In A Bubble Economy, Capital Goods Aren’t Always A Good Thing

The annual rate for US non-military capital goods orders excluding aircraft fell to 1.9% in September from 7.8% in August to stand at $69.6 billion.

Observe that after closing at $60.2 billion in December 2015 capital goods orders have been trending up.

Most commentators regard a strengthening in capital goods orders as evidence that companies are investing both in the replacement of existing capital goods and in new capital goods in order to expand their growth.

There is no doubt that an increase in the quality and the quantity of tools and machinery, i.e. capital goods, is the key for the expansion of goods and services. However, is it always good for the wealth generation process?

Consider the case when the central bank is engaged in a loose monetary policy, i.e. monetary pumping, and an artificial lowering of the interest rate structure. Such policy sets the platform for various non-productive or bubble activities. In order to survive, these activities require real funding, which is diverted to them by means of loose monetary policy. (Once the loose monetary policy is set in motion this allows the emergence of various bubble activities).

Note that various individuals that are employed in these activities are the early recipients of money; they can now divert to themselves various goods and services from the pool of real wealth.

These individuals are now engaging in the exchange of nothing for something. (Individuals that are engaged in bubble activities do not produce any meaningful real wealth; they however by means of the pumped money take a slice from the pool of real wealth.)

Now bubble activities like any non-bubble activity also require tools and machinery (i.e., capital goods).

Therefore, capital goods that are generated for these activities are in fact a waste of real wealth.

The tools and machinery that are generated here are going to be employed in the production of goods and services that are on the low priority list of consumers. (The wrong infrastructure has emerged).