The Capital-Scarce World To Come
by Martin Hutchinson -- August 16, 2010
The last 15 years in global markets have been marked by one consistent factor: the ready availability, even overabundance of capital. Returns to investors have been driven down to dangerously low levels, both in debt and equity, by over-expansionary monetary policy, while asset values even after crashes have been far higher than their historical norms. Yet this insouciance about capital, this preparedness to waste it in one feckless bubble after another, must have an inevitable result: at some point in the near future we will face a world of capital scarcity, like the late 1930s in the United States, the early 1950s in Europe or the 1980s in Latin America.
The explosion in global liquidity is apparent in domestic money supply statistics, but becomes even clearer when international central bank reserves are tallied. In 1995, global central bank foreign exchange and gold reserves totaled $1.39 trillion, approximately 4 percent of a $33 trillion world economy. In the first quarter of 2010, reserves totaled $8.3 trillion, approximately 14 percent of a world economy that had grown to $60 trillion. The rate of increase in global reserves was 6.8% per annum in 1995-2000, when the global economy was expanding at a rapid rate and the Asian crisis had increased Asian countries' desire for liquidity. However reserves increased by 16.4 percent per annum in the ten years from the first quarter of 2000 to 2010 – a period in which the world suffered through two debilitating recessions. Liquidity in central banks alone has increased by 3½ times as a proportion of the economy.
This isn't a "savings glut" as the foolish Fed chairman Ben Bernanke would have us believe. It is almost unrelated to private savings, because few private individuals hold balances in their central banks. It is instead a liquidity glut, caused by the manic monetary expansion of the Fed and its sister central banks. The world's central banks are holding far higher cash balances than they have traditionally needed to provide liquidity for their country's cross-border transactions.
This global liquidity glut has led to bubble after bubble, first in tech stocks, then in housing, more recently in commodities and