Tag Archives: economics

Impossible Germany

Pieter_Bruegel_d._Ä._037My Comments: I’ve mentioned before how easy it is for us to discount the economic influence of Europe on the world stage. But it’s a mistake to do so. Collectively, the European Union is an economic engine that is just as critical to the economic welfare of the world as we are. If they go down the tubes, so do we, just not so far. But down is down and not a fun place to be.

One reason Europe has been reluctant to respond aggressively to what Russia has been doing to Ukraine and it’s environs is because Germany, and much of the rest of Europe, know they are already walking on thin ice. Shutting out Russia means pissing in your own well, to borrow a phrase.

And, of course, Russia is happy to push those buttons as long as they can get away with it. What makes it troubling for me is that it might simply be delaying the inevitable. And I for one don’t want that inevitable to be known 25 years from now, as World War III.

Nov. 16, 2014 Eric Parnell, CFA

Summary
• The economic and market outlook appears impossible for Germany over the next few years.
• The world’s fourth-largest, heavily export-dependent economy is facing a fundamental problem.
• With future growth prospects increasingly fading, this bodes ill for the future performance of the German equity market.

The economic and market outlook appears impossible for Germany over the next few years. The world’s fourth-largest, heavily export dependent economy is facing the fundamental problem of struggling to thrive within the currency union it went to such lengths to help form over the last several decades. Future growth prospects are increasingly fading, and this bodes ill for the future performance of the German equity market.

German economic growth has effectively ground to a halt in recent years. After what was initially a fairly solid bounce in the early years of the “post-crisis” period, real GDP growth in Germany slowed to +0.7% in 2012 and +0.4% in 2013.

As for 2014, German real GDP growth projections for the year were recently revised meaningfully lower from 1.9% to 1.2%. More specifically, the economy just barely skirted past entering a technical recession by generating +0.1% growth in the third quarter, after having posted a negative -0.3% growth reading in the second quarter. It is worth noting that Germany managed to clear the bar into positive territory thanks to a surprisingly solid export number to non-Euro trading partners in September, a outcome that may not prove repeatable in future months. And despite the fact that Germany just barely avoided officially having the dreaded “R” word tied to their economy, these are still hardly growth numbers about which to get excited.

As for 2015, the growth projections have already been reduced to just 1.0%. And experience in the post-crisis world has repeatedly shown us that future economic and corporate earnings growth projections are simply made today to be lowered in the future. As a result, a final number for 2015 that is closer to 0%, if not outright negative, should not be completely ruled out.

Economic growth is grinding to a halt in Germany. But so what? Economic growth has been sluggish in the United States for years, yet the stock markets in both countries are now well above their pre-crisis highs. Can’t we simply expect the same degree of perpetually blind optimism among German stock investors to bid their own stocks to the stratosphere as well, fundamentals be damned? After all, it has worked well so far, as both the U.S. S&P 500 Index (NYSEARCA:SPY) and the German DAX have moved in virtual lockstep with each other in local currency terms dating back to the very beginning of the financial crisis in July 2007. That is, of course, until this past July, when these markets suddenly started to diverge widely from one another.

It is worth noting that currency effects have amplified the return differences between the U.S. and Germany since the summer of 2011. This is due to two specific periods – the first from the summer of 2011 to the summer of 2012, and the second since April 2014 – where the euro currency weakened sharply relative to the U.S. dollar. Thus, for those investors that have not hedged the currency, exposures associated with their German stock investments through vehicles such as the iShares MSCI Germany ETF (NYSEARCA:EWG) have not performed nearly as well.

But what about a monetary policy rescue in Germany and across the eurozone? Unfortunately for stock investors in the region, Germany does not claim to want such stimulus, and even if the European Central Bank decided that it wanted to provide it, they, unlike their American and Japanese counterparts, do not have a central bank that has the unchecked power to decide to print a few trillion euros out of thin air simply because their central bank head thinks that it is a good idea over his cereal one morning. Instead, ECB President Mario Draghi faces far more restrictions on his ability to engage in outright quantitative easing, and that includes getting clearance from German policymakers that have stated they do not want it.

