Wednesday, April 22, 2009

Necessary process for recovery

from Morgan Stanley Global Economic Forum: "Capex [capital expenditure] Bust and Capital Exit"

"The silver lining in this capital spending bust is that it will help to purge investment excesses; indeed, it is essential to do so. Most of the excesses in this cycle have been concentrated in housing, where foreclosures continue to fuel vacancy rates and supply-demand imbalances. But as noted above, easy credit did fuel exuberance in commercial construction, and the downturn has unmasked acres of obsolete plant and equipment. The cure for excessive investment is the exit of capital from what my former colleague Steve Galbraith calls the ‘capital pigs’ – overcapitalized industries – and the redeployment of that capital into new products and new industries that can use it productively." [emphasis original]

The article is basically saying the easy money resulted in misallocation of capital and that these malinvestments need to be purged before the new growth can begin.


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