Capital in the Twenty-First Century (34 page)

Leaving aside these interesting international variations, which reflect the fact that
the price of capital always depends on national rules and institutions, one can note
a general tendency for Tobin’s Q to increase in the rich countries since 1970. This
is a consequence of the historic rebound of asset prices. All told, if we take account
of both higher stock prices and higher real estate prices, we can say that the rebound
in asset prices accounts for one-quarter to one-third of the increase in the ratio
of national capital to national income in the rich countries between 1970 and 2010
(with large variations between countries).
²⁴

As noted, the enormous amounts of foreign assets held by the rich countries, especially
Britain and France, on the eve of World War I totally disappeared following the shocks
of 1914–1945, and net foreign asset positions have never returned to their previous
high levels. In fact, if we look at the levels of national capital and net foreign
capital in the rich countries between 1970 and 2010, it is tempting to conclude that
foreign assets were of limited importance. The net foreign asset position is sometimes
slightly positive and sometimes slightly negative, depending on the country and the
year, but the balance is generally fairly small compared with total national capital.
In other words, the sharp increase in the level of national capital in the rich countries
reflects mainly the increase of domestic capital, and to a first approximation net
foreign assets would seem to have played only a relatively minor role (see
Figure 5.7
).

FIGURE 5.7.
   National capital in rich countries, 1970–2010

Net foreign assets held by Japan and Germany are worth between 0.5 and one year of
national income in 2010.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

This conclusion is not quite accurate, however. For example, Japan and Germany have
accumulated quite significant quantities of net foreign assets over the past few decades,
especially in the 2000s (largely as an automatic consequence of their trade surpluses).
In the early 2010s, Japan’s net foreign assets totaled about 70 percent of national
income, and Germany’s amounted to nearly 50 percent. To be sure, these amounts are
still substantially lower than the net foreign assets of Britain and France on the
eve of World War I (nearly two years of national income for Britain and more than
one for France). Given the rapid pace of accumulation, however, it is natural to ask
whether this will continue.
²⁵
To what extent will some countries find themselves owned by other countries over
the course of the twenty-first century? Are the substantial net foreign asset positions
observed in the colonial era likely to return or even to be surpassed?

To deal correctly with this question, we need to bring the petroleum exporting countries
and emerging economies (starting with China) back into the analysis. Although historical
data concerning these countries is limited (which is why I have not discussed them
much to this point), our sources for the current period are much more satisfactory.
We must also consider inequality within and not just between countries. I therefore
defer this question, which concerns the dynamics of the global distribution of capital,
to
Part Three
.

At this stage, I note simply that the logic of the law
β
=
s
/
g
can automatically give rise to very large international capital imbalances, as the
Japanese case clearly illustrates. For a given level of development, slight differences
in growth rates (particularly demographic growth rates) or savings rates can leave
some countries with a much higher capital/income ratio than others, in which case
it is natural to expect that the former will invest massively in the latter. This
can create serious political tensions. The Japanese case also indicates a second type
of risk, which can arise when the equilibrium capital/income ratio
β
=
s
/
g
rises to a very high level. If the residents of the country in question strongly
prefer domestic assets—say, Japanese real estate—this can drive the price of those
preferred assets to unprecedentedly high levels. In this respect, it is interesting
to note that the Japanese record of 1990 was recently beaten by Spain, where the total
amount of net private capital reached eight years of national income on the eve of
the crisis of 2007–2008, which is a year more than in Japan in 1990. The Spanish bubble
began to shrink quite rapidly in 2010–2011, just as the Japanese bubble did in the
early 1990s.
²⁶
It is quite possible that even more spectacular bubbles will form in the future,
as the potential capital/income ratio
β
=
s
/
g
rises to new heights. In passing, note how useful it is to represent the historical
evolution of the capital/income ratio in this way and thus to exploit stocks and flows
in the national accounts. Doing so might make it possible to detect obvious overvaluations
in time to apply prudential policies and financial regulations designed to temper
the speculative enthusiasm of financial institutions in the relevant countries.
²⁷

One should also note that small net positions may hide enormous gross positions. Indeed,
one characteristic of today’s financial globalization is that every country is to
a large extent owned by other countries, which not only distorts perceptions of the
global distribution of wealth but also represents an important vulnerability for smaller
countries as well as a source of instability in the global distribution of net positions.
Broadly speaking, the 1970s and 1980s witnessed an extensive “financialization” of
the global economy, which altered the structure of wealth in the sense that the total
amount of financial assets and liabilities held by various sectors (households, corporations,
government agencies) increased more rapidly than net wealth. In most countries, the
total amount of financial assets and liabilities in the early 1970s did not exceed
four to five years of national income. By 2010, this amount had increased to ten to
fifteen years of national income (in the United States, Japan, Germany, and France
in particular) and to twenty years of national income in Britain, which set an absolute
historical record.
²⁸
This reflects the unprecedented development of cross-investments involving financial
and nonfinancial corporations in the same country (and, in particular, a significant
inflation of bank balance sheets, completely out of proportion with the growth of
the banks’ own capital), as well as cross-investments between countries.