What has been absolutely extraordinary to this point is how Mr. Draghi has been able to repeatedly boost regional stock and bond markets including Germany for years by doing nothing more than making promises about things he intends to do (and may not technically be able to do), without actually doing much of anything. How much longer his power of the podium can sustain itself remains to be seen, but the recent performance of stocks across the region suggest that equity investors both in Germany and elsewhere may be growing increasingly tired at this stage, particularly now that the spillover tailwind from the Fed’s quantitative easing has finally gone away.

Looking forward, the German stock market faces a fundamental problem that investors would be well served to confront sooner rather than later. In short, the German economy has experienced real growth of only 3% above pre-crisis levels from late 2007 and early 2008. Yet, the German DAX is nearly 20% above pre-crisis levels. More specifically, the German economy has posted a real GDP increase of just 1.4% since the summer of 2012, yet the DAX is up nearly 50% over this same time period. Put more simply, German stocks have skyrocketed over the last two years based on virtually nothing fundamental. Such are not the strong foundations of sustainable stock market gains into the future.

Adding to the forward-looking challenges for German stocks is the highly cyclical and economically sensitive make-up of the market. German stocks are more heavily concentrated in the variety of cyclical industries, including consumer discretionary, financials, industrials and materials. Overall, the allocation of the German stock market to cyclical industries is a notably high 82%. This is well above the U.S. reading at just over 70%. As a result, the German stock market is expected face more pronounced downside pressure if economic conditions in Germany deteriorate as we move into 2015.

Yet another issue for German stocks is valuation. For example, Germany’s 10-year cyclically adjusted price-to-earnings ratio is 16.4. While this reading is not the extraordinarily high 26.6 reading currently hanging over the United States, it is still a fairly lofty number in its own right. Moreover, Germany’s trailing 12-month price-to-earnings ratio is a notable 17.1, which is fairly reasonable but not necessarily what would be considered cheap. As a result, German stock investors should not expect to find comfort and support in deeply discounted valuations, as we are far from such an outcome at this point.

For those possibly interested in exploring individual German stock themes as an alternative to a broader exchange traded fund, it is worth noting they will find a limited selection of stocks from which to choose. At present, only six companies that are domiciled in Germany trade on the U.S. exchanges. And only three – SAP (NYSE:SAP), Deutsche Bank (NYSE:DB) and Fresenius Medical Care (NYSE:FMS) – are of any meaningful size from a market capitalization standpoint. Other larger names such as Siemens (OTCPK:SIEGY) and BASF (OTCQX:BASFY) that once traded in the U.S. have since departed from the American exchanges back to Germany.

For reasons discussed here and more, owning German stocks is less than desirable at the present time even after the recent pullback, given the persistent potential downside risks. And while U.S. may not be listening, what is unfolding in Europe along with many other global stock markets is important, for it is foreshadowing what is likely to arrive on U.S. market shores someday. For while U.S. stock investors can continue to ride off of “the best house on a bad block” theme, if conditions on the block continue to deteriorate, it is only a matter of time before the spillover effects begin to adversely and directly drag down this remaining “best house”.

Guess Who’s Back? The Middle Class

My Comments: There is lots of handwringing about last Tuesdays election results. And lots of people looking for someone to blame if it didn’t meet hopes and expectations.

One of my long time concerns has been the growing inbalance between the haves and the have-nots. Statistically it’s very real with the middle class that evolved and grew after WW2 now faltering and fading. That has huge implications for all of us and the quality of our lives going forward.

This article has been on my post-it-someday list since this past summer. It suggests the middle class is making a comeback. What is so perverse for me about the election results is that while I understand why the “haves” are naturally Republican, I find it difficult to understand why so many of the “have-nots” vote Republican. They are the ones most likely to fall down the economic rabbit hole and yet they seem happy to do so.

posted by Jeffrey Dow Jones July 31,2014 in Cognitive Concord

This has been a very important week for economic data. I know everybody saw yesterday’s GDP report coming, but it’s great news nonetheless. It was a blowout, a 4% real increase in the second quarter.

