The Global “Capital” Glut
No, I’m not talking about Piketty hitting the Times bestseller list. And it’s not just wild-eyed lefty Frenchman who are expressing concern about the state of world capital these days. Mitt Romney’s shop was beating this drum loudly more than a year ago.
One of the central takeaways from Piketty’s Capital in the 21st Century is the U-shaped long-term trend in the capital-to-income ratio, especially in rich countries. He uses “capital” synonymously with “wealth.” Here are the latest numbers for the U.S. from his compatriots Saez and Zucman (source PDF):
The economic relationship between wealth (or net worth, financial assets minus liabilities) and real capital is a sticky one, even if you’re only considering “fixed capital” — structures, equipment (hardware), and software. It’s even more so if you consider human skills, knowledge (i.e. patents), organizational capital, etc. (The line between organizational capital and “software” is getting especially blurry these days; what would Vanguard’s, much less Google’s, value be without their web presence?) And more so again if you consider natural capital like land and what’s on/under it.
But “Wealth in the 21st Century” wouldn’t have had quite the same ring to it, so let’s just go with it, with the knowledge that we’re talking about wealth (“financial capital”), and wealth has some indeterminate but somewhat representative relationship to real assets/capital. We can at least say, loosely, that financial assets are claims on real assets, or on the production that’s enabled by those assets.
So what about Bain Capital, Romney’s shop? Here from their December 10, 2012 report (PDF; hat tip to the always-remarkable Izabella Kaminska, and to Climateer Investing).
World awash in nearly one quadrillion of cheap capital by end of decade, according to new Bain & Company report
Their takeaways include:
The capital glut will be accompanied by persistently low real interest rates, high volatility and thin real rates of return.
Sound like secular stagnation to you?
Also:
The ever-present danger of asset inflation will contribute to an overall steepening of the investment risk curve… companies will need to strengthen their bubble-detection capabilities
In short, there’s a huge amount of money floating around out there relative to income and production. (In Steve World, all financial assets embody money, and the money stock is the total value of financial assets — including dollar bills, deeds, or other formal financial claims — regardless of how currency-like those things are. Equating currency and currency-like things with money is conceptually incoherent.)
With so much money around, is it any surprise that people are lending it cheap?
As usual I have much more to say on this but instead I’ll hand it off to Jesse Livermore, who recently wrote one of the clearest and most cogent posts I’ve seen in years on financial asset values, hence wealth. I’ve been meaning to link to it. Read the whole thing.
The Single Greatest Predictor of Future Stock Market Returns
Hint: it’s about what the herd does with all that money.
Cross-posted at Asymptosis.
Many people don’t realize a huge part of the global savings glut is in the U.S., since many foreigners save a large proportion of their incomes.
However, U.S. corporations, including U.S. multinationals, have $2 trillion in cash, or cash equivalents, earning enough interest for capital preservation, while U.S. commercial banks are holding over $2 trillion in excess reserves.
U.S. corporations made huge profits, through efficiencies and market power, while capital flowed into the U.S. through international trade.
The U.S. has a “wall of money” to flood into the economy. Unfortunately, it has been held back by politicians like Dodd & Frank (who are weapons of mass economic destruction, given they facilitated and accelerated the housing boom, creating massive moral hazard, and then when the economy crashed, went to the other extreme over-regulating the financial industry and creating uncertainty).
It’s not Dodd and Frank who are holding back the tide of money. It’s our low income tax and lack of a wealth tax. Odds are that Dodd and Frank would vote for higher taxes or a wealth tax given the opportunity. Of course, they’ll never get that opportunity, so we’ll continue the sequester, moving money from the economy into the financial sector.
Kaleberg, income tax rates are high for some and low for others. There are inheritance taxes and an estate tax.
Higher tax rates may not necessarily lead to more tax revenue.
The “financial sector” is part of the economy. It’s not clear what you mean money has moved from the economy to the financial sector.
There’s more risk aversion and that’s part of the problem, e.g. caused by Dodd-Frank. And, there has been massive buying of U.S. Treasury bonds, for example.
It seems, income taxes have become more progressive.
CBO:Top 40% Paid 106.2% of Income Taxes; Bottom 40% Paid -9.1%, Got Average of $18,950 in ‘Transfers’
December 9, 2013
“The top 40 percent of households by before-tax income actually paid 106.2 percent of the nation’s net income taxes in 2010, according to a new study by the Congressional Budget Office.
At the same time, households in the bottom 40 percent took in an average of $18,950 in what the CBO called “government transfers” in 2010.
