PRINTING BUT STILL PRESSED

The global economys bizarre problem: Too

much money

More money, more problems. (Paramount Pictures)

Written by

Matt Phillips@MatthewPhillips
April 12, 2015
If youve seen The Wolf of Wall Street, you know having too much money can be a problem. And too
much money is part of the predicament that the world economy finds itself in right now.

In the aftermath of the Great Recession, the worlds most important central banks embarked on a
program of pumping out billions in freshly created money. Though the US Federal Reserve has turned

off the spigot, the deluge continues. The Bank of Japan is in the midst of a giant push to churn out yen.
And belatedly the European Central Bank has just started, and likely will have to continue generating
new euros for years.
This was, of course, the right thing to do. The US economy is in the best shape of any of the large,
developed countries, thanks in no small part to the aggressive actions of the US central bank. And
while the jury is still out on whether Japans push will be effective, the ECBs effort already seems to
be bearing a bit of fruit. (Unemployment is finally falling, albeit slowly.)
But the aggressive action hasnt been good enough. How do we know? Interest rates. Global interest
rates remain ridiculously low. (One way to think about interest rates is that that theyre essentially the
price of money, that is, where supply meets demand.)

In some cases, theyre lower than low. Theyre negative. This week Switzerland became the first
country to sell 10-year government bonds with a negative interest rate. That means that at the end of 10
years, investors will get less money back than they lent to the Swiss. And Switzerland is not alone
interest rates are negative for a range of government bonds, especially in Europe.

Remember, interest rates are one price for money. And prices are determined by supply and demand.
Weve already talked about the supply. Theres a lot, thanks to central bank money printing.
Demand? Not so much. Investors dont seem to want to invest in a global economy that doesnt look so
hot. China is slowing. Europe is barely puttering forward. South American giant Brazil looks
horrible. Russia looks even worse. Nobody expects much from Japan.

The US is the best banana in the bunch. But even American companieswhich have a ton of cash
dont seem particularly willing to do too much productive investment. Just look at one of
Americas greatest blue chip companies, General Electric. The industrial giant said on April 10 that it
would return $90 billion to shareholders through a series of dividends and share buybacks. And in order
to return that money to shareholders, GE is going to repatriate some of it from foreign countries,
racking up what could be a $4 billion tax bill. CEOs are loathe to fork money over to the taxman. If
paying taxes is a corporations idea of efficient use of capital, then the company is running out of ideas.
There are any number of ways to describe the current status quo. Former US Treasury Secretary Larry
Summers has been pushing the idea that the global economy is in the midst of a secular stagnation.
Summers draws on the work of American economist Alvin Hansenwho coined the phrased secular
stagnation during the Great Depressionto argue that a persistent excess of savings over investment
was due to a slowdown in demographic and technological development.
Former Fed chairman Ben Bernanke casts the situation as a global savings glut, an idea he first
posited in the 1990s. Put roughly, the idea here is that foreign governmentsspecifically in developing
economies that were freaked out by the currency crises of the late 1990shave been hoarding
dollars. They use their dollars to buy super safe government bonds. Those bond purchases are part of
the reason why interest rates are low.
Whos right? It doesnt really matter. The facts on the ground are the same. Theres too much money
and not a lot to do with it. And thats why were seeing investors make some interesting, seemingly
non-economic decisions with their piles of cash.

For instance, China is one of the key countries racking up dollar reserves and contributing to exchairman Bernankes savings glut. But China also is a victim of the low interest rates that the glut
has helped create. Thats because there are very few places for China to put any of its dollars for safekeeping that will earn much of a yield over time.
So instead, China seems to be putting the money to political use, using its giant pile of reserves to help
finance the new Asian Infrastructure Investment Bank, a Chinese-led rival to the western-dominated
IMF and World Bank.
Governments around the world would do well to follow Chinas lead. With corporate investment weak,
it now falls to governments to spend more, on long-term investments that can boost productivity and
give the economy a nudge. Germany certainly has the wherewithal to undertake such a program. And
thanks to super low interest rates, many others can, tooincluding the United States.

Governments around the world have been hoping that aggressive money-printing policies from central
banks could get the global economy fully up-to-speed again. It hasnt happened. Essentially, the free
ride is over. Governments need to start contributing.