Investment(t) = Demolishing(t) +  d(underutilization(t))/dt + α*d(Sales(t)/dt +α* d(Inventory)/dt²

whereby α is a conversion factor describing how many inventory units can be made per capital unit per time, and ignoring delays. In words: Investment is equal to replacement plus a higher idleness plus growth in sales plus a change in the growth of inventory. This formula helps understanding the dimensions and the dynamics of investments. E.g. Sales and Inventory follow iron laws and dictate that investments are made, certainly for the industry as a group. If Sales goes up and nobody would invest, stocks deplete, a shortage develops, prices goes up and investing becomes more attractive, so will eventually be done.  Delay in sales-driven investments creates wave around the α*sales curve.

Lack of credit during the Lehman Crisis had two effects:  1) it caused companies to reduce their inventories strongly, making d(sales)/dt strongly negative, and 2) it prevented people from investing. Companies who could not afford a large d(underutilization)/dt, had to close, which is equal to strong demolishing.   Surviving companies delayed demolishing, so delayed investment for replacement and let their fleet of capital goods grow older, but not bigger. This aging fleet will require extra investments in the future.

This formula works for a company, and for an industry, and for the whole economy, if the proper settings are used.  One caveat: in reality delays play a prominent role in investments: so calculating real investments should be done dynamically.  Call Flostock if you want to know how to do this.

Law 18 also means that striving for higher inflation is not needed. Economists Larry Summers and others argue that we need inflation and not deflation (=negative inflation),  otherwise real interest rate (=interest rate minus inflation) cannot be lowered far enough to stimulate investment to achieve full employment.  It is clear that interest can’t be < 0  (it would be ridiculous to pay people to take your money, although banks come close to this J), so Summers argues that a small positive interest rate minus a  negative inflation gives a bigger positive real interest rate, which does not stimulate investments. But Law 18 indicates that  at this moment investment is low because the industry is still reducing the underutilization, which is high because sales is still lower than the peak in 2007. Interest rates do not influence this decision too much. Summers’ view is obsolete in a world with constant low interest rates.

The other argument in favor of inflation is that consumers would otherwise delay their purchases. This I don’t believe either. Which purchase does a normal person delay because next year prices will be 1% lower? This has never prevented sales of electronics, which strongly decline in price. And it certainly does not prevent sales of FMCG.  It may delay purchasing a house, but that is a different category. For most other purposes lower prices stimulate demand.