The households in the top 20 percent by income paid 92.9 percent of net income tax revenues taken in by the federal government in 2010, said CBO.”
http://cnsnews.com/news/article/terence-p-jeffrey/cbotop-40-paid-1062-income-taxes-bottom-40-paid-91-got-average-18950
I’ve ALWAYS been of the personal belief that raising TAXES MEANT RAISING more TAX revenue. I don’t know why, it just seems up would be up and down is down.
Peaktrader
“However, U.S. corporations, including U.S. multinationals, have $2 trillion in cash, or cash equivalents, earning enough interest for capital preservation, while U.S. commercial banks are holding over $2 trillion in excess reserves. ”
There is alot of cash but it isnt being employed productively. If the general public had more cash then that would translate into higher growth because they spend more than large corporates or high wealth individuals.
Dannyb2b, I agree. I stated in Feb ’09 (it should be noted, the U.S. had increasingly larger trade deficits, through the mid-2000s, where U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds):
1. Obama should change his stimulus plan to a $5,000 tax cut per worker (or $700 billion for the 140 million workers at the time, including through the earned income tax credit), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.
2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.
3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
Peaktrader
Monetary policy alone could be greatly improved too in terms of efficiency. The fed could directly interact with the public when conducting monetary policy. As a result every money expansion would result in more growth because the general public have a higher MPC than large corporates and the wealthiest. Also proceeds from asset sales (MBS, treasuries) arent much used for spending when compared to money transfers.
If the fed can directly increase money balances of the public when expanding the base the money supply can expand without necessitating an increase in debt. Higher debt is correlated to more frequent recessions and longer lasting ones.
Dannyb2b, there’s profit from production, which is actual capital creation, with exchanging one asset, e.g. money, for another asset, e.g. Treasury bonds, through the commercial banking system, to regulate the money supply.
Much of the profit, over the past few years, has been stored in U.S. Treasury bonds rather than employed in productive assets.
Typically, workers with higher marginal propensities to consume have lower income and fewer assets. So, how can the Fed increase the money supply, enough to facilitate growth, when there are fewer assets to exchange for money?
The Fed already has a powerful effect on growth, e.g. reducing interest rates and raising asset prices for households and firms, to increase production and consumption, ceteris paribus.
Peaktrader
“there’s profit from production, which is actual capital creation, with exchanging one asset, e.g. money, for another asset, e.g. Treasury bonds, through the commercial banking system, to regulate the money supply.”
Sorry I didnt understand, could you explain that differently?
“Typically, workers with higher marginal propensities to consume have lower income and fewer assets. So, how can the Fed increase the money supply, enough to facilitate growth, when there are fewer assets to exchange for money?”
The money is not expanded to the general public in exchange for anything. It can be simply transfered to the public.
“The Fed already has a powerful effect on growth, e.g. reducing interest rates and raising asset prices for households and firms, to increase production and consumption, ceteris paribus.”
The effect on gdp from the wealth effect as a result portfolio rebalancing does exist but it is limited and less effective than dealing with the broader public. For example the richest 20% own more than 90% of stocks so most people arent experiencing much wealth effect there. Housing: only 2 thirds of households own a house, etc…
Increasing the wealth of the richest is also less effective because they do have a lower average MPC. Also increase the value of assets isn’t as effective as increasing money balances because assets need to be sold before spending and things like taxes can be a hindrance.
Directly crediting accounts of people broadly would affect wealth of 100% of people.
Mikre,
Cactus showed multiple times here at AB that there are 2 ways to increase tax revenue. One is raise the rates, the other is increase collections. Increasing collections is certain, the other is not.
Currently the IRS is functioning at its lowest level since the 1960’s based on watching Cspan this week. So we have lowered taxes and then additionally lowered collections.
Peak,
How can one pay 106% of a total amount?
Giving a tax credit to 140 million people does nothing to shift the income to those who helped the capital controllers earn it.
Edward Lambert would probably point out that the hesitation in investing that quadrillion of loose capital is probably due to what he calls lack of “effective demand.” I’m not technical enough to appreciate the exact term — but I know that loss of labor income is stalling the economy here and that labor is being squeezed for more work for less money world-wide …
… so it all goes back to reforming labor markets; to fairly balancing bargaining power between labor and ownership. (This may take decades some places, world-wide.)
Larry Summers was babbling the other day about how the government has to spend more money on infrastructure, etc., to get the economy moving out of “secular stagnation.”
Nothing is going to get things really moving except reforming our labor market. We would have no trouble I think understanding the need to put more demand in the hands of consumers in some poorer countries (China, India, Russia); we should have no trouble understanding that the same thing is the Alpha and the Omega of getting America moving again as well.
