Fear the Global Investment Shortfall, and What It Means for Long-Run Growth

Antonio Fatas on the Global Economy: Bubbles, interest rates and full employment:

Global [safe] real interest rates during the last expansion (2001-2007) were very low by historical standards. The main candidate to explain low real interest rates is the saving glut that Ben Bernanke referred to in his 2005 speech…. But if what we saw in these years was an increase in the pool of saving that drove down interest rates we should expect investment to increase…. And if investment increases we should expect an increase in growth rates. But none of this happened….

What happened to investment? Why didn’t it go up as real interest rates fell and the pool of saving was increasing? I am not sure we have an answer to these questions but what the data suggests is that we are not just facing the negative consequences of a deep recession, we should also have some concerns about the strength of the recovery based on the weakness of investment in the previous expansion (once we take into account the low level of interest rates).

Well, henceforward, investment is going to be low because:

• The 1941-2007 promise that if you build it, demand will come–that governments will stabilize demand at a high level and so you won’t need to worry about a shortage of customers–is gone, so firms will expect lower risk-adjusted profits from individual investment projects.
• The belief that tails are small and hence the risk of a diversified portfolio low is gone as well, so savers will demand a higher mean rate of return before they will commit their money to firms.
• The belief that Wall Street professionals can deploy risk-bearing capacity properly is gone as well.

So: lower expected returns by firms, higher required returns by savers, and less confidence that risks are being properly managed and assigned to those who can properly bear them–even if we weren’t already expecting lower investment share as a result of the disappointing mid-2000s, we would be expecting them now.

And we haven’t even started thinking about the possibility of technological exhaustion…

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