SOME ONCE CALLED IT "OVERACCUMULATION"
Roger Altman chimes in on "the conundrum" in yesterday's WSJ (sub. only), but does little more than echo Ben Bernanke:
Three alternative schools of thought have emerged to explain it. One is that the bond market has overshot. A second is that the growth outlook is actually weaker than the consensus forecast, and the bond market is discounting such slower growth before it manifests itself. But the right answer involves excess global liquidity which, for the moment, has nowhere else to go but into dollar-denominated fixed- income assets like U.S. Treasury securities. . . .In braver times, this used to be called the "overaccumulation of capital", the 'natural' tendency of capitalism to overproduce capital which, because of the glut, consequently has difficulty finding profitable avenues for investment. The smart money breaks out of the tired old circiut of M - C - M' and into the magic of M - M', bypassing production altogether.
What is uncommon is for developing regions to run positive international accounts. Historically, they have grown rapidly and consumed foreign capital on a net basis. But today the opposite is true. Remarkably, Latin America, China, Africa and the Middle East are in surplus, as shown in the chart nearby.
By definition, such unprecedented foreign liquidity must be invested, and more of such capital usually flows into fixed income instruments than equities. Believe it or not, comparable rates outside the U.S. are even lower than ours. Economic growth is so anemic in Europe and Japan, for example, that the yield on Japan's 10-year government bond is 1.3%, while the 10-year German Bund is at 3.3%. At the margin, therefore, the highest returns are realized on American bonds. That is why this excess foreign liquidity has nowhere else to go.
Whereas Marx saw this tendency as capitalism's terminal illness, the capitalist state in particular has found ingenious means by which to mop it up, as Giovanni Arrighi pointedly observes in his sweeping Braudelian work The Long Twentieth Century (p. 232):
In every phase of financial expansion of the world-economy, the overabundance of money capital engendered by the diminishing returns and increasing risks of its employment in trade and production has been matched or even surpassed by a roughly synchronous expansion of the demand for money capital by organizations for which power and status, rather than profit, were the guiding principle of action.Thus the "global savings glut" is simply the reverse side of the "government debt mountain". As capital (and increasingly states) see profits waning in the realm of production it removes investment from the mundane processes of making things and delivering services and places it instead into the arena of financial intermediation and speculation. This fits the present condition as the IMF notes:
In the ASEAN countries and the NIEs, the increased current account surpluses result from a marked drop in investment, largely a reaction to the excessive investment prior to the 1997-98 crisis. In Japan also, investment has fallen steadily following the bubble years.Recall also that in the US, real nonresidential investment peaked in 2000 and has still not recovered to that level.
At the same time, governments of the most advanced capitalist economies happily find a wealth of cheap money available for their consumption and consequently borrow -- heavily. The two together generate a cycle of savings and debt which describes our present economy to a T. From 2000 to 2003, the general government fiscal balance as a percentage of GDP fell from +1.3% to -4.6% in the US; +1.3% to -3.8% in Germany; -1.4% to -4.2% in France; +3.9% to -3.3% in the UK; and -6.1% (2001) to -7.8% in Japan.
So instead of calling it the "global savings glut" and acting like it's something new under the sun, let's call it plain old "overaccumulation" which we've seen far too many times before.