As of January 1, 2014 to March 31, 2014, it is appreciated at PHP 86,094. That’s PHP 39,728 more! It could not be considered a complete lot but hey, who would give me PHP 39,728 just for waiting? Note: Nowadays, I invest more on individual stocks more than mutual funds. This shared fund was similar to “getting my a damp” and “testing water” kind of investment.

While the demand for investment is high (point D), there’s not enough saving to fund it (point B). As such, the amount of investment falls from A to B. The low investment eventually translates into lower GDP. As income declines, the saving schedule shifts down and the economy eventually settles at point C. This is secular stagnation as a result of the Fed’s financial repression. So is this a sensible argument?

  • Private equity groupings
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Because zero bound to interest rates destroy the savings function of capitalism, which is a necessary and in fact synchronous component of investment. Why that is true is not immediately obvious. If companies can borrow close to zero, why wouldn’t they invest the proceeds in the real economy? The evidence of recent years is they have not. Indeed, the reasoning of the argument is not apparent at all. With interest rates so low, the business sector should be screaming for money to fund huge new capital expenditures (point D in the diagram above).

But they aren’t. At this time, he abandons the reasoning and refers to the evidence simply. As if the data alone somehow supports his illogical argument. You will find, in fact, some logical arguments that one can use to interpret the reality. One is distributed by the neoclassical interpretation in the first diagram above.

Expectations are stressed out because the investment environment is poor (feel absolve to make a summary of reasons for why this is actually the case). The demand for investment is low. Low investment demand is keeping the true interest low. The Fed is just delivering what the marketplace “wants” in present circumstances. Raising the interest in today’s climate would be counterproductive.

There is another argument one could make. Guess that the investment environment is not stressed out. You will find loads of positive NPV projects out there just waiting around to be financed. Unfortunately, financial conditions are such that many firms find it difficult to find low-cost financing to fund potentially profitable investment projects. In the wake of the financial meltdown, creditors still do not trust debtors to make good on their promises completely. As well, regulatory reforms like the Dodd-Frank Act could make it more difficult to supply credit to worthy ventures. In the lingo utilized by macroeconomists, firms may be debt-constrained. The situation here’s depicted in the next diagram.

The debt-constraints that afflict the business sector’s investment plans caps the quantity of investment which will be financed by creditors–the investment demand timetable effectively becomes level at this capped amount. The financial crisis moved the economy from point A to B. As before, the lower investment eventually reduces the productive capacity of the economy, so that income declines.

The decline in income shifts the saving schedule down–the economy techniques from B to C. The equilibrium interest is low–not because of Fed policy, but because investment is constrained. Savers would love to extend more credit if investors could be respected and if regulatory hurdles were removed. But alas, present circumstances do not enable this saving flow to be released (except, possibly, to finance government expenditures or tax cuts). The result of a policy-induced upsurge in the interest in cases like this would be to lower income even more. If the evaluation above is appropriate, then the suggestion to increase interest rates in today’s environment is off foundation.

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