The reason why in the developed countries capital is in surplus and in the BRIC countries capital is in undersupply need of “hot” money for compensation) is that automation generates much higher productivity which makes more profits in the developed countries than in the BRIC countries where the productivity lags behind the West. However, it is cheaper to invest in the BRIC countries than in the West. This phenomenon also helps explain why unemployment in the BRIC countries is lower in general than in the West.
Will the capital glut in the West change to capital shortage? It will change not so much by fiscal or monetary policy changes or global investment demand and capital supply as the two authors suggested but by means of abolishment of global overproduction of commodity and the concomitant over-accumulation of capital.
The root cause of all crises is overproduction of commodity and over-accumulation of capital. Although the monopoly finance capital has damaged the world as much as $1.5 trillion per year for 20 years
including the peaking financial crisis of 2007-2008 and the ensuing economic crisis, http://www.nakedcapitalism.com/2011/01/nj-public-pension-slugfest-reporting-omits-15-years-of-governors-stealing-from-workers.html apparently, that is not enough for liquidating the surplus capital that created the crises together with the commodity glut.
So long as capital and its state machine continuously hoard up the surplus capital; and refuse profit-sharing with the working majority by letting go the commodity glut, ever-present and severe crises will haunt them and the world with no end in sight.
The two authors’ warning about capital shortage is to put the cart before the horse.
Mark
Marv Gandall on Sunday, February 06, 2011 10:23 AM wrote:
>The financialization of Western economies, characterized by engineered low
>interest rates and speculative investment in stocks, bonds, and a
>bewildering array of derivative products, was an outgrowth of the shrinkage
>of profitable investment opportunities in the "real" economy of plant,
>equipment, infrastructure and other hard assets. Over the past three
>decades, the opening of new zones of exploitation in China, the former
>Soviet bloc, and the old colonial and semi-colonial sphere gave global
>capitalism a new lease on life by providing it with profitable new outlets
>for the export of surplus capital. Now, argue economists Michael Spence and
>Richard Dobbs, that surplus is rapidly disappearing as accelerating demand
>from China and other emerging economic powers begins to outstrip the global
>supply of capital. They foresee a new era of scare capital, higher interest
>rates, capital controls ("hoarding"), and a resulting slowdown in global
>growth. Whatever its merits, beneath their thesis lies a familiar
>ideological subtext: that governments need to "act now" to slash public
>spending, lest "the fiscal deficits possible with recent low interest rates
>will not be as easily financed in the future, and could result in greater
>crowding out of private investment."
* * *
>The era of cheap capital draws to a close
By Richard Dobbs and Michael Spence
Financial Times
January 31 2011
>The global economy faces a dilemma. Attempts to boost growth have lowered
>interest rates in advanced economies. The resulting hot money has moved
>exchange rates out of line with fundamentals, creating inflation and asset
>appreciation in the developing world. Accumulation of foreign reserves and
>the imposition of barriers to inward capital flows have begun to replace
>tariffs and quotas in the trade protectionism arsenals of governments.
>Yet even as brewing currency wars threaten full-blown trade conflicts, we
>must remember one fact: this moment will not last. The 30-year era of
>progressively cheaper capital is nearing an end. The global economy will
>soon have to cope with too little capital, not too much. And worries about
>hot capital moving too quickly into emerging markets could soon be replaced
>by an era of financial protectionism – in which governments restrict
>outflows of capital as a defence against rising interest rates for
>corporations and consumers.
>Since 1980 differences in the cost of capital in most countries have
>converged, as financial markets globalised and risk premiums in developing
>countries fell. Capital became plentiful, and long-term interest rates
>declined too – primarily as a result of falling investment in assets such
>as infrastructure and machinery. Global investment fell dramatically,
>creating a fall in the demand for capital substantially larger than the
>growth in supply created by Asian current account surpluses. In other
>words, the “saving glut” so often cited as a cause for low interest rates
>really resulted from a decline in global investment.
>Today, however, this trend is reversing. Across Asia, Latin America, and
>Africa, rapid urbanisation is increasing the demand for roads, water,
>power, housing and factories. Global investment demand will now rise
>considerably up to 2030, reaching levels not seen since the postwar
>reconstruction of Europe and Japan.
>The global appetite to save, however, is unlikely to rise in step, for
>several reasons. China plans to encourage more domestic consumption.
>Spending will rise as populations age. Even increased expenditure to
>address or adapt to climate change will play a part. As a result the world
>will soon enter a new era of scarce capital, and rising real long-term
>interest rates. Such rates will in turn constrain investment, and could
>ultimately slow global economic growth by as much as 1 per cent a year.
>An era of sustained tighter capital will have significant implications.
>Governments should anticipate higher costs of debt, and act now to improve
>their public finances. The fiscal deficits possible with recent low
>interest rates will not be as easily financed in the future, and could
>result in greater crowding out of private investment.
>Yet even with restrained public finances, there is still a very real danger
>that governments will quickly resort to financial protectionism to insulate
>their economies from rising capital costs. New rules could be introduced to
>stop state-insured banks or domestic pension funds lending and investing
>abroad, or to direct sovereign wealth funds to make only domestic
>investments. Such moves would be self-defeating for the global economy.
>Real interest rates would diverge between countries, meaning nations with
>big current account deficits would suffer lower growth. Savers in surplus
>countries, meanwhile, would receive lower returns too.
>Governments must therefore be vigilant for early signs of capital hoarding,
>while international institutions must start to develop the financial
>architecture needed for a capital-constrained world. New mechanisms,
>supplemented by properly regulated cross-border bank intermediation, are
>needed to facilitate the flow of capital from the world’s savers to the
>places where it can be invested.
>New ways of financing infrastructure in emerging markets will also be
>important, given their low domestic savings. Emerging economies must work
>to develop deeper and more stable financial markets to develop local
>savings, while mature economies should introduce policies to spur household
>saving (or at least less borrowing).
>Businesses will also need to adapt to a world in which capital costs more.
>Just as Japanese companies with access to cheap capital in the 1980s held
>an advantage over western peers, companies with access to inexpensive
>capital – for example those based in high-saving countries such as China,
>or with links to sovereign wealth funds – will have a new source of
>competitive advantage. Financing is likely to become bundled with exports
>as a source of distinctiveness, while financial institutions need to
>refocus their businesses on accessing new global sources of savings.
>For three decades the world has grown used to cheaper capital. But the next
>stage of globalisation will be different. Governments will soon want to
>stockpile capital, and efforts to boost today’s global recovery must also
>anticipate an era in which capital scarcity places new brakes on growth. A
>future of creeping financial protectionism would be just as destructive as
>today’s currency wars. We must begin to take precautions.
>Richard Dobbs is a director of the McKinsey Global Institute. Michael
>Spence was a recipient of the 2001 Nobel Memorial Prize in Economic
>Sciences, and is on the faculty of New York University Stern School of
>Business. Their report, ‘Farewell to Cheap Capital’, is published by the
>McKinsey Global Institute
http://www.ft.com/cms/s/0/1478bc50-2d70-11e0-8f53-00144feab49a.html#axzz1DBTM9slE