By Karl Smith, Contributor Kevin Drum asks what’s really going on with real interest rates. On one level its obvious, A Global Savings Glut Stupid. But, In theory, as [Ryan] Avent says, if the savings level is high, then interest rates will go down until it’s once again attractive to borrow all that money to invest in real-world production of goods and services. But that hasn’t happened, which means the real problem we’re facing is the mirror image of a global savings glut: namely, a global investment drought. For more than a decade now, no matter how low interest rates have gone, the appetite for real-world investment has remained anemic. This is a big question but I want to suggest that the answer might lie over here in this general direction somewhere: China has become the Jeff Bezos of Industrial Production China at some points has had investment rates of in excess of 40% of GDP. For super-geeks this exceeds the Ramsey Rule at a zero discount rate. For non-geeks it means that there is no investment strategy under which this is the profitable thing to do. Its always hard to tell but on balance I think the Chinese government is aware of this, yet is willing to lose money on its capital investments in order to provide jobs for people moving to the city. This is a smart move if you think cities produce agglomeration effects. With apologies to the less wonkish, China is using physical capital as a loss leader in order to grow cities that will produce network effects will in turn foster the human capital that really makes a country rich. In this way China has become like Amazon’s Jeff Bezos, a Destroyer-of-Worlds.1 You can’t win a physical capital accumulation battle against someone whose plan is to overinvest and lose money on the physical capital. And just as you there is no point even trying to fight a determined central bank on interest rate policy; there is no point fighting a determined China on Industrial policy. That leaves a huge swath of investment unavailable. 1] Bezos is properly styled: His Entropic Incessancy, Destroyer-of-Worlds. …read more

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