Building a Stronger Economy: Investing in Intellectual Capital


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The past decade has seen a significant shift in the US economy.

We are beginning to learn some of the changes that we have not identified so far.

Today I want to bring to your attention to the role that foreign investment in research and development in the United States has apparently helped create the strong dollar that we have recently seen rise.

We see that the value of the US dollar has been rising since shortly after the end of the Great Recession.

dollar index

Real Broad Dollar Index (Federal Reserve)

Now note how private non-residential fixed investment as a share of GDP has remained high at near historic levels over the same period.

Fixed investment

Share of private non-residential fixed investment in GDP (federal reserve)

Finally, note here the sustained growth in R&D spending in the United States over this same period.

R&D expenses

Research and Development Expenditures: GDP (Federal Reserve)

This data was suggested by James Mackintosh in the Wall Street Journal, as he examined the “sudden generational rise” in the value of the US dollar.

Mr Mackintosh suggests that “something else happened” and he wants to consider what possibilities might exist to explain the rise.

Of course, as I have written many times, there is the fact that the Federal Reserve has outstripped other central banks in its fight against inflation.

This effort by the Federal Reserve is a relative effect because the strength of the dollar results only from the “relative” movement of the various central banks as they fight inflation in their own geographic regions, as well as the inflation that is now present in the world.

But Mr. Mackintosh goes further.

He points to research by Marvin Barth of Thematic Markets in saying that much of the strength of the US dollar comes from the innovation that has taken place in the United States over the past few years and decades.

Barth points to the major relationship between academic research and “the close ties between universities and business” that gave the United States “a head start in computerization in the 1970s and early 1970s. 1980s, on the Internet in the 1990s, and in new Internet applications and artificial intelligence more recently.”

Waves of innovation have sparked investment, from both domestic and foreign sources, driving the dollar higher.

Note that the leadership in each phase was short-term leadership, as others around the world copied each new advance.

But, these organizations practiced “temporal rhythm” practices that favored short-term leadership followed by a new wave of innovation to retain leadership through the next round of innovation.

The “cycles” of innovation became so closely intertwined that the overall picture of ongoing advancement seemed almost seamless, constantly moving upwards.

This, as stated, is something new. Private non-residential fixed investment in the United States has stabilized at a fairly high share of GDP.

The 10-year average is the highest since the late 1980s.

Research and development spending is also at historic highs as a percentage of GDP.

Things have definitely changed in the past.

“This cycle is very focused on US economic supremacy,” says Kit Juckes, head of currency strategy at Societe Generale.

The future

Well, we’ll see.

Things are certainly different now, and the evolution of technology will continue to add to the “new future”.

Moreover, European competition seems to be falling even further behind. Events, including those in Ukraine, certainly do not improve the general situation.

But, what needs to be watched is where the research and development efforts are going. Innovation is taking place, but it is not producing advances in labor productivity as in the past.

This, of course, helps explain the slowdown in economic growth during the economic recovery of the past decade.

But progress in R&D is going somewhere, and if Mr. Barth is right, the changes are happening in intellectual capital, not physical capital.

We’ve seen it in other areas on the supply side of the equation. Money for R&D goes into one area, but labor productivity does not increase. The reason for this is that R&D expenditures go into intellectual capital, and this will increasingly be the case.

Apparently, more sophisticated investors around the world have discovered this, and so their money ends up in the world of innovation in the United States. This also contributes to the rising value of the dollar.

In fact, this will likely be the case in more and more areas associated with innovation in the advancement of computing.

In other words, investment in intellectual capital will be the future.

The United States leads in this area and will continue to lead.

And sophisticated investment funds from around the world will continue to flow into these regions.

We are only just beginning to understand this. However, in the future, we should look for more and more opportunities like this.

It’s the future.


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