The FT carried a fascinating article by John Authers today in which he quite convincingly argues that there is a glut of capital in the world. As he puts it:
What happens when there is too much capital? It may be a good problem to have, but it demands solutions that the world currently lacks.
Measure capital as the sum of all financial assets and, according to the management consultants Bain & Company, global capital tripled between 1990 and 2010 — driven by financial wizardry, and increasing leverage. As financial services groups introduced new products, and populations looked for new ways to save, the supply of financial assets outstripped growth in the underlying economy.
Just think about that for a moment. Not only has the world increased its capital threefold in twenty years - and according to Authers is still doing so and yet if you listen to big business what is vital is that tax on capital be reduced because it is in such short supply.
No it isn't! There is a glut of it and as Authers argues:
Crowds can of course go mad. But too much capital is seeking a home, and the risks of misallocation are clear. It is worth looking for new ways to guide that capital.
I agree. The first way is to direct it into the Green New Deal. That can be done voluntarily, as a condition of pension tax relief or by tax itself. But the one thing we can be sure of is that better use and higher returns will be made than if it is left to the whims of market speculation.
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Harry Shutt has some interesting things to say on this issue, http://harryshutt.com/
Corporate and finance capitalism plus, oil rich tyrants and oligarchs with wealth extracted from former soviet block countries makes for an economy for rentiers, asset strippers / squeezers and speculators, put on your safety belts and wait for the next crash.
Richard,
I genuinely don’t know if this is a problem or not & would be grateful for your thoughts.
I don’t know how assets can possibly expand in this way when every accountant will tell you, for every asset there must be a liability. My concern increases when I’m told the figure was, according to Bain & Company, driven by financial wizardry and increasing leverage. Isn’t it the case that if assets have increased by this level so must liabilities but the liabilities are “underwater” mostly consisting of yet uncalled-on derivatives ?
I listened to an R4 program the other day that suggested derivatives vastly exceeded the world’s genuine product which is, plainly, insane. I keep trying to figure out what will happen as the various derivatives expire & it seems potentially horrifying. My only comfort as regards my stupidity is that Warren Buffett said he couldn’t understand them !
Each asset does have a lability
The crisis is when the debt can’t be paid ie when th matching no longer takes plce
This is the inherent danger in these markets
A genuine productive investment such as a factory manufacturing widgets will probably only show a real profit in over a year.
By speculating, the same money can be taken as profit in the space of a week.
That is why the economy needs to be rebalanced, the finance and banking sector shrunk and money pumped into genuine productive investment.