There is no negative way to spin this one. Even personal consumption expenditures rose at a 2.5% rate. Housing bounced back in a big way, with a 7% increase in residential investment. The consumer is alive and well, and given the fact that inventories, durable goods, and other investment all shot much higher, the business world is betting he’ll stay healthy for a while longer.

What’s interesting is what happens when we marry that data to what we saw in the July consumer confidence report. Consumer confidence surged to yet another post-crisis high and is now officially back in the range that, before 2008, we would have called “normal”.
CONTINUE-READING

5 Reasons Why You Should Be Afraid Of A Bear Market

question-markMy Comments: Until I found this, I had never heard of hedgewise.com. I make absolutely no assertion that they know what they are talking about. My personal solution for you is quite different from what you read below, but this part of life is almost always a guessing game.

Oct. 30, 2014 http://www.hedgewise.com/

Summary
• The Fed officially just ended its bond buying program, marking the close of a financial era.
• With the bull market now in its 6th year, stocks may struggle to continue their run without the Fed’s help.
• Many significant warning signs are signaling an oncoming bear market.
• There are smart steps you can take to better hedge your portfolio.

1) There have only been 2 longer bull markets in recent history

Beginning in January 2009, this bull market is now in its 71st month. Only two bull markets have lasted longer in the past century, during the 1920s and the 1990s.


2) Price-to-earnings ratios are approaching 2006 levels

The widely-recognized “Shiller-PE” ratio compares average inflation-adjusted earnings from the previous 10 years to the current price of the S&P 500. This helps to smooth out variance over time caused by natural fluctuations in the business cycle. The current level of the Shiller-PE ratio of over 25 is near that of 2006 and well above the mean of 16.5. While this does not indicate an imminent collapse, history would suggest that the stock market may not be the best investment for the next ten years.


3) The Fed is removing the punch bowl

Interest rates have been at historic lows for the past five years. This has created a sensational environment where stocks are one of the only reasonable investment options. However, the Fed just stopped their bond buying program altogether, and interest rates can only go in one direction. Moving forward, the market faces a cruel double-edged sword. If there is strong growth, it will prompt the Fed to begin raising rates, causing investors to demand higher returns and businesses to cut back. If there is weak growth, it will threaten corporate earnings and spark worries about another recession. Either way, stocks may fall.

4) The volume of the October rally has been light

October was a rollercoaster ride for the markets. While most of the losses have been offset here at month-end, the gains have occurred with relatively light trading volume. This suggests that the major players aren’t the ones buying.


5) Global growth is shaky

As recently studied by Larry Summers, India and China may be on the brink of a major slowdown. China has experienced a 32-year streak of extremely rapid growth, perhaps one of the longest streaks in all of history. Its economy is supported by approximately six trillion dollars of ‘shadow debt’, which may eventually create major systemic issues. While the US may not be the primary source of the next global slowdown, it would still certainly be a victim of the ripple effect.

How to Protect Your Portfolio (by hedgewise.com)

The two most likely scenarios for the economy are a rising interest rate environment with moderate growth, or a continued global slowdown which carries the risk of another recession. Unfortunately, US stocks face an uphill battle in both cases. If the Fed begins to raise rates, it will be a drag on both stocks and bonds. If rates remain low, it will probably only be due to a poor overall economic environment.

If you are seeking alternatives for your portfolio, you may want to consider a few contrarian investment options. When the Fed does raise rates, it will probably be on the heels of stronger growth and higher inflation. In that environment, Treasury-Inflation Protected Bonds (NYSEARCA:TIP) can help keep you safe from the rising price level, and commodities like gold (NYSEARCA:GLD) and oil (NYSEARCA:USO) may outperform due to a weaker dollar and stronger demand. On the other hand, if a significant slowdown occurs, investors may flee back into the safety of Treasury bonds (NYSEARCA:TLT), sending interest rates down yet again. Since it is unclear how the future will unfold, it may be wise to hedge your portfolio with some or all of these investments for the time being.

