07 Nov 2011

Depreciation Rules and Investment Swings

Economics, Financial Economics, Shameless Self-Promotion 2 Comments

And now for something, completely different. Since there aren’t too many people willing to pay me to spin out the implications of a private legal system, I have been focusing more on research for investors. (In all seriousness, if you are curious about such individualized consultting work, drop me an email.) Tom Landstreet and I have a piece today at Forbes.com summarizing a research paper we are preparing for institutional investing clients. The opening paragraph:

Many analysts have been surprised lately by the strength in certain economic indicators, such as the growth in business investment in the third-quarter GDP report, particularly in equipment & software. The hopes for a general rebound are misplaced, however, because temporary depreciation rules may be driving the apparent upswing. The generous bonus depreciation and small business deduction rules begin to drastically phase out in January 2012, which will likely cause a dramatic reversal in investment and other indicators.

2 Responses to “Depreciation Rules and Investment Swings”

  1. Brent says:

    Good article.

  2. Major_Freedom says:

    Depreciation rule changes in January 2012 may also be dominated by easy money by the Fed……eral Reserve System since July 2011. But there almost certainly will be a decline in business investment and hence business profitability from where it otherwise would have been. Whether or not there will be a temporal decline, I think remains to be seen, because there are other factors today that weren’t present in 2004/2005.

    The Fed slowed down inflation and raised the fed funds rate starting in late 2004, which in our monetary system affects net investment the most, which could (in part), along with the depreciation rule changes, explain the drop in net investment in late 2004, early 2005. Maybe there was a double whammy of depreciation rule changes and a tightening up of money.

    For today, given that short term rates are at near zero, and will remain that way until 2013, will the depreciation rule changes be dominated by the easy money that has been quickly accelerating since July 2011 and will more than likely continue into 2012?

    There could be a double whammy of another sort come January 2012. Europe’s problems could deepen, and along with the depreciation rule changes, that could dominate the easy money from the Fed.