There's one point about which no contention exists: return on investment is generated by increased productivity of the invested capital. However, as The Great Recession (and Spain's current problem as explained in todays NY Times) has made clear to anyone with at least a functioning brain stem (which vampire squid lack, by the way), fiduciary instruments don't generate real returns, irregardless that the Squid Squad managed to flummox most that the opposite were true. Real estate, as distinct from industrial plant, can generate fiduciary returns only if the owners somehow receive increasing real incomes. Wage earners think that's true during times of wage pull inflation, so ARM type mortgages make sense in that circumstance. Currency, and prices, are arbitrary measures; the Prime Principle.
Now we have the Superman's CAPE (Cyclically Adjusted P/E), as a "new" measure of return courtesy of Robert Shiller in his 2000 tome "Irrational Exuberance". The notion is that a retrospective 10 year moving average of P/E is a better measure, since it incorporates more information. But CAPE, at least as much as standard P/E, is based on the assumption that the world is linear and monotonically (as measured in trend) upward. In other words: past is prologue.
Being in the Malthus/Ehrlich camp, well, no. The issue boils down to the science. It's been suggested that the inventions of the 19th century were more significant than those since (more below, finally). I'd argue that the future of invention or innovation isn't especially bright. And thus, the notion of investment and returns stands on wobbly legs. How can this be?
By 1900 we knew about the entirety of the planet. We knew where all the arable land was. We knew about all the fossil fuels, although it wasn't until the 1930s and 1940s that we knew about the largest reserves. We knew how to identify lodes, although computer technology has allowed exploration in places not possible before. Nevertheless, secondary and tertiary deposits is all we have to show for it. Oil sands (by various names) consume vast amounts of fresh water to process; those hydrocarbons extract a significant trade-off. Drink or burn, that's your choice.
Turns out, this avenue has been explored. I knew I'd seen a cite that someone had written an article/book/whatever addressing the issue. Couldn't find anything; very frustrating. So, off to my thought experiments, so composed and mused here. Just a few minutes ago, I found it!. Eureka, I cried! Jonathan Huebner is discussed here (I knew I'd find a cite, eventually this is the original). His research largely confirms my thought experiments. A car with GPS is still just a car. That may be good or bad, depending on your point of view. At least one commentator disagrees, citing patent count per capita as proof that Huebner is wrong. The tsunami of pointless software patents is proof enough that Huebner is correct. And, Jan Vijg wrote a book on the same lines.
Since 1900 we've learned: relativity (which makes bombs and some electricity, although really only making steam), quantum mechanics, the Bohr model of the atom, semi-conductors. The various electronic devices are refinements of the vacuum tube, a 19th century discovery (yes, it is); solid state devices are just billions and billions of teeny diodes and triodes. We've leveraged that knowledge into various medical therapies, such as DNA discovery. We, from now on, exist in a world of superficial increments to our technology. There's no real return, of any magnitude at the macro level, to be garnered. A CD/DVD is still a recording of audio and video; 19th century *inventions*.
Some say, well no one knew about the 19th century discoveries before they were found, so what's to stop humans from making yet more in the 21st? The answer is simple: we've discovered or found all the laws of nature, all the elements, all the arable land, all the potable water. Unlike 19th century America, we don't have a vast frontier of natural resources to stumble upon and exploit. We have filled the planet. We know the limits of both nature and ourselves, whether all of us admit it or not.
Is it reasonable to conclude that productivity of physical capital can rise in the 21st century the way it did in the 100 years from 1850 to 1950? Nope. Just as in that rat experiment referenced some time ago in these musings, we have to learn how to prosper without the luxury of "infinite" new resources and breeding. An obscene amount of virgin resources is what made American Exceptionalism, and nothing else. Without the resources, this would just be West Britain. Petroleum, in the form of gasoline and diesel, provide us with portable high calorie energy sources. It supports most of agriculture and manmade materials. The portability is most of the value to the economy; until Mr. Fusion is invented, we're stuck. These fossil resources are temporary, and perhaps more temporary than we think. Europeans have learned that lesson, having been living on that piece of ground for the better part of 2,000 years. Red blooded Americans still believe they can behave like Davey Crockett. In Montana, it appears they do.