I think Steve, we are in the end game (as in finally arrived at the moment the process of money from money becomes complete, predictable and some what automatic) of the goal of finacialization. That is money from money. No need for labor.
There is danger of inflated assets and commodities for society in general (people need to be able to sustain life), but for those who are of the means to use the money from money factory their only concern is going to be who is first to pull out of the inflated assets converting the money to cash.
It is this concern about who starts the pull out/conversion that is the gambling for such income earners. It truly is gambling now.
And then it will start again.
“…With so much money around, is it any surprise that people are lending it cheap?”
Lending to whom? Each other?
To me, the capital situation now resembles a depression or wartime structure, where a few people hold most of the liquid capital, while the majority are so cash-poor that they are driven to selling assets simply to stay afloat. In the Great Depression, and during WWII in Europe, individuals sold their art, their land, their antiques and jewellery to put bread on the table. This time around, it is a bit slower and less obvious but just as true.
As a result, the flood of abstract, liquid capital is exchanged for real, unique solid wealth, accelerating the whole process.
This doesn’t happen because the big players have lots of money, but necessarily because the majority do not have enough.
Noni
Dannyb2b, profit creates capital. Monetary policy exchanges one asset for another, to create or destroy money.
If money was free, it would have no value. You cannot create (unlimited) assets without any liabilities.
And, the Fed couldn’t regulate the money supply, e.g. to preempt inflation, by just giving away money.
Lower interest rates and higher asset prices induce people to spend and borrow, and reduce saving, a lower cost of capital spurs production, refinancing at lower rates increases discretionary income, lower mortgage rates makes buying a home more affordable, 401(k)s and IRAs increase in value, etc. There are massive multiplier effects throughout the economy.
Daniel, if I pay $2 in taxes and someone else pays negative $1 in taxes, then the government collected $1 in taxes and I paid 200%.
“…If money was free, it would have no value. You cannot create (unlimited) assets without any liabilities…”
Money like water all seeks a level. So lots of money would cause inflation, all things being equal. But they aren’t equal.
Imagine a garden that needs 50 gallons a day to flourish. But if those gallons are mostly kept in a cistern and dispensed by the cupful, then you don’t have a garden, you have a desert with a handful of watering holes. The segregation of capital means there are two economies side by side, one parched and one sodden.
And the benefit of this to the cistern owners is control.
Noni
If one PAYS the cost of printing money with money one has printed up, then technically its free at some point.
Peak,
You paid 200% of the total tax that the government tax table requires?
You paid $2. The government collected $2. That they gave $1 to something does not mean you paid 200%. You paid 100% of the tax the government required.
If the government required $3 and you paid $2, then you paid 66% of the total tax. Someone else will pay that other $1. The government collects all taxes due (assuming they want to).
If someone did not pay taxes it is because their income was too low including those million and billionaires who use tax shelters.
But, maybe what you are saying is you paid 200% of what that one person paid who received a dollar? Well aren’t you cute. How many people do you wow with that one?
“If money was free, it would have no value. You cannot create (unlimited) assets without any liabilities.”
If the base money supply was expanded by 5% in a year through asset purchasing or just issuance to citizens the result on inflation would be the same assuming both sets of counterparties (public or large corporates) had equal MPC. But because the public has a higher MPC the fed would print less and achieve the same growth and inflation goals.
The money supply needs to be managed with reference to the fed’s targets. Money dervies its value becuase it is a medium of exchange, store of value unit of account. Not becuase it is issued as debt.
“And, the Fed couldn’t regulate the money supply, e.g. to preempt inflation, by just giving away money.”
The money supply doesnt need to contract. Im not aware of any period in history when the money supply was contracted for any sustained period of time.
The fed could stabilize money supply. Im not aware of any period when money supply was stable and excessive inflation persisted or any inflation. If the fed didnt allow money to grow for sustained period of time we would get deflation. Even in the case where inflation persists and the money supply isnt growing it will be caused by non monetary factors which monetary policy cannot address. This will place the onus on other aspects of government to deal with it instead of obfuscate.
Contracting money will have no benefit if prices are sticky becuase it will contract rgdp. Prices will take time to reduce but ngdp wont.
“Lower interest rates and higher asset prices induce people to spend and borrow, and reduce saving, a lower cost of capital spurs production, refinancing at lower rates increases discretionary income, lower mortgage rates makes buying a home more affordable, 401(k)s and IRAs increase in value, etc. There are massive multiplier effects throughout the economy.”
Expanding the base money supply through transfers will also lower rates just like under asset purchases and also induce portfolio rebalancing. It will also create a broader wealth effect that will result in more spending and improve balance sheets.