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McVean Weekly Update – February 24, 2012

ARTICLE February 29, 2012

by Michael Drury, Chief Economist, McVean Trading & Investments, LLC
Taylor Somerville, CFA, Senior Economist, McVean Trading & Investments, LLC
Vadim Sinitsyn, Associate Economist, McVean Trading & Investments, LLC

Historically, economists have found that when a country’s per capita GDP exceeds $3,000 good things happen. Wealthier households begin to invest in durable goods, like automobiles and appliances – in essence shifting their savings into future consumable assets. The shift to durables requires heavier capital investment: 1) for plant and equipment to produce the durables; 2) for expansion of input industries like energy and steel; and 3) for infrastructure, like streets & highways, railways, and the electrical grid. During the building of these plants and infrastructure, incomes and employment are rising without any new consumer goods yet being produced. This raises the prices of existing goods and services, stimulating profits and further investment outside the durables industry. The scale of durable goods production also tends to stimulate urbanization, which leads to increased specialization and higher income growth. Finally, the increase in capital investment also generally requires a more mature financial system either through banking or securities (often from the government in the early phases of development). The spark of income levels high enough so that some consumers can make long sighted investments, rather than just fulfilling subsistence needs, results in a broadening of economic well being for the entire company.

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