Europe Must Act Now

My Comments: By now you may be tiring of my posts that say a market crash is coming and yet here we are moving along merrily. But like a broken clock that is correct at least twice every day, I’m confident that a crash will happen before long, and it won’t be a slow decline to the bottom. It might not last long, but it will be dramatic.

The latest economic news from Europe is not encouraging. They mostly took a different tack in their response to the economic meltdown that happened in 2008-09 and the result is a profound lack of liquidity. How do you reverse course and pump money into the system to make it work again if there is no money?

A version of this article first appeared in the Financial Times. By Scott Minerd, Guggenheim Investments

In recent conversations—whether with the U.S. Federal Reserve, the European Central Bank, the U.S. Treasury, or the International Monetary Fund—one theme is playing large and loud: things in Europe are bad and policymakers appear already to have fallen behind the curve. Quantitative easing in Europe is coming, but too slowly to avert a severe slowdown and perhaps even a hard landing.

The depreciation of the euro, while welcome, will not be enough to lift the economy out of the doldrums and more must be done both in terms of monetary policy and fiscal reforms. In plain language, France must start taking significant steps to reduce social benefits and improve its fiscal balance (a bitter pill to swallow). Germany must reduce its fiscal surplus, which Chancellor Angela Merkel appears ready to do through increased military and infrastructure spending. Italy must move to reduce its fiscal structural imbalance. Others on the periphery must do their part too by staying the course on austerity and continuing with further structural reform. The European Investment Bank stands ready to support infrastructure investment, but at a scale that currently appears too small to make much of a difference.

In the meantime, the ECB will work as quickly as it can to expand its balance sheet. The problem is simply that there may not be enough assets to buy. Mario Draghi, ECB president, has made it clear that the ECB must increase its balance sheet by at least €1 trillion—a tough mandate as the balance sheet will continue to shrink in the coming year as the earlier longer-term refinancing operation assets roll off. The reality is the ECB will need to purchase at least another €1.5 trillion in assets, and even that may not be enough.

The much heralded asset-backed securities purchase program will only yield about €250 billion to €450 billion in assets over the next two years. More LTRO (or the newer targeted LTRO) will prove a challenge as sovereign bond yields in Europe are so low that a large balance sheet expansion through this means seems impractical. Perhaps there is another €500 billion to €750 billion to do over the next year or two. Outright purchases of sovereign debt would prove politically difficult, as many would interpret such purchases as violating the ECB’s mandate, and the matter would probably end up in the European courts.

Current Tools Will Not Get Job Done

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policymakers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly.

How is this affecting the markets? The recent rally in U.S. fixed income is materially different than when rates last approached 2 percent. Previously, the Federal Reserve was actively managing the yield curve to reduce long-term borrowing costs in order to stimulate the economy. The current rally is caused by a massive deflationary wave unleashed upon the United States by beggar-thy-neighbor policies in Europe and Asia.

Rate Hike in 2016 or Later?

The precipitous decline in energy and commodity prices, and competitive pressures on prices for traded goods, will probably push inflation, as measured by the Fed’s favored personal consumption expenditures index, back down toward 1 percent. This raises the likelihood that any increase in the policy rate by the Fed will be pushed into 2016 or later.

With inflationary expectations falling and the relative attractiveness of U.S. Treasury yields over German bunds and Japanese government bonds, U.S. long-term rates are likely to continue to be well supported with limited room to rise, a dynamic that could push them lower from here.

In the real economy, the decline in energy prices should offset the effect of reduced exports, which is supportive of U.S. growth in the near term. This should help equities recover from the recent storm of volatility as we move deeper into the fourth quarter, which is a time of seasonal strength for the stock market. However, this may prove to be the rally to sell. Results from currency translations for large, multinational companies will likely weigh heavily on S&P 500 earnings in the first half of 2015.

It is too early to be making decisions for next year, but the events overseas provide ominous portents of things to come. If we do get a sign of a bear market in U.S. equities, it could be that the events in Europe presage what lies ahead for the United States. Is it too late to change these shadows of dark foreboding? It is hard to tell but time is not on our side.

