There’s been a lot of discussion about a savings deficit in the United States. But recently, there have been several articles suggesting that the US…indeed, the entire world…now has a surplus of capital, and that this surplus is pulling down rates of return on investment. (In actuality, supply and demand of capital will always be equal, of course: the question is at what price level…in terms of returns on investment…the supply and demand curves will intersect.)
Floyd Norris makes the capital-surplus argument in The New York Times (3/25). As evidence, he makes these subsidiary arguments:
1)There are low rates of return on debt instruments, and long-term rates have proven to be “sticky”
2)Stock prices are high relative to underlying valuations
3)Countries defaulting on debt have been able to get away with it (he specifically mentions Argentina) implying reduced relative power on the part of owners of capital
4)Increasing management compensation levels, which he believes make the same point about relative power (in this case, of managers vs owners of capital)
These seem like good arguments, except for the last, which feels like a stretch. I’d also observe that many corporations are carrying considerable amounts of cash on their balance sheets, which they’d be unlikely to do if they were seeing lots of compelling opportunities for investment.
But on the other hand….
Here’s a report from the American Society of Civil Engineers, providing a “report card” on the state of U.S. infrastructure (highway, rail, electricity generation & transmission, drinking water supply, etc) and asserting that an infrastructure investment of $1.6 trillion is needed. I’d take this report with a bag or two of salt, given that civil engineers tend to benefit from projects of this nature (and I also observe that the ASCE report seems to have a pretty strong slant toward solutions involving a heavy role for govenment.) However, there’s no question that there are a lot of infrastructure investment needs, and even if the ASCE number is too high by a factor of 2X….$800 billion is still a pretty good chunk of change.
Also: as nations like India and China continue their growth, they will absorb increasing amounts of investment. They will also drive investment requirements on the part of supplier nations: for example, for mining and for shipbuilding. If things go well in newly- or potentially-democratized nations (Iraq, Lebanon), this is likely to bring on an era of economic growth for those countries, with consequent capital demands.
There are also heavy investment needs in the oil and gas industries: new rigs, new refineries, new tankers. Some of the technologies with promise for reducing our dependence on imported oil (like coal-to-liquid) are also likely to require considerable amounts of capital when they reach the deployment phase.
So…is there really a capital surplus? If so, is it only temporary, and how long before the balance swings back the other way? Are there structural factors which are keeping capital from flowing where it needs to flow, and if so what can be done about them?
Discussion is encouraged.