Can We Talk About the Global Investment Drought, Please?

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The topic of the day in the econosphere is interest rates. Why are they so low? How long will they stay low? Ryan Avent comments:

The most common explanation for the drop in real interest rates (one advanced by Ben Bernanke) is the global savings glut. In a sense, the explanation is almost tautological; if a price is falling, a glut (or excess of supply relative to demand) is almost by definition the cause. The more interesting issue is the source of the imbalance. Mr Bernanke points, among other things, to reserve accumulation by emerging markets. More recently, he has also noted that a shortage of safe assets could be contributing to the problem.

For these dynamics to work, there should be an insensitivity, somewhere along the line, to interest rates. The glut occurs when there is too much desired saving relative to desired borrowing, and the interest rate falls in order to bring the two into balance.

I wish I understood this better, because that bolded sentence has always seemed like the key insight to me. In theory, as Avent says, if the savings level is high, then interest rates will go down until it’s once again attractive to borrow all that money to invest in real-world production of goods and services. But that hasn’t happened, which means the real problem we’re facing is the mirror image of a global savings glut: namely, a global investment drought. For more than a decade now, no matter how low interest rates have gone, the appetite for real-world investment has remained anemic. During the aughts, this problem was partly masked by the flow of money into property and related derivatives, but after that blew up nothing was left. Capital is still sloshing around the system and is available at ever more attractive rates, but it goes begging nevertheless.

So forget the savings glut. The real question is why, over the past decade, the world has gotten so bearish on real-world investment opportunities. The answer, almost by definition, is that confidence in future economic growth has waned. But why?

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

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As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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