Banquo’s Grain and U.S. Interest Rates

My Comments: I had no idea what or who is/was Banquo. Nor why ‘grain’ has any relevance. But I like to share the thoughts of this writer from time to time as his insights are often right on the mark. Remember what I said last week about the possibility of rising interest rates in the next three years.

The U.S. economy is strong enough to suggest higher interest rates ahead, but a number of factors suggest U.S. Treasury yields could move lower.

October 02, 2014 - Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer for Guggenheim Investments

Early in Shakespeare’s “Macbeth,” Lord Banquo asks the prophetic three witches, “If you can look into the seeds of time, and say which grain will grow, and which will not, speak then to me.” Banquo’s turn of phrase reminds us that if a farmer planted the wrong grain he could yield a poor harvest, or worse, he might even starve.

I thought about this recently when asked about the outlook for U.S. interest rates. Investors, like farmers, have a sense of the seasons that guides which grains, or investments, are more likely to yield favorable results. While I have no special divining powers, I can draw on our macroeconomic research team that employs the not-so-mystical forces of data and analysis.

Based on macroeconomic research, we estimate “normalized” real interest rates could justifiably be 100 basis points higher than they are today. The U.S. economy is certainly doing well enough to suggest higher interest rates ahead. With quantitative easing ending in the United States this month and the U.S. Federal Reserve preparing investors for a higher federal funds rate in 2015, the stage is set for U.S. interest rates to move higher. But that may not be the grain that grows: The reality is that, despite a strengthening U.S. economy, the greater risk is that interest rates head lower, not higher, in the near future.

Looking at the world today, there are a number of forces that could keep rates low. The first is the impact higher rates would have on the U.S. economy. Remember what happened following the “taper tantrum” last year? Before rates were able to reach historical norms, the average rate on a 30-year mortgage spiked almost a full percentage point in two months—the sharpest rise since the late 1990s—resulting in an abrupt housing slowdown, which slowed the U.S. economy materially. The impact of higher interest rates on the housing market and the broader U.S. economy is something the Fed is extremely mindful of, especially after the first quarter winter soft-patch where the U.S. economy contracted by 2.1 percent.

Next, U.S. Treasury yields are materially higher than those in any other developed market. The spread between 10-year U.S. Treasuries and comparable German bunds reached 157 basis points in September, its widest level since 1999. After inverting in late 2011, the Treasury/bund spread has steadily risen for the past three years as U.S. yields have moved higher while German rates have dropped. The spread between 10-year Treasuries and 10-year Japanese government bonds is now 189 basis points. With developments in the Middle East resembling something from the Bible’s New Testament Book of Revelation and turbulence continuing elsewhere from Ukraine to Hong Kong, the relative price value of U.S. government bonds versus other safe haven investments should continue to be a factor keeping U.S. interest rates low.

Elsewhere in financial markets, the U.S. stock market is vulnerable to higher volatility over the short term. I told my investment team in a meeting on Sept. 23 that, were I a trader, I would tell them to go short stocks, but I am not a trader, I am an investor, and the long-term trends of this bull market still look solid. To paraphrase Shakespeare’s witches, while in the near term something wicked may come this way to markets, the evil portends of this wicked season of volatility may sow new seeds of yet one more rally for U.S. stocks and bonds.

Chart of the Week :Foreign investors will likely look to the United States for higher yields on government bonds as foreign central banks increase monetary accommodation in their own economies. Historically, rising foreign purchases of U.S. Treasuries have pushed U.S. yields lower. So far in 2014, foreign buying has accelerated—a trend likely to continue, putting downward pressure on U.S. Treasury yields.

Short-Term Optimism, Longer-Term Caution

profit-loss-riskMy Comments: You by now know that I’m expecting a signficant market correction in the near future. However, when I say that, one has to wonder what I mean by “near”. An analogy I sometimes use is a comment by a currency trader I knew years ago. His idea of “near” was in the next 24 hours; for him a long term hold has 3 or 4 days.

U.S. stocks will likely move higher as pension fund managers go bargain hunting in an effort to put seasonal cash inflows to work.

