Flood of capital

On page 1 of today's (11/3/05) Wall Street Journal, an article by Greg Ip and Mark Whitehouse titled "Huge Flood of Capital to Invest Spurs World-Wide Risk Taking". I think Greg Ip is one of the WSJ's most insightful writers in capturing the content of the high tech / speculative capitalism.

I think that deflation is the tendency in high tech/digital capitalism, inasmuch as price corresponds to value on a global scale, and less value is bound up in commodities produced under near-laborless conditions. But just like Marx's famous "Law of the Tendency of the Rate of Profit to Fall", it is a tendency that invokes counter-tendencies that mute or even counteract the tendency.

In the case of deflation, one counter-tendency is the rise in labor-intensive production in low-wage production sites (China, Bangladesh, El Salvador etc) on the one-hand, and the expansion of labor-intensive services and various forms of unproductive labor to ensure the circulation of commodities. (For more on this paradox see The End of Value.) While prices may tend to fall in, say, manufactured goods, prices rise for things like health care and education.

The "Huge Flood of Capital" article describes another counter-tendency -- capital that can't be invested profitably in the production of stuff (no need for more capacity) goes chasing for returns in other markets. Per the article, world pension funds, insurance companies and mutual funds have $46 trillion at their disposal, up almost a third since 2000. U.S. companies alone have $1.3 trillion in liquid assets. This capital, when compounded through leverage (investing with borrowed money), pushes up the price in investment markets, in turn reducing overall return. "This means that investors are demanding less compensation than usual for taking on the risk inherent in owning the assets." This in turn can lead to a positive feedback cycle (or a vicious cycle) of more money chasing fewer returns. Or as one person quoted in the article says, "It is a global game of chicken."

The obvious danger is a crash in asset prices if capital is withdrawn for whatever reason -- e.g., investors become more averse to risk, or companies expand investment. Given the high degree of interconnection in modern speculative capital, the danger of systemic crisis is present.

jd