Michael Hudson presents his explanation for below trend growth in the US and Europe. Many economists assume that the economic growth rate prior to the financial crisis in 2008 is the long term growth rate for the economy. The expectation is that the economy will return to the trend growth rate as the financial system recovers. Hudson makes a different argument. He claims that the growth rate prior to the financial crisis was fueled by debt. Therefore, the growth rate can only return to trend by resuming debt funded growth. He believes that this is unlikely.
Central banks have done their best to keep interest rates low but that has not increased investment demand by large corporations. Hudson claims the F500 corporations in the US invested only 9% of their earnings on capital investment. The rest was used to fund stock buybacks and dividend payouts. He argues that this is consistent with corporate compensation systems. Executives compensated with stock options have a strong incentive to increase the value of their options. Many corporations have even borrowed money to fund stock buybacks and dividend payouts.
In theory, low interest rates should encourage business and governments to invest and expand. It should also encourage consumers to spend. Instead low interest rates have created asset bubbles. Moreover, governments have not been willing to take advantage of low interest rates to build infrastructure. The volatility that we see in stock markets reflects the concerns that investors have about the willingness of central banks to maintain low interest rates and uncertainties that they have about the global economy. Europe is in particularly bad shape because many of its banks have been weakened and they have not been able to stimulate growth through credit expansion.
To summarize, Hudson believes that global economic growth fueled by credit growth may have reached its limits.
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