future activities legitimately and ultimately our standard of living.
The lesson in this week’s news is a simple one: use credit wisely and for productive purposes and there will be demand at your bond auctions. Behave foolishly and you’re going to have empty seats and the need to monetize.
The story about monetizing the US debt is a bit of a stretch, since part of the Fed’s actions include replenishing the Treasuries it had sold off previously. But the point is still the same. Unless we get our fiscal house back in order and until we get back to plowing investors’ money into productive uses (i.e. building out domestic capital stock), GDP growth is going to be dampened and standards of living along with it.