[Marxism] Capital glut

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times Op-Ed, March 25, 2005
FLOYD NORRIS
Too Much Capital: Why It Is Getting Harder to Find a Good Investment

THERE is too much capital in the world. And that means that those who own
the capital - investors - are in for some unhappy times.

That thesis may sound inherently unlikely, but it explains a lot. Those
with capital find they must pay high prices for investments that are likely
to produce only a little income. The relative importance of things other
than capital, like commodities and cheap labor, has grown.

Evidence of the capital glut can be seen in interest rates. Market rates
are low, and even when central banks set out to raise short-term rates,
longer-term rates are slow to move. Little additional yield is available to
those who buy very risky bonds. For the same reason, stock prices are high.
Profit disappointments may not cause the stock market to plunge, since the
capital will have to go somewhere. But the return on the underlying
investments is likely to be below what investors have expected.

With capital in a weakening position, returns that once would have gone to
owners of capital have gradually been redirected. That is one way to
explain the surge in management compensation in the last two decades. In
the early 1980's, when interest rates were high and stock prices low, the
average chief executive received no stock options in any given year. Now
nearly all get sizable grants, and one study found that chief executive pay
rose faster than that of any group save for professional athletes and movie
stars. Those who provided the capital had less power to demand the profits
from the enterprises they financed.

Another sign of excess capital can be seen in what Argentina did to its
creditors - and in how they reacted. When Argentina defaulted on its debt
in December 2001, many thought it would eventually negotiate a deal with
creditors that was similar to previous arrangements made by countries in
default. Instead, this year it imposed far harsher terms and refused to
talk about them. The vast majority of the bondholders meekly went along and
bonds of other emerging markets have not suffered.

Emboldened, Argentina's government is sounding an uncompromising note
regarding foreign-owned utilities and oil companies. It is betting that it
can get away with treating the owners of capital badly and it may be right.

Why is there too much capital? One answer is that central banks reacted to
the bursting of the technology bubble by cutting interest rates by too much
for too long. The resulting liquidity might in other times have sent
inflation soaring, but now China's emergence has placed offsetting
deflationary pressures on consumer goods prices. The excess liquidity is
sloshing around world capital markets.

At the same time, China's emergence is spurring investment that the world
may not need. The world automobile industry is plagued by overcapacity, but
every car company believes it must have plants in China.

We have seen too much capital before, but not on a worldwide basis. It
flooded into Japan in the 1980's when money there was cheap and the success
of the Japanese economy obvious. Japanese business still suffers from
excess capacity. Excessive investment in telecommunications in the late
1990's left a lot of unused fiber optic cable.

The excess of capital is bad news for wealthy economies, especially as it
is happening when aging populations in Japan, Europe and the United States
need good investments to finance retirement. But it should be good news for
economies that need capital to develop.

Capital will not remain in excess forever. Money will be spent on
consumption rather than investment, and new technologies and rising demand
will eventually create more uses for a supply of capital that will have
been depleted as low returns discourage saving. But for those with capital,
that could be a slow and painful process.

Louis Proyect
Marxism list: www.marxmail.org


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