Where Have All The Investment Opportunities Gone?
Kevin Drum offers an interesting perspective on the “savings glut”:
I'm putting my money into American real estate! (cc photo by chi king)
But why weren’t there enough good, traditional places to invest that money? And by “traditional” I mean people who want to build factories or expand call centers or start up biotech ventures. That is, businesses that provide goods and services to meet demand from consumers and corporations. The supply side of the economy may have been going great guns, but the demand side wasn’t keeping up. This is why some people think it’s better to talk about this phenomenon as an “investment drought.”
Kevin offers an explanation for this that relates to the maldistribution of income in the United States. But isn’t the real issue here that the good investment opportunities were all in China?
That’s what was screwy about the global economy of the 2000s. For each and every one of those years, everyone believed that the short- and medium-term growth prospects in China were better than the prospects in the United States. And yet on net investment funds were flowing from China to the United States. Similarly, Americans had much more consumer goods than Chinese people, yet it was Americans borrowing money to finance present consumption. Borrowing it from China! That’s why Bernanke called it a savings glut.
But in a larger sense, this reflects the failing of the international financial architecture. The IMF wasn’t just created as a stimulus program for the makers of giant puppets—the architects of the postwar economic order thought the globe would be wracked by periodic crises without something to play its role. Nevertheless after the way the IMF handled things in the 1990s, Asian countries resolved to never again rely on the IMF and to instead start stockpiling dollars. But this effort to develop a workaround created a ton of problems. Bypassing the organization turns out to be a poor substitute for actually addressing the problems with it.
28 Responses to “Where Have All The Investment Opportunities Gone?”
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October 30th, 2009 at 1:07 pm
And yet on net investment funds were flowing from China to the United States.
Because, if they didn’t, the renminbi would rise and China would loose much of its competitive advantage.
October 30th, 2009 at 1:20 pm
The current difficulties in the US have nothing to do with international economics.
There are and always were investment opportunities in the US. The problem, since the 1980s, has been that Wall Street has called the shots and has demanded extraordinary returns on capital. Politicians were bribed to eliminate regulations so as to insure that those returns were available. So investment funds went to LBOs, hedge funds and asset inflation instead of the real economy. Jack (”Neutron Jack”) Welch of GE is one personification of the attitude.
Another effect has been a huge increase in income/wealth maldistribution due to the shift in returns from labor to capital.
This was all created within our borders. Blaming foreigners is a diversion.
October 30th, 2009 at 1:22 pm
As a referee of international finance, the IMF stinks as bad as those blind motherfuckers overseeing the World Series last night.
October 30th, 2009 at 1:24 pm
Seriously Matt, blame China for not allowing the renminbi to rise. Of course they couldn’t because if they don’t deliver high growth politically they could face a shitstorm. Add in a
US government that decided to dis-save and we have problems. But this isn’t a problem for “Asia”
October 30th, 2009 at 1:26 pm
And as a referee of Interstate Commerce, the US Congress is a ref who openly takes bags of money from the owners out behind the bleachers before the game starts.
Until you fix that , any talk of “economic policy” is bullshit.
October 30th, 2009 at 1:27 pm
Heh.
October 30th, 2009 at 1:38 pm
I don’t know what this even means. “Where have all the investment opportunities gone”? People are still founding new companies, and new companies are still succeeding. Big companies are still growing. Obviously they’re on the whole worth a lot less than we thought they were in 2007, but that transformation was a realization that we had previously been perceiving value where it did not, in fact, exist. The idea that we’re poorer now than we were then makes as little sense as saying that a dude in the desert is worse off for having realized that the oasis is actually a mirage.
If what’s really being expressed is the idea — really more of an irritable mental gesture than a fully-baked critique — that new companies aren’t spending all their investments on the wages of laborers… well, welcome to the obvious and foreordained secular trend that has existed since the Industrial Revolution and will continue apace forever.
October 30th, 2009 at 1:38 pm
Seriously Matt, blame China for not allowing the renminbi to rise. Of course they couldn’t because if they don’t deliver high growth politically they could face a shitstorm.
Inflation, too. If they didn’t take money out of the country, their economy would have grown too quickly and inflation would have led to unrest. And if China has made anything abundantly clear in the last 20 years, it’s that it will do anything to avoid or prevent public displays of dissatisfaction.
Also, this post would be more useful if it actually enumerated the problems within the IMF.
October 30th, 2009 at 1:39 pm
I always thought the constant talk by Americans of a savings glut was projection.
There wasn’t really a savings glut.
