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Monday, March 28, 2005

Savings Deficit or Capital Surplus (From Chicago Boyz)

David Foster at Chicago Boyz asks the question, "Savings Deficit or Capital Surplus":

There's been a lot of discussion about a savings deficit in the United States. But recently, there have been several articles suggesting that the US...indeed, the entire world...now has a surplus of capital, and that this surplus is pulling down rates of return on investment. (In actuality, supply and demand of capital will always be equal, of course: the question is at what price level...in terms of returns on investment...the supply and demand curves will intersect.)

Floyd Norris makes the capital-surplus argument in The New York Times (3/25). As evidence, he makes these subsidiary arguments:

1)There are low rates of return on debt instruments, and long-term rates have proven to be "sticky"
2)Stock prices are high relative to underlying valuations
3)Countries defaulting on debt have been able to get away with it (he specifically mentions Argentina) implying reduced relative power on the part of owners of capital
4)Increasing management compensation levels, which he believes make the same point about relative power (in this case, of managers vs owners of capital)

These seem like good arguments, except for the last, which feels like a stretch. I'd also observe that many corporations are carrying considerable amounts of cash on their balance sheets, which they'd be unlikely to do if they were seeing lots of compelling opportunities for investment.

But on the other hand....

Like any good "two handed economist", he then goes on to provide arguments that there either might not be a surplus, or that it's only temporary.

Click here for the whole article.

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