Source: Financial Sense

In a recent podcast with Financial Sense, Michael Pettis discussed the wider implications of large capital concentrations in single markets, such as in the current U.S. economy. Such concentrations arguably can lead to major debt crises and unemployment; Pettis offered German trade surpluses in the pre-2008 era as an example. Germany’s huge surpluses and the Eurozone’s restraints on monetary policies for countries such as Spain and Italy led to negative real interest rates in high inflation European countries. This negative interest rate, he explained, contributed to real estate and stock market booms, as well as large consumption binges, all of which rapidly increased debt and played a role in the financial crisis. Pettis argued that Germany continues to have large surpluses that are now being absorbed outside of Europe, such as in the United States, which could lead to economic problems in the future.  

To address various concerns of concentration in capital, Pettis explained that both the United States and Europe should make large infrastructure investments. He forecast that the industrial commodity sector—including iron ore and steel—have not in fact bottomed out, and may drop in price even further.

The complete interview was published by Financial Sense.