An Economic Primer: Why Americans Won't Invest in Themselves

Consider these Americans:

Our first case is one of five million Americans unemployed for more than 27 weeks:

Graph of Civilians Unemployed for 27 Weeks and Over

A second American is part owner of a $20 trillion investment fund.

A third American is terrified that her pension fund will go bust (as the Illinois teachers' fund will some time during the next ten years, among many others).

The $20 trillion fund squirrels away its money in safe, low-yielding assets. It won't invest in the kind of risky investments that put bricks on top of mortar and hires workers.

Because American #2 at the $20 trillion investment fund won't take risks, American #1 can't find a job. And because low-risk investments now pay very little -- investment-grade corporate bonds and mortgage-backed securities with federal backing yield barely 3% -- pension funds can't earn enough to meet their obligations to prospective retirees, and American #3 won't have enough retirement income to live on.

All these Americans could well be the same individual, and probably are members of the same family.

Pension and retirement funds in the United States control $16 trillion in assets. That's more than double the total assets of the whole U.S. banking system, and more than five times the total assets of hedge funds world-wide. The retirement savings of ordinary Americans dominate the capital markets, not the sort of fat-cats caricatured in the press. Add another $4 trillion in life insurance assets, which mainly reflect the retirement savings of the middle class, and the middle class investment fund now stands at $20 trillion.

Americans won't take risks on each other. That's our problem.  A decade ago, at the peak of China's investment in American securities, I quipped that a rich Chinese won't lend money to a poor Chinese, unless the poor Chinese moves to America. That's starting to change. China's huge trade surplus has shrunk to nearly zero as the Chinese consume more at home. The problem now is that middle-class Americans won't invest in themselves.


We're not talking about greedy Wall Street cheating Main Street: The plain fact of the matter is that $20 trillion of middle-class retirement savings refuse to invest in the sweat and ingenuity of the same people who own the savings. Corporations have about $2 trillion of cash on hand, and a lot has been written about the risk-aversion of U.S. companies. But that's a tenth of the money available to pension funds.

There are two possible explanations.