Capital glut and declining growth

I’ve commented before about what may be a disturbing trend: the U.S. economy is growing at ever-decreasing rates. Meanwhile, the very rich continue to accumulate ever-increasing amounts of capital. Since those with money always seek to maximize their returns on investment, they are in a never-ending search for places to put their dollars.

In Europe we saw that the core nations, notably Germany, invested heavily in peripheral economies. Then the Great Recession hit, reversing capital flows and sovereign indebtedness in Greece, Spain, et al. The austerity imposed on the peripheral nations further exacerbated fiscal balance sheets and impoverished millions.

Over the last few decades capital has found a nice home in China, which has enjoyed double-digit growth rates—until recently. Now China’s economy looks a lot like ours and Europe’s, with economic output decreasing. This article in Quartz presents dismal numbers. Here’s a chart showing capital flows in and out of China:

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Matt Phillips, the article’s author, concludes:

But the broader point is that this marks a new phase for the global economy. For nearly 30 years, China has bulked up by digesting tons of commodities from the world’s emerging markets and turned them into exports, and in the process has become a key creditor to the world’s largest consumer economy, the United States. All of that is changing now, and nobody is quite sure how it will play out.

You may have noticed that U.S. stock markets are especially volatile. As a group, investors react quickly to events, real or imagined. The quest for returns persists, but opportunities appear to be few and hardly guaranteed.

Some economists (e.g., Larry Summers) believe that in the midst of capital accumulation only speculative bubbles will yield significant growth. But, as we’ve seen, bubbles have a tendency to burst, wreaking considerable havoc on the Rest of Us. “Animal spirits” rule during both ups and downs. Is x the next big thing? If the perception is affirmative, billions of dollars rush to x. Then just as suddenly a few investors have second thoughts and begin to retrieve their dollars. The herd quickly divests, collapsing the bubble.

Most would surely benefit under a more sustainable economy, one devoid of speculative bubbles. I suspect that won’t happen until capital is invested in socially productive activities. And that won’t happen unless more of us have the money to purchase goods and services sufficient to justify the investments. Demand comes before supply, as Mr. Keynes instructed.