Sunday, October 15, 2017

Excess Global Capital

I read an article today, Goldman To Lend to House Flippers by Liz Hoffman and Peter Rudegeair, in the Friday, October 13, 2017 Wall Street Journal.  This article said that Goldman Sachs Group is investing in house flipping by acquiring Genesis Capital, "a closely held Los Angeles firm that backs investors seeking to buy, spruce up and quickly sell homes."

We need to be able to read between the lines.  When Goldman stoops to investing in house flipping, we can read between the lines and say, "Goldman is having trouble finding good investments."  Then we might say, "maybe Goldman has more money than it knows what to do with."

It has been my contention for years that there is too much money floating around the world.  But I did not reach this conclusion on my own.  Niall Ferguson in The Ascent of Money wrote, "The volume of derivatives - contracts derived from  securities, such  as  interest  rate  swaps  or  credit  default swaps (CDS) - has grown even faster, so that by the end of 2007 the notional value of all 'over-the-counter' derivatives (excluding those traded on public exchanges) was just under $600 trillion."  I recall seeing his video version of this book saying there is more money in derivatives than in the capitalization of all companies on the U.S. stock market.

Investopedia defines "capital surplus" as "equity which cannot otherwise be classified as capital stock or retained earnings. It's usually created from a stock issued at a premium over par value."  This is not what I mean by excess global capital.  I mean that money available for investment exceeds the value of all businesses, of all corporate property.

Here is a quote from the Bain Report, November 14, 2012:  By 2010, global capital had swollen to some $600 trillion, tripling over the past two decades. Today, total financial assets are nearly 10 times the value of the global output of all goods and services.  The article is A world awash in money by Karen Harris, Andrew Schwedel and Austin Kim. 

A couple of questions arise naturally.  (1)  How did it happen that too much money came into existence? (2)  Does this mean that world governments have lost control over their money supply?  (3) And what dangers to the world economy lurk in the background, waiting to wreck our lives?  You might profit from reading the Bain Report on excess global capital.

Wikipedia has an article, Global saving glut, saying 'Ben Bernanke expressed concern about the "significant increase in the global supply of saving" and its implications for monetary policies, particularly in the United States.'  Corporations holding onto their money instead of investing it is not what I am concerned about.  That is certainly a topic worthy of consideration, but corporations make money by selling products and services.  Saying corporations do not always know what they are doing is not a surprise, that is the human condition.  I am concerned about financial firms making money out of thin air, sort of like Bitcoin.  It seems to me that governments losing control over their money supply is a dangerous circumstance.  If you and I do not understand these issues, we can be sure our representatives in Congress do not understand them either.

I believe it is important for us to better understand these financial issues because we depend on money to pay our bills.  If our money is destroyed, we are in incalculable trouble.


I have touched on this topic before.
Global Surplus Capital August 9, 2012
The Cause of the Crash of 2008 and the New Business Project August 5, 2012