There was a desire on the part of Americans to live beyond their means. Now, this is not to blame a bunch of rubes for buying flatscreen TVs.
Rather, it had become impossible for Americans – excepting, of course, the Masters of the Universe – to continue to maintain their standard of living save by borrowing.
This was something that came out of what American companies, aided and abetted by Wall Street, did over the course of the 80s and 90s.
American politicians, meanwhile, got their campaign contributions from the latter and had full knowledge of what happened to the last politician to tell Americans they might have to accept a lowered standard of living.
That gave them motivations from *both sides* to keep the game going.
October 30th, 2009 at 1:41 pm
Rob:
Seriously Matt, blame China for not allowing the renminbi to rise. Of course they couldn’t because if they don’t deliver high growth politically they could face a shitstorm.
I hate dictatorships which is why I’m glad they let Musharraf go in Pakistan, but the Chinese Communists have been pretty smart, from their ginormous government stimulus package to delivering high growth to their people. Their oppression of the Muslim Uyghurs? Not so much.
But I think Matt’s post is on to something.
ron:
This was all created within our borders. Blaming foreigners is a diversion.
I’d guess it’s both but a look at the numbers involved should tell you what extent you’re right.
My guess is that regular manufacturing just isn’t that profitable so to get decent returns you need to make some risky bets or invest in manufacturing where labor is dirt cheap, even if they have riots at the factory every now and then.
October 30th, 2009 at 1:43 pm
I hope the National Zoo has a restraining order for Matty.
Mei Xiang’s virtue must be protected.
October 30th, 2009 at 2:43 pm
Abandoning the IMF worked out badly for whom?
October 30th, 2009 at 3:06 pm
Warning to people reading this post – it makes no sense.
“Similarly, Americans had much more consumer goods than Chinese people, yet it was Americans borrowing money to finance present consumption. Borrowing it from China! That’s why Bernanke called it a savings glut.”
This is gibberish. Americans were not borrowing money from the Chinese, they were borrowing it from American banks. The Fed sells bonds to the Chinese as part of its open market operations. In no sense does this borrowing finance American consumption.
October 30th, 2009 at 3:07 pm
While both true to a significant extent, the larger issue was the maldistribution of income in China. Chinese people didn’t have money, so they bought little and supplied cheap labor. The extant wealth in China was either invested in the capacity to create capital goods or consumer goods for export, or lent to the US.
October 30th, 2009 at 3:12 pm
BILATERAL BANKING SYSTEMS
[George Soros]
Now, we know little to nothing about George Soros, or much of anything else were sort of a simpleton Independent smarter than a Democrat knowing what the meaning of Is, Is, and more honest than a Republican, it IS better to give than receive, with the exception of on Tax day, but it the one thing that we did like about the guy was in an interview given by George Soros [China Will Lead New World Order, by Paul Joseph Watson, http://www.PrisonPlanet.Com. at least you could understand what the old fella had to say. Now, George say more [more content] and plainer in [10 min.] Ten minutes then the Media Messiah Imperial President of the American-Israeli Empire could and does in [24/7-365] twenty-four hours a day, seven days a week, three-hundred-sixty-five days a year, more words with no content. But, with George you better listen or use some method to get it all down, it contains volumes of information in a short space. It’s not the former William F. Buckley, Jr., or George Wills sitting together having a talk, and your there listening, not understanding a word they said, and even if you did take it down, each word would have a half a page of definitions not all the same, and then it’s zing over your head, George Soros talks and you better be able to follow the dots back to each book, its all there, it like hiding in plaine sight, and the guy seems to know what the meaning of Is, Is, unlike most Liberal Democrats.
[There is a New Bank in Town]
Now, George came right out with it [Bilateral System SEE BELOW] what it boils down to is there is a new bank in town and they aren’t about giving out toasters for new deposits, but about giving a better interest rates, and no loan sharking. Up to this point the American-Israeli Bank of Hemi-Town, [NYC] New York City, has been the only bank in town. Well that is over, now we have the [BRIC SEE BELOW] Bank, of China-Town, Hong-Kong, and the boys are offering a better deal, the boys in Hemi-Town are buying bad debts that will never be repaid, gambling with taxpayer money, getting [GOLDERN PARACHUTES], bending the depositors over when they need loans unless its government guaranteed so the taxpayer has to pick up the losses, and loan sharking on loan rates, the Hong-Kong boys aren’t having any part of it, but old George is making his pitch to have them at least take the [IMF SEE BELOW], the loan sharking department of the American-Israeli Bank of Hemi-Town, but that doesn’t seem like the China-Town, Honk-Kong, [BRIC] Bank. Unlike the Hemi-Town Bankers the Hong-Kong Bankers make their money the old fashion way they earn it, and not steal it. There is a New Kid In Town.
