In the opening to a recent post, J.P. Koning gives a very good overview of Paul Krugman’s and Larry Summer’s secular stagnation theory,
According to Krugman, if the natural rate of interest has become persistently negative—i.e. new capital projects are expected to yield a negative return—then investors will look to existing durable assets like gold or land that yield no less than a 0% return. The prices of these goods will be bid upwards, bubble-like. Or, as Summers puts it, if the return on capital is below the economy’s growth rate, then intrinsically valueless ponzi assets may be recruited as stores of value to bridge the distance between an individual’s present and the future. (Krugman and Summers’s ideas are a bit hard to follow, but Nick Rowe has a bunch of helpful posts on these ideas).
This is how I interpret the above: a negative natural rate of interest makes investment in capital projects unattractive, leading investors to invest in commodities, rather than in productive capital goods.
In my experience, if you think you have a “gotcha” you probably don’t and you’re probably wrong. But, it seems to me that the pro-cyclical behavior of intermediate goods contradicts Krugman’s and Summer’s prediction,
I’m using “intermediate materials” and not “capital equipment” — and, admittedly, the PPICPE is more ambiguous —, but I think the intermediate materials index does a better job capturing the range of inputs firms use to make physical investments. Capital equipment tracks machinery, but intermediate materials is more inclusive,
Commodities that have been processed but require further processing before they are ready for sale to the final demand user. This includes goods such as flour, cotton yarn, steel mill products, and lumber. This also includes items that are physically complete but that are purchased by business firms as inputs for their operations, such as diesel fuels, paper boxes, and fertilizers.
The behavior of input prices seems to be better explained by a business cycle theory that predicts procyclical movements in inputs for physical investment projects, rather than theories that assume physical investment is comparatively unattractive.