In this respect, note that the phenomenon of international cross-investments is much
more prevalent in European countries, led by Britain, Germany, and France (where financial
assets held by other countries represent between one-quarter and one-half of total
domestic financial assets, which is considerable), than in larger economies such as
the United States and Japan (where the proportion of foreign-held assets is not much
more than one-tenth).
²⁹
This increases the feeling of dispossession, especially in Europe, in part for good
reasons, though often to an exaggerated degree. (People quickly forget that while
domestic companies and government debt are largely owned by the rest of the world,
residents hold equivalent assets abroad through annuities and other financial products.)
Indeed, balance sheets structured in this way subject small countries, especially
in Europe, to an important vulnerability, in that small “errors” in the valuation
of financial assets and liabilities can lead to enormous variations in the net foreign
asset position.
³⁰
Furthermore, the evolution of a country’s net foreign asset position is determined
not only by the accumulation of trade surpluses or deficits but also by very large
variations in the return on the country’s financial assets and liabilities.
³¹
I should also point out that these international positions are in substantial part
the result of fictitious financial flows associated not with the needs of the real
economy but rather with tax optimization strategies and regulatory arbitrage (using
screen corporations set up in countries where the tax structure and/or regulatory
environment is particularly attractive).
³²
I come back to these questions in
Part Three
, where I will examine the importance of tax havens in the global dynamics of wealth
distribution.

The dynamic law
β
=
s
/
g
also enables us to think about what level the global capital/income ratio might attain
in the twenty-first century.

First consider what we can say about the past. Concerning Europe (or at any rate the
leading economies of Western Europe) and North America, we have reliable estimates
for the entire period 1870–2010. For Japan, we have no comprehensive estimate of total
private or national wealth prior to 1960, but the incomplete data we do have, in particular
Japanese probate records going back to 1905, clearly show that Japanese wealth can
be described by the same type of “U-curve” as in Europe, and that the capital/income
ratio in the period 1910–1930 rose quite high, to 600–700 percent, before falling
to just 200–300 percent in the 1950s and 1960s and then rebounding spectacularly to
levels again close to 600–700 percent in the 1990s and 2000s.

For other countries and continents, including Asia (apart from Japan), Africa, and
South America, relatively complete estimates exist from 1990 on, and these show a
capital/income ratio of about four years on average. For the period 1870–1990 there
are no truly reliable estimates, and I have simply assumed that the overall level
was about the same. Since these countries account for just over a fifth of global
output throughout this period, their impact on the global capital/income ratio is
in any case fairly limited.

The results I have obtained are shown in
Figure 5.8
. Given the weight of the rich countries in this total, it comes as no surprise to
discover that the global capital/income ratio followed the same type of “U-curve”:
it seems today to be close to 500 percent, which is roughly the same level as that
attained on the eve of World War I.

The most interesting question concerns the extrapolation of this curve into the future.
Here I have used the demographic and economic growth predictions presented in
Chapter 2
, according to which global output will gradually decline from the current 3 percent
a year to just 1.5 percent in the second half of the twenty-first century. I also
assume that the savings rate will stabilize at about 10 percent in the long run. With
these assumptions, the dynamic law
β
=
s
/
g
implies that the global capital/income ratio will quite logically continue to rise
and could approach 700 percent before the end of the twenty-first century, or approximately
the level observed in Europe from the eighteenth century to the Belle Époque. In other
words, by 2100, the entire planet could look like Europe at the turn of the twentieth
century, at least in terms of capital intensity. Obviously, this is just one possibility
among others. As noted, these growth predictions are extremely uncertain, as is the
prediction of the rate of saving. These simulations are nevertheless plausible and
valuable as a way of illustrating the crucial role of slower growth in the accumulation
of capital.

FIGURE 5.8.
   The world capital/income ratio, 1870–2100