[BILATERAL SYSTEM]
At present there is a Bilateral [Two-Side by Side] systems, of Base Currencies operational, the Old Empire Base Currency System of the Empire Dollar, and New [Diversified/Multilateral Currency Regime/See Below] and there can only, in the end be [1] one. Soros stated that the Empire Dollar has been, is, and will continue to be a drag on the entire Global Economy as it declines into a Third World Status, along with the Empires Demography, and cultural base, and that in fact has the [BRIC] is actively engaged in [Cash and Carry/ See Below ] and Cornering of [STRATEGICALLY IMPORTANT ECONOMIC AND MILITARY] assets as hedges against the collapse of the Dollar, as the [NYSE] New York Stock Exchange is felt to be [1/3 / 33.3%] One-Third or Thirty-Three and a Third Percent over valued, and should be in the [6K] Six-Thousand Range, and the [S&P 500] Standards and Poor Five Hundred Index over-valued by [40%] Forty-Percent. Those countries that choose to remain with the Empire Base Currency will decline along with that currency, those that choose to uncouple from and shift to the Diversified/Multilateral Currency Regime, will rise with the Currency Regime, as the Empire Dollar is devaluing as the Euro and others of the New System are on the rise.
[BRIC]
The [BRIC] Sphere of Influences, Brazil, The Russian Federation, India, and The Peoples Republic of China
[IMF] International Monetary Fund
The American-Israeli Empire directly appoints the heads of the [IMF], which is basically the loan sharking department of the Empire. The [IMF] in concert with the World Bank give’s huge high risk, loose term, loans to countries to cope with crisis situations, putting them in the back pocket of the [IMF], who in turn request [Services in Return], the [IMF] is the Landlord and the loaner country becomes the provided service renter, if you get the drift. The best thing for any country is to avoid dealing with the [IMF] because they do attach strings and conditions that do more good for the [IMF] at the cost of the country taking out the loan, forcing many countries to build up huge currency reserves, rather than deal with the [IMF]. The [IMF] basically provides the Empire policy-makers with advice as how to put other countries under their economic thumbs. If a country has a sick economy going to the [IMF] is the same as being a twin under the loving care of the Nazis [Angel of Death] Dr. Josef Mengele, and the [IMF] can be counted upon to miss the boat when it comes to providing early warnings of impending crises, your better off seeing a physic/witch, or just flip a coin.
HERCULE TRIATHLON SAVINIEN
October 30th, 2009 at 3:31 pm
BTW one of the central critiques of the IMF by the DFH with the puppets was that it was an institution created with a Keynesian mission being run by Monetarists and creating vastly more problems than it solved. This was CW at the IMF by 2006.
October 30th, 2009 at 3:57 pm
Ape Man: It finances American consumption because money is fungible. Money that the goverment borrows from abroad is money that doesn’t have to be borrowed domestically, which is money which is available for borrowing by the private sector. It can be oversimplistic to look at the pool of savings as being a static quantity of money since the pool of savings grows and shrinks according to people’s actions, but at least to a first approximation, it does balance out.
October 30th, 2009 at 3:59 pm
“That’s why Bernanke called it a savings glut.”
It took me a minute or two to divine the antecedent to “it” in the sentence. I take “it” to mean the source of all that Chinese investment money. In any case, could all that money be available to the Chinese because they actually make things as opposed to the current American economic model of shuffling papers? Not being at all competent in matters of international finance, I pose the question in all seriousness.
October 30th, 2009 at 4:07 pm
In any case, could all that money be available to the Chinese because they actually make things as opposed to the current American economic model of shuffling papers?
There are things they don’t sell at walmart you know.
Largest US Exports by Category
1. Semiconductors
2. Industrial Machines
3. Commercial Aircraft
4. Telecommunications Equipment
5. Computer Accessories
China Exports
1. Computer accessories, peripherals and parts
2. Miscellaneous household goods
3. Toys & sporting goods
4. Computers
5. Non-cotton household furnishings & clothing
Again, the US exports far more industrial goods while China exports consumer goods leading to the impression that we don’t make anything. When was the last time you bought a new cell phone tower or computer controlled plasma cutter?
October 30th, 2009 at 4:32 pm
There are things they don’t sell at walmart you know.
