So much money

Billionaires have a problem. I know, there’s never enough money for them, but they face a challenge: Where to put it all?

As the rich continue to siphon off most of the economy’s output, they find themselves hoisted with their own petard. The global market, which they fashioned for their own interests, is stuck in a capital gut. Meanwhile, the Rest of Us have an opposite problem. We have too little money to buy the things we need, let alone the things we want.

Yesterday I wrote a bit about the output gap created by the Great Recession. The U.S. economy is at least $15 trillion behind where it would have been without the housing-bubble collapse. Yet, the deleterious effects have fallen mostly on the Rest of Us. Indeed, the extremely wealthy took an increasing percentage of economic output, steadily adding to their financial portfolios while nearly everyone else struggles.

It has always seemed obvious to me, as it was to John Maynard Keynes about 85 years ago, that a market economy functions best when more money is circulated rather than accumulated in the hands of a few. Ultimately, the economy depends on demand, ordinary people buying goods and services. But if the people lack sufficient income, as is now the case, demand falls. When demand falls, there is less need to produce those goods and services. As production falls, people become surplus to industry, resulting in even lower demand.

Capital constantly searches for investment opportunities, and political borders are no impediment. When China’s economy was bustling like no other’s, capital flowed into the country. Now that output is slowing, China’s leaders have reduced the value of their currency in hopes of enabling more exports. However, a lower currency pushes money out rather than in. China may be on the cusp of a downward spiral, with further devaluations inducing increasing capital outflows.

net_capital_flows_to_emerging_market_economies__annual__forecast_chartbuilder1

In the United States, corporations sit on mountains of cash. Why? One suspicion is that they expect very poor outcomes in the near future.

So what would you rather hold in “hard times,” or if you thought hard times were coming? In “hard times” I want to hold cashand buy only what I need. Why? Because in deflationary times, cash increases in value while the price of things keeps falling.

The question is begged: Why the hard times? I return to my culprit—diminished demand. Money-lacking people are unable to buy what they need or certainly want.

We’ve seen over the last few decades that the economy needs to do exceedingly well for the Rest of Us to financially benefit. That happened in the post-war period until the mid-1970s. It happened again, to a lesser extent, during the Clinton I years, when the economy realized consecutive gains for several years.

But economic growth continues to fall. That bodes ill for the Rest of Us.

real gdp percent change to 2016The rich, unfortunately, are drowning in their own success with potentially disastrous consequences should China’s decline trigger a worldwide reaction to the bottom. If only they would part with some of their money so that the Rest of Us had dollars to spend.