Fred writes: > >3. The current recession was caused by a sharp decline in investment >spending, beginning in late 1990. > > > >The main point of disagreement seems to be - whether or not the decline of >investment spending that caused the recession was itself caused by the >decline in the rate of profit since 1997. > >However, it has been widely discussed in the business press that >investment collapsed in 2001 as a result of "rapidly deteriorating >profitability". As we have discussed, the rate of profit turned down in >1997, and has continued to decline ever since, and finally took its toll >on investment spending in late 2000.
I raise a single question (and Doug your reply would doubtless be most illuminating--am I way off here?): Why did the drop off in investment spending *lag behind* the drop in profitability? So far we have not mentioned the effect of interest rates. In the wake of the Asia Panic, Greenspan flooded the market with liquidity which led to an asset inflation. With low rates and an ease in raising equity capital in this Age of the IPO, many very questionable long term R & D projects and what the Hayekians would call higher order projects were undertaken. However since Greenspan seems to want to follow sensitive commodity prices, he was later forced to play catch up as the price of the basket of sensitive commodities fell; Greenspan aggressively raised rates to maintain confidence in the value of the currency. The successive rate hikes took the floor away from what were inviable long term, R and D intensive projects which were counting on cheap capital before they were completed. The Nasdaq balloon was pierced. Investment in so called higher order industries collapsed. And the effects of that have multiplied out. Greenspan's reversal has not since restored confidence. Just guessing. Rakesh
