The core problem worldwide is productive capacity has largely out run the capacity of debt ridden and lowly paid worker consumers to buy the goods and services capable of being produced. A decade or so ago, producers sought out newly emerging consumers in developing countries to avoid the impact of the imbalance in their home countries, but that option is now waning. This leaves few good investment opportunities and the problem is fast becoming one that is global.
Productive capacities are badly out of line with consumption levels because of the skewed distributions of income, especially in China, Japan (which has a derivative problem), the United States and several, but not all European countries. The skews in these countries, except for Scandinavia, keep consumers from buying more and this is creating deflationary pressures for both commodity prices and the prices of goods, and, and it is stalling out investment.
Income distribution problems are the world's key economic problem now. Everywhere, high income earners of the world and their banks sit on cash hoards that are neither lent or spent. Banks and those controlling available or discretionary income are in effect saving the liquidity created by the Fed instead of lending it and spending it. For example, US holdings of liquid savings deposits as a percentage of GDP, has gone up dramatically from about 17 percent at the time of the 2008 crash to over 42 percent currently, even though GDP has itself risen notably. Meanwhile, the federal funds rate has dropped from about 4 percent to zero over that same interval. No real inducement to save is there. Large cash hoards are not invested because there is already a glut of productive capacity relative to consumption levels and deflation threatens. Returns relative to risks are inadequate. The high income earners of the world hoard income and spend too little of it on consumption because they have relatively too much of it and therefore their marginal and average propensities to consume are relatively too low.
Capitalism stalls out with this imbalance between consumption and production and leaves anything resembling Says law in total disarray. Keynes' greatest contribution was to show us that Says law can grossly fail; however, he didn't, as here, tie any such failure directly to the mal-distributions of income. His focus was on the general business cycle and the role of "animal Spirits" among investors (a "we don't know" designation). This business cycles perspective he addressed is one thing, but the constant economic malaise from the investment/production vs. income/consumption imbalance addressed here is another matter entirely.
Keynes and his leading followers wrote between the era of robber barons in the 1890's and the early 1960's, when the income distribution problems the world faced were relatively minor. However, as Thomas Piketty, the French economist, suggests and we mostly now realize, economic growth and labor's share of income invariably stalls and falls relative to that of capital because of 1) the greater mechanization of production by robots and such, and 2) the compounding of interest. As we move toward a Marxian surplus of labor, with depressed wages and technological change geared toward displacing other workers, Labor's share of income cannot help but fall, and capital's share rise. This state of affairs skews in the distributions of income ever more rapidly. The suggestion, of course, is skewing is inevitable, but we have no corrective method of dealing with it or its consequences. So economic situations simply gets worse. Capitalism in the modern world is fatally flawed and has no corrective mechanism to remedy this problem which is becoming acute, but being ignored.
The consequences of the skew problem addressed here in turn induces world governments -- such as the US, Japan and also China until now, to pour excessive liquidity into their economies and to lower interest rates, in the hope of causing more capital investment, but the efforts fail everywhere (except until now in China) because of the relative lack of investment opportunities due to the production/consumption imbalance created by the skewed income distributions in the various countries. What happens instead of increased investment is those with high incomes hoard more, banks sit on more money and financial asset markets and housing markets tend to bubble up as is now the case in China, Japan and the United States.
These consequences of these distributional skews and their attending inter-country interactions are not well studied or understood because the neoclassical framework of economics inadequately considers these aspects of world economies and because the implicit implications offend those who sponsor neoclassical economic study and research and their spokesmen. A willful blindness attends.
Capitalism as we know it is in big trouble.
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