Why the World Won't Run Out of Capital


Widespread Fears Of a Crunch. The prospect of a global capital shortage alarms many financial analysts today, especially those on Wall Street. Some experts anticipate a worldwide shortfall of as much as $ 200 billion annually over the next several years. This could unleash high interest rates and a global credit crunch, which would then hobble world economic growth.

Fears of a global capital shortage are based on several major developments. First, the nations that provided the bulk of international lending during the 1980s -- Japan and Germany -- have turned inward in the '90s. Over the course of the 1980s, almost $ 600 billion of Japanese surpluses were invested abroad, especially in America, helping to finance the U.S. budget deficit. Recently, however, Japan's savings rate has fallen, and a domestic investment boom has kept more capital at home. Meanwhile, Germany, which ran trade surpluses until recently, has channeled its money into unification. The cost may run as high as $ 200 billion over the next five years. Some estimates suggest that the combined capital exports of Japan and Germany, which were $ 133 billion in 1987, could be less than $ 60 billion in 1991.

Concern about a capital crunch also stems from the fact that government borrowing, which has recently represented a diminishing drain on world savings, is on the rise again. The trend is most pronounced in Germany, where the costs of unification are expected to turn what was a roughly balanced budget in 1989 into a deficit of more than $ 40 billion this year. Capital-shortage anxieties are further driven by the growing need for investment outside the industrial world. Eastern Europe and Latin America, for example, are capital starved.

But does this add up to a real crisis? Most economists outside Wall Street are skeptical about a capital crunch.

Absorbing Global Capital Demands. Perhaps the most important reason to be relaxed about the global capital market is its size. Each year, the world's advanced nations save and invest about $ 3 trillion. Because this capital market is so large, it can absorb extra demands that sound enormous with only a modest rise in interest rates.

Another thing to keep in mind is that, except in Germany, the surge in budget deficits does not necessarily represent a net demand for capital. When Washington borrows to pay for a financial bailout, for example, it is not actually increasing spending and depleting savings. It is replacing a hidden government liability, insured deposits at thrifts and banks, with government debt.

Finally, much of the estimated capital demand for the 1990s is based on what countries would like to borrow, not what they are likely to receive. Capital will now go only to those who can repay. Eastern Europe, for example, needs hundreds of billions of dollars to rebuild itself, but it will get only a small fraction of that from nervous Western banks. This means the region will not compete in any meaningful way for the scarce world saving supply.

No Negative Signals from the Market. The ultimate test will come in the markets. And so far there are no signs of a capital shortage. Interest rates on government bonds have risen in Germany, but in the United States they are below their average levels in the 1980s.

Why, then, does the financial community perceive a capital shortage? Probably because money for takeovers and leveraged buyouts has dried up. The collapse of this high-risk lending is not the result of international developments. It stems from investor disillusionment with expensive corporate restructurings and financial institutions' unwillingness to make speculative loans. There is a real shortage of certain capital -- the kind that investment bankers are most interested in -- but that hardly presages a global capital crunch.

Shrinking surpluses

Huge current account surpluses, which enabled Germany and Japan to pour capital into world markets, have diminished.

Current account surpluses as a percentage of GNP

Japan Germany

1986 4.4 pct. 4.4 pct.

1987 3.6 pct. 4.1 pct.

1988 2.8 pct. 4.2 pct.

1989 2.0 pct. 4.6 pct.

1990 1.7 pct. 3.3 pct.

1991 1.8 pct. 2.3 pct.

Dilating deficits

Budget deficits of industrialized countries are rising again as government borrowing draws upon world capital.

Average budget deficit as a percentage of GNP, seven major industrial countries

1985 3.3 pct.

1986 3.2 pct.

1987 2.2 pct.

1988 1.5 pct.

1989 0.9 pct.

1990 1.1 pct.

1991 1.5 pct.

Note: Figures for 1991 are estimates.

Rate reaction

Increased demand for global capital has raised German -- but not U.S. -- interest rates over the past two years.

Long-term bond yields



June 10.6 pct. 7.8 pct.

Dec. 11.7 pct. 8.4 pct.


June 12.6 pct. 8.2 pct.

Dec. 12.3 pct. 7.7 pct.


June 11.2 pct. 7.4 pct.

Dec. 10.0 pct. 6.7 pct.


June 8.1 pct. 6.2 pct.

Dec. 7.3 pct. 6.2 pct.


June 7.8 pct. 6.0 pct.

Dec. 9.0 pct. 6.5 pct.


June 8.7 pct. 6.3 pct.

Dec. 9.0 pct. 6.6 pct.


June 9.0 pct. 6.9 pct.

Dec. 8.0 pct. 7.1 pct.


June 8.6 pct. 8.7 pct.

Dec. 8.6 pct. 9.0 pct.


Jan. 8.1 pct. 9.0 pct.

Feb. 7.8 pct. 8.5 pct.

Note: Figures are six-month averages, except 1991, which represent Jan. and Feb.

Originally published, 4.15.91