A lack of physical productivity increase puts the whole enchilada in question. While the Banksters were able to flummox both themselves and most of the financial world leading up to the dotcom bomb and The Great Recession into believing that purely fiduciary investing (trading instruments, in plain English) generates real returns, it isn't true. Only inflation of asset prices can occur. Such inflation can be motivated either by economy wide inflation (what most mean when they say 'inflation'), or by sector specific inflation. The latter is what has motivated the stock market since March, 2009. Just as the crash was fake, in the sense that the Bankster tail was wagging the macro dog, the climb out was the inevitable bounce after a market wide short. The QEs since have funneled funds into instruments, which floats asset prices, but does little to stimulate general recovery. Unless, and until (not likely), the Apples and GEs decide to "re-distribute" some of that moolah to the 47%, nothing will change with the economic recovery (it hurts to type that last bit).
This endeavor said, in it's first installment:
How does a stimulus program increase demand for those goods and services still capable of manufacture by Americans? That is the question being avoided by all.
So, near the end of that missive:
Finally, the ultimate point: Mr. Obama exercised a Freudian slip when he used the phrase "spread it around". He was accused by the Right Wing professional commentators of running, not to be president, but "redistributer in chief". Guess what, that's what has to happen to get us out of this mess. The real issue is that the Right Wing likes to see labor devalued; they don't see the current situation as a mess, but a return to the way the world should be.
What Obambi did was implement (charitably, due to obstructionism from the Right Wingnuts) Hoover-ite Trickle Down economics. Didn't make much difference, of course. He dare not admit either part of that, I suppose.
Inflating fiduciary instrument prices does nothing to help the larger economy, nor perversely, investment decisions for inter-generational support (aka, retirement or Social Security). By skewing the nominal return on fiduciary instruments relative to physical investment, the result is mis-allocation of capital. CAPE doesn't help in the decision.
Shiller is noted to have the view:,
... based on more than 140 years of history, the market's CAPE would indicate that investors should expect annualized gains of just under 4 percent a year, accounting for the effects of inflation. That's worse than the long-run average of real annual returns of more than 6 percent for blue-chip stocks.
Again, as McElhone says, "the world is not linear". Not only does that mean there will be oscillations, it also means that reality can deteriorate at an increasing rate if you push Mother Nature into a corner. We have, and she is pissed. What drives real returns is technological progress. Much of that in the past decades has either been in non-production fields (analysts, of various stripes), or automation which dis-employs humans. Predicting future returns depends on understanding where emerging technologies have advantage. Right now, I'd wager there aren't many. We know the scope of the planet; there is no New Frontier to exploit. Apple becomes a behemoth shifting portable distraction devices. Not exactly like US Steel or General Motors of yore.
Fiduciary instruments can only gain value at the expense of other forms of "investing", since they provide no intrinsic gain. We saw this when Greenspan cratered Fed interest rates: funds flew to housing, as nearly "risk free" instruments. The industry created ever more units of these instruments so sop up the funds. The crash was unavoidable.
Finally, is there some method to fund future incomes (retirements) from future returns? Likely not, given the current structure. Some returns will be generated by further automation of industry, but at the direct cost of wages and demand for output; whether demand can keep up with supply is not a slam dunk. Will there be "distribution" of real returns to wage earners? Not if the the 1%/.1% have their way. Since they control governments, not likely. With a lack of real returns available to corporations (recall that 40% of profits in corporations were due to financial activities, leading to The Great Recession), real and nominal interest rates have to fall. Ultimately, real returns to real investment control the interest rate. If a corporation can garner 10% organic growth/return, they'll pay most of that to acquire the moolah to do so. When corporations run out of real return opportunities, as it appears, they'll not pay much for access to the moolah. Real interest rates fall just because there is a lack of demand for the moolah. In fact, it is in their narrow self interest to *deflate* world currencies, since doing so increases the value of the accumulated moolah. Get ready for it.
The entrepreneurial sector has been predominantly software, and much of that software is Facebook-ish: entertainment. You can't eat Facebook. You can't wear Facebook. You can't run your auto on Facebook. More Facebook won't improve any economy, only subtraction from other sectors. It didn't take Mr. Market long to figure out that Facebook was a waste of money. Hell of a basis for the world's greatest country.