Is a looming global capital shortage responsible for the upswing in global bond yields this year? Some experts see a clash unfolding between the capital requirements of recovering industrial nations and the rising needs of developing economies, which attracted a huge $140 billion in long-term capital last year.
Economists at Merrill Lynch & Co. argue that fears of a global capital shortage are overblown, however. They note that part of the long-term flows to developing nations last year were recycled back to the industrialized nations via central bank purchases of foreign currency reserves. In fact, the total current account deficits of developing nations came to only $95 billion, $45 billion less than their capital inflows.
East Asia's need for foreign capital is tempered by very high domestic savings rates--as high as 30% to 40% of gross domestic product, notes Merrill Lynch. And Latin America's need for capital may be peaking.
In any case, the increase in capital flows to developing nations over the last four years was equivalent to only one-third of 1% of the industrial world's GDP. And the structural government budget deficits of the industrial nations are expected to shrink by a cumulative 11/3% of GDP this year and next--a decline in domestic capital needs that will dwarf any likely increase in capital demands from developing economies.