Bubble Thinking Continues To Plague The Economy

Kevin Drum nicely summarizes the problems with the current economy. Basically, the people who control the huge sums of investment capital that are available in the world don't want to invest in new industry, and instead are looking for cheap profits:

Roubini's argument boils down to this: The major economies have been growing only slowly. Yet with low interest rates and aggressive central bank action across the globe, there is a giant pool of money that has to go somewhere. That somewhere has not been productive new investments, like companies building new factories. Rather, it has come in the form of people taking advantage of cheap credit to bid up the price of existing real estate in cities from Stockholm to Sydney.

The key problem, as it's been for over a decade, is why investors can't find enough productive uses for their money. Weak economic growth due to rising income inequality is one possibility. Another is the rise of cheap entertainment—Facebook, Xbox, World of Warcraft—which portends lower demand for physical goods and services in the future. Or maybe it's because of steadily rising unemployment thanks to the growth of automation.

Whatever the reason, if this imbalance continues, it's hard to see things turning out well in the medium term. We need either less capital formation or else more consumer demand—or both. The alternative is bubble after bubble. They may come in different places and different things, but what other alternative is there?