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Ocse meets Piketty: an alternative economic narrative

How today’s profits are not tomorrow’s investments. Somethings about return on risk-free financial investment and the role of fiscal policy in reviving aggregate demand.

A  picture can say more than a thousand words. This is certainly true for the set of graphs (see below) that the OECD (Ocse in italian) published in its latest Economic Outlook and that show the rate of return on fixed assets – a proxy measure for the rate of profitability on capital investment.

A quick glance reveals high rates of return in OECD countries. Indeed, across the body as a whole, the rate of return on fixed assets is back at its pre-crisis level and as high as 10 percent. While in the US and the UK the rate is higher (12 percent), Germany and the Netherlands have hit record highs of 13 to 14 percent profitability. Moreover, these rates only reflect returns before any financial leverage effect operates when companies take out loans and pay a lower interest rate cost than the return on assets. This indeed implies that returns on equity would be even higher and a multiple of the returns shown below.

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