The Global Capital Glut

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The Global Capital Glut

In these economically challenging times, it's somewhat hard to remember that the world faces a global surplus of cash and other financial assets. Furthermore, the sum total of global capital is forecast to grow by 50 percent by the end of the decade, despite the continued aftershocks of the enormous loss of wealth and leverage that began in the Global Financial Crisis of 2008-2009.

To understand this trend, we need to review the definition of "capital" and the factors that have put it into "surplus."

Fundamentally, "capital" is the financial representation of all claims on future earnings from existing assets. Those assets can be physical ones, like minerals, machinery, and land, or intangible ones like patents, copyrights, brands, and licenses. Savings, which represent value obtained from past economic activities stored in a form that can either become equity or be lent as debt, is a form of capital.

This financial relationship can be envisioned as an inverted pyramid, where today, over $600 trillion in financial assets represent claims against a 2011 global GDP of roughly $69 trillion. By 2020, Bain & Company estimates that there will be roughly $1 quadrillion in financial assets representing claims against about a $100 trillion/year global GDP.1

While the huge stock of capital in the West grows, emerging markets, such as China and India, will help drive the increase with new forces of capital expansion. Although China continues to dump most of its "excess capital" into antiquated state-owned enterprises, it is also starting to shift its focus to become a country that exports capital, rather than simply absorbing it.

According to Bain, $87 trillion will be added, by China, to total global financial assets by 2020. That represents more than four times the growth that is projected by the Japanese economy, and $25 trillion more than the combined growth of capital in the U.S. and the EU.2

This glut of capital — that is "the surplus of capital in excess of the amount of capital that can generate an adequate return on investment" — can be traced to two primary factors:

  • First, the explosive growth of financial capital since 1983 has caused a precipitous drop in real risk-adjusted returns on the physical and intangible assets. (Nominal returns have dropped even more than that because inflation expectations have fallen; in fact, if it were not for absurdly loose monetary policy, the global economy would have been in a deflationary spiral since at least 2008...

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