Macroeconomics
FX
limited to command economies such as China, or a few countries in which the state distorted the allocation of capital. We propose here that it is a much more generalized problem, and this analysis can be rooted in a long intellectual and policy history.
Chart 3
distributed, creating new speculative opportunities.
Bernanke attributed the surplus savings to Asia and the Middle East, but there was a large domestic component as well. There was redundant investment in many key industries and a growing financial surplus, generated by non-financial corporations, that had to be managed by the financial sector.
Just as the capital surplus was growing, the political forces through both Republican and Democrat Administrations saw the dismantling of
large parts of the
safeguards established after another large credit cycle ended in tears. It seems that many policy makers hope that the fiscal and monetary measures
taken will buy time to
make stronger financial pipes so the old system can re-start. In fact, it seems that the policies being pursued in many countries to cut
corporate taxes, while increasing the taxes on consumption, will aggravate the surplus capital condition.
It is a similar exercise as the Smithsonian Agreement, which were attempts to re-introduce new fixed exchange rates after the collapse of Bretton Woods. There is no going back now either. The financial sector, which also had vast excess capacity, is in the process of being rationalized, to some extent as well. It has lost capacity, while the surplus continues to grow.
The Reagan-Thatcher strategy for absorbing the surplus capital has run its course. There are two main obstacles to developing a new solution: misdiagnosis of the problem and ideological constraints. Most observers operate under a different paradigm. To the extent that a surplus capacity or over- production problem is recognized, it is seen as a special case, largely
The ideological constraints to a solution cannot be under-estimated. These constraints resist calls for greater redistribution of the surpluses in the form of wages and public investment (e.g., infrastructure, schools, conservation).
There is
reluctance to a jubilee of sorts that would destroy capital through debt forgiveness. Ideologically, we attribute to capital and profits a privileged place in our political and economic discourse.
Even if not recognizing the problem as sketched in this essay, there are implications for surplus capital in some the views of others. Of course, the libertarians (modern day anarchists and largely in the WEIRD, in the sense of Western, Educated, Industrial Rich Democracies) would argue
against any state-oriented
solution to address the surplus of capital.
There are some conservatives who argue that the market, left to its own devices, can be self-correcting and falling rates of return will discourage investment
over time. The state
itself, they would argue, has distorted the investment incentives through subsidies and taxes and creates the conditions for surplus capital.
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