From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sun Oct 08 2006 - 09:05:56 EDT
IMF Research director Raghuram G. Rajan had some splendid rhetoric at the Conference on International Financial Instability: Cross-Border Banking and National Regulation organized by the Federal Reserve Bank of Chicago October 5-6, 2006: "So for the world as a whole, despite widespread strong productivity growth, investment has remained relatively weak, while desired savings is strong. (...) The problem when the world has excess desired savings relative to investment, and when central banks are accommodative, is that it is awash in liquidity. (...) low investment relative to desired savings... has pushed down interest rates and pushed up asset prices. With plentiful liquidity, investment managers have reduced the premia for risk as they search for yield. (...) The search for yield and for illiquidity knows no borders as oceans of capital spread across the globe, and asset prices across the globe are being pumped up. As one says in French, "Pourvu que ca dure!" ["As long as it lasts" - JB]. http://www.imf.org/external/np/speeches/2006/100506.htm For some IMF data on the fall-off in investment see: http://www.imf.org/external/pubs/ft/weo/2005/02/pdf/chapter2.pdf One obvious problem with this analysis is that it does not show the categories of the assets being invested in and who owns them, or the forms that savings take - and who owns those. Hence the analysis is largely useless - although it is certainly true that excess liquidity exists, and that the average annual fixed investment level in the OECD stays relatively low (with a modest upturn from 2005). It is precisely the existence of capital surpluses not invested in production, in the context of stagnating growth of real wages, that boosts financial speculation. Jurriaan
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