Book: The Age of Oversupply
Author: Daniel Alpert
Key takeaways: The world is oversupplied with labor and capital. Beginning in early ’90s, thanks to internet, globalized companies, China’s entry to WTO in ’01 (and container shipping), the world “suddenly” changed (as it has begun to after the fall of the iron and bamboo curtains). The last time the world had changed so much was after the WW-II and that was followed by the Bretton Woods agreement, which underpinned the world’s economic and financial systems for decades. This time on, the world changed but the mechanisms by which it is operated did not. This, in part, has to led to where we are–a world oversupplied with talent and capital.
Oversupply of labor: Because many of these workers live in countries with insufficient social safety nets or pensions, these workers tend to put away a large portion of these earnings as savings (esp. when compared to those in developed countries). This means that the arrival of nearly 2 billion workers on the global scene has not led to a balanced rise of both supply and demand, and has instead led to ever-growing supply of both labor and capital, with hardly much of an increase in demand.
This oversupply of labor means that Fed policy is meaningfully impacted (given its dual mandate) because even if there is incremental demand, the companies meet this incremental demand by firing up factories in Asia/LatAm as opposed to OH/NC.
Oversupply of capital: Between 2002 and 2008, the total assets of banks and other financial entities grew from roughly $110 T to $240 T–a staggering rise in wealth that is now looking for demand as capital. According to a Bain study, “A World Awash in Money”, total financial assets in 2010, at $600T, will jump to $900T by 2020, even as the world economy increases by only $37T over the same period. This total capital will be 10x the size of the world GDP and 3x the size of the non-financial assets from which the world GDP growth is derived.
How do we get out? The only way out of this is when demand eventually catches up with supply, with EMs absorbing the new wealth and labor supply in a balanced/sustainable way. Global population growth is slowing, which should level off the labor supply in the next two decades. Further, as savers in Japan/China finally start spending money, they contribute to world demand. Finally, as citizens of China and India begin asking for things that the developed world has–safety net(s), better schools, better mass transit, cleaner air/water, public investment by the government will begin to sop up the excess wealth.