October 23, 2014 Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Investments

Last week’s investment roller coaster was something we had been expecting—U.S. stocks delivered their usual bout of seasonal volatility right on cue. For now, recent spread widening in high-yield bonds and leveraged bank loans seems to be over, and it also appears that equities have regained their footing after a turbulent week.

With the anticipated seasonal pattern of higher volatility in September and October now largely fulfilled, we anticipate more positive seasonal factors over the next two months. Over the last 68 years, the S&P 500 has averaged monthly gains of 0.9 percent in October, followed by even stronger increases of 1.2 percent in November and 1.8 percent in December.

The current dark cloud that hangs over Europe is a serious threat and something that investors should closely monitor. If the anticipated seasonal strength—which is typically driven by an influx of cash into pension funds that their managers are keen to put to work—is not forthcoming, investors should seriously question how much further the current bull market can run. As of now, we remain cautiously optimistic as we await some crucial economic data.

Economic Data Releases / U.S. Housing Market Data Is Solid

  • Existing home sales rose 2.4 percent in September to an annualized rate of 5.17 million homes, the highest in one year.
  • Housing starts rose 6.3 percent in September to an annualized pace of 1.02 million.
  • Most of the gains were driven by a 16.7 percent jump in multi-family starts.
  • Building permits increased by a modest 1.5 percent to 1.02 million in September.
  • The FHFA house price index rose a better-than-expected 0.5 percent in August, a five-month high.
  • University of Michigan Consumer Confidence rose to 86.4 from 84.6 in the initial October reading. The reading was the highest in seven years and was driven by better consumer expectations.
  • Initial jobless claims rose off a multi-year low for the week ending Oct. 18, increasing to 283,000, the fourth lowest reading this year.
  • The Leading Economic Index expanded by 0.8 percent in September. Nine of 10 indicators were positive.
  • The Consumer Price Index was unchanged on a year-over-year basis at 1.7 percent in September. The core CPI also remained at 1.7 percent. Falling energy prices were offset by higher food and shelter costs.

Why Public Investment Really Is a Free Lunch

US economyMy Comments: The author of this article, which appeared in the Financial Times, is no stranger to economists, investors, and politicians.

My first reaction, however, was that it tends to endorse Keynesian economics, from a source that up to now has argued that the way to achieve economic recovery and more jobs, is for there to be much less government, lower taxes, strict austerity. This is strongly echoed by our national politics with the Tea Party on one side and the Democrats on the other.

Europe has to a great extent followed the Austrian model, the antithesis of the Keynesian model. Today, there is strong evidence Europe is experiencing signs of recession once again, while our approach is steadily moving toward recovery and growth. What follows is an argument that it is within our ability to further boost our recovery and by extension, our standard of living.

By Lawrence Summers / October 6, 2014

The IMF finds that a dollar of spending increases output by nearly $3

It has been joked that the letters IMF stand for “it’s mostly fiscal”. The International Monetary Fund has long been a stalwart advocate of austerity as the route out of financial crisis, and every year it chastises dozens of countries for their fiscal indiscipline. Fiscal consolidation – a euphemism for cuts to government spending – is a staple of the fund’s rescue programmes. A year ago the IMF was suggesting that the US had a fiscal gap of as much as 10 per cent of gross domestic product.

All of this makes the IMF’s recently published World Economic Outlook a remarkable and important document. In its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the US but much of the world. It asserts that when unemployment is high, as it is in much of the industrialised world, the stimulative impact will be greater if investment is paid for by borrowing, rather than cutting other spending or raising taxes.

Most notably, the IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves.

Why does the IMF reach these conclusions? Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.

When it takes these factors into account, the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

While the case for investment applies almost everywhere – possibly excepting China, where infrastructure investment has been used a stimulus tool for some time – the appropriate strategy for doing more differs around the world.

The US needs long-term budgeting for infrastructure that recognises benefits as well as costs. Projects should be approved with reasonable speed. The government can contribute by supporting private investments in areas such as telecommunications and energy.

Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.

Emerging markets need to make sure that projects are chosen in a reasonable way based on economic benefit.

What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. The IMF, a bastion of “tough love” austerity, has come to this important realisation. Countries with the wisdom to follow its lead will benefit.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary