Friday, January 22, 2016

The Wealthy Have Nowhere To Put Their Money, This Is A Problem

From The Week:

Rich people have nowhere to put their money. This is a serious problem.
So here's a mystery: According to the latest numbers from the International Monetary Fund (IMF), the world economy grew 3.1 percent in 2015 and is projected to grow 3.4 percent in 2016. On the world stage, that's a pretty modest rate, but it is growth. And yet at the same time, financial markets started 2016 by panicking as if they expect Armageddon any day now: The S&P 500 has dropped 9 percent this year already, and stock indexes in poorer developing countries have fallen further.
Neil Irwin tried to puzzle through this contradiction in The New York Times, and put forward a few ideas. But he admitted that "what makes these falling prices unnerving is that it's hard to tell a simple story about what is driving them."

Allow me to try.

The first thing to know, as Irwin points out, is that there is just an unprecedentedly huge amount of money sloshing around the upper echelons of the American economy these days. This is not simply a matter of rising income inequality, but it's certainly related.

Every business in the country is its own hub of distribution: It doesn't just decide how much of its revenue to pay to workers versus top management, but how much to pay to all of them versus how much to pay out to shareholders. (And, of course, top management and shareholders overlap enormously these days.) Over the last 30 years there's been a massive shift in favor of paying out to shareholders, rather than investing in new jobs or capacity. There is now far more money churning endlessly in financial markets than there is going into real-world investment in any given year. Wealth inequality — largely driven by ownership of stocks and other assets — is just insanely skewed towards the top.

This is more than a justice problem. This sort of imbalance comes with real practical consequences.
The rich cannot possibly spend all this money on consumption. So they need to park it somewhere. And the basic idea behind an investment — be it in stock or bonds or whatever — is that it's a bet. Someone in the economy has an idea for a new business or other project, and is either borrowing money or trying to raise equity to give it a try. If you buy a stock or a bond, you're basically saying you think that looks like a good bet: If the project is successful, you'll get dividends form the stock or service payments from the debt, and the value of those instrument will go up on the financial markets.
When the rich have excess money, this is how Econ 101 says they store it: in new projects that lead to new growth and new jobs.

Yet that isn't happening. All the buying and selling in the financial markets isn't going into new investments. It's just endlessly trading instruments that already exist back and and forth. Meanwhile, corporations are sitting on roughly $1.9 trillion in unused cash. As Adam Davidson noted, also in the Times, this is equally weird: Investing money in new projects is supposed to be more beneficial, in purely self-interested terms, than holding onto it.

These facts are being treated as grand mysteries by most commentators. But may I invoke Occam's Razor and suggest the simplest explanation is the right one: There's not enough stuff going on in the economy that's worth investing in....MORE