The Age of Oversupply, by Daniel Alpert

There are plenty of books about the financial crisis and how we can fix the economy. You can usually guess what they’re going to argue for, but there are a few with something new to say. The Age of Oversupply: Overcoming the greatest challenge to the global economy is one of them. It’s written by Daniel Alpert, a hedge fund manager who describes himself as “a pragmatic realist who has devoted much of his career to finding novel solutions to financial problems.”

One of the defining questions of the financial crisis is ‘where did all the money go?’. Alpert’s starting point is further back. Where did all the money come from in the first place? This question is vital to his theory, which is that we’re not living in a world where there is not enough capital, but too much.

Here’s the essence of the argument, which I’ll bullet point for my own benefit as much as anyone else.

• For decades, the dominant economies of the world were the US, Europe and Japan. That began to change in the late 90s, with the surfacing of a post-Socialist Russia and a rising China.
• These economies, along with several others, began to engage in the global economy, flooding it with new workers and creating a glut of labour. Between 1980 and 2010, a grand 1.7 billion new workers joined the economy, directly competing with industrial workers in developing countries.
• These emerging countries typically run budget surpluses and hold large currency reserves, partly because of lessons learned in the 1997 Asian financial crisis. Additionally, many of these new workers still live in countries with poor social security provision. Consequently, they save far more of their earnings than we do in the West. The result of these two things is that along with a glut of labour, the emerging economies have also created a glut of capital.
• That capital had to go somewhere, and it went to the West, where the flood of cheap money pushed down interest rates and undermined investment. This led to a debt boom and a property bubble. Remember the beleaguered mortgage lenders Freddie Mae and Fannie Mac? China had $376 billion in mortgage bonds with them when they tanked.

In short, “you can’t understand the housing bubble and the financial crisis without appreciating how the rise of the emerging nations distorted the economies of rich countries,” to put it in Alpert’s words. And therefore “the central challenge facing the global economy is an oversupply of labour, productive capacity, and capital relative to the demand for all three.”

The problem for rich countries is that they took advantage of cheap borrowing to raise standards of living, while the real economy was eroding and jobs were shifting South. Wages didn’t really rise, but people could afford what they wanted regardless, because interest rates were low and loans were easy to get. “China and other surplus nations gave the deficit nations a credit card with no limit, and we went nuts”.

That era is over, the bubble has burst, and the challenge is to piece together some kind of functioning economy out of the remains. So far efforts to return to stability have been counter-productive, Alpert argues, amounting to little more than “drum-beating and pixie dust”. This is partly because of popular but flawed economic ideas, and partly because governments haven’t yet woken up to the fundamentally different landscape that the emerging economies have created. A host of associated problems are emerging as we pump more money into our already bloated economies – rising inequality, rentier capitalism, and the dangers of plutocracy.

I think this analysis so far is perceptive and a helpful perspective, but Alpert’s solutions aren’t quite as convincing in my opinion. If the problem was oversupply, it would imply that we had too much of a good thing and should learn to do with less. Instead, Alpert argues that “the only way out of this conundrum is for demand to catch up with supply.”

So rather than sobering up, the solution is to restart demand as soon as possible. That means that austerity and supply-side economics are the villains, and major stimulus spending is a large part of the answer – alongside a host of other solutions such as stabilising banks, writing down unpayable debts, and the perennial call for a ‘new Bretton Woods’. (I can sense the rolling of eyes and muttering about Keynesians at this point, but you’d be mistaken if you think you’ve heard everything Alpert has to say before. He’s more interesting than that.) Still, most of this is geared towards using government resources to re-ignite the spending power of Western consumers.

While I can appreciate the consequences of insufficient demand in Western growth-based economies, I have a problem with the idea that there isn’t enough demand in the global economy. We live in a world where 2 billion people don’t have toilets or running water, and a billion live without electricity. Hundreds of millions lack primary education and basic healthcare. And yet somehow Alpert can write “the global economy is suffering from a demand shortage”.

The only way you can write such a sentence, let alone a whole book about it, is if your economic analysis completely ignores poor countries. And indeed, in the whole 280 pages of The Age of Oversupply, I noticed one passing mention of Nigeria in a table. Otherwise, Africa is invisible.

This isn’t just me being precious about the continent where I grew up. Alpert is missing an important piece of the story. China and the other emerging nations know about the dangers of oversupply, and that they need destinations for their exports and investments. But unlike Western economists, they don’t necessarily see the saturated, debt-ridden West as the natural destination for such things. They know that the biggest growth opportunities are in under-developed countries, not over-developed ones. It’s why China’s biggest trading partner is now Africa, overtaking the US in 2009. China’s business with Africa soared from $10 billion a year in 2000 to $200 billion in 2010.

This blind spot is my biggest criticism of the book. If you want to write about the global economy, you need to look outside the G20. If you don’t, all you’re doing is writing about how to make rich countries richer, and some of us think the challenge is bigger than that.

My second problem with the book is related, but more controversial. That’s simply that everything in the book is about restarting growth in countries that, by Alpert’s own admission, overconsume. The question of what further growth might be for goes, as usual, unasked. Is further growth in countries like Japan or the US really necessary? Of course, you can’t just switch it off. But if growth has stalled and looks unlikely to start again any time soon, what’s the real solution – throwing everything at stimulating it, or transitioning to an economy that no longer requires it?

In an age of climate change, there are real benefits to postgrowth economies in the rich world, but the environment is almost as absent from The Age of Oversupply as Africa. The thing is, the book actually reaches rather similar conclusions to books like Richard Heinberg’s The End of Growth. It’s just that Heinberg then takes the extra step to question growth itself, while Alpert doesn’t dare.

But I don’t want to let my minority opinions on economics distort my review too much – The Age of Oversupply has all sorts of useful things to say, and says them well. It is informative, imaginative, and clips along at a good pace. Well worth reading.