Fair enough, though China does export lots of industrial and farm machinery to the rest of Asia. Anyway, I wonder what is the percentage of GDP the Chinese industrial economy compared to that of the U.S.?
And thanks, jmo, for your response.
October 30th, 2009 at 4:41 pm
How much of this lack of investment is because so many of our “investment bankers” were really gambling with our people’s money rather that investing in new businesses or other enterprises that would actually create new jobs or value.
October 30th, 2009 at 4:46 pm
As of 2009 manufacturing represented 43% of the Chinese economy.
In 2008 the US was the worlds largest manufacturing nation, “U.S.-based manufacturers will account for 16.9 percent of global value-added factory output for the whole of 2008, with China close behind with 15 percent.” So while the manufacturing sector in the US is smaller than China, with 1/4 the population we make more stuff than they do.
October 30th, 2009 at 4:48 pm
So while the manufacturing sector in the US is smaller than China, with 1/4 the population we make more stuff than they do.
Sorry that should read: So while the manufacturing sector in the US is smaller, as a percentage of the economy, than China, with 1/4 the population we make more stuff than they do.
October 30th, 2009 at 5:02 pm
Money that the goverment borrows from abroad is money that doesn’t have to be borrowed domestically, which is money which is available for borrowing by the private sector.
In what sense is private sector borrowing constrained by the level of government bond sales?
October 30th, 2009 at 5:26 pm
How much of this lack of investment is because so many of our “investment bankers” were really gambling with our people’s money rather that investing in new businesses or other enterprises that would actually create new jobs or value.
A lot of it. The financial system is not good at allocating money to worthwhile enterprises (like the development of the Internets). It’s a mongo casino.
October 30th, 2009 at 8:59 pm
Isn’t the problem in the US that capital gains taxes are lower than taxes on income from production? Somebody has to run the companies, after all, and make money that way.
October 31st, 2009 at 2:26 am
The major question is: what is the sense of international trade when we have two groups of countries: group A has a persistent deficit, group B has a persistent surplus. In aggregate, companies and governments of A become huge lenders, and those in B, huge borrowers.
One model of hugely borrowing countries were countries that try to quickly increase production capabilities using foreign capital. When such a country gets into trouble, the currency collapses and so does the standard of living, and the balance of trade is restored, and with defaulting on some debt the books are balanced. Importantly, the balance of trade can be restored because prior to the temporary collapse the country build some capacity for exports and/or import substitution. But this is not “Anglo-Saxon model” (USA/UK/Ireland and perhaps Spain).
The second model is that while the trade deficit finances chiefly consumption and residential construction, the monetary policies of the country are so sound that the currency risk of the lenders are negligible. Also, the legal and financial systems of these borrowers reduce the risk of massive defaults. Well, nothing on the scale of Russia and Argentina when the shit was happening there.
Still, twin “puzzles” persist:
A. why A’s insist on selling goods for a pile of paper that will surely loose value, rather than consuming a bit more? Why the “saving glut”? The answer is simple: A’s are mercantilists. The central bank is absorbing the risk and it has a huge capacity to sustain it given its enormous level of control over domestic financial system. And even if they eventually loose some trivial trillion or two of dollars and pounds, in the meantime they amassed enormous production capacity and infrastructure. Yeah, it is not very sustainable, but if and when that deal will collapse, they will be much better off.
B. Why B’s insist on borrowing as if there was no tomorrow? Because they are anti-mercantilists. If someone provides you with goods or credit “below market value”, you gain, the other party looses. Letting “free flow of capital” is the best way to prosperity. If the market puts fewer investment in manufacturing and more in residential real estate, health care and financial sector, well, then this is what has a larger value: there is really no other way of determining what value is. Mercantilists who think otherwise are just wrong.
It seems to me that USA and increasingly, EU, are committing industrial suicide. We started earlier. Our hitherto industrial towns are pretty much wasteland. I would balance the trade using old-fashioned tarifs (say, 20%?) on the theory that we should have actually huge capacity for import substitution, and that tarif-stimulated industrial investments would have nice multiplier effect. First, tarifs would decrease budget deficits, second, investment would stimulate employemnt. We would create some “inefficient jobs”, but we do not need to maximize efficiency — which is done by outsourcing. If the zone protected by tarifs will be sufficiently big, say, combination of NAFTA and EU, the anti-competitive effects will be small.
November 1st, 2009 at 1:17 am
The Chinese save so much that they can finance a huge account surplus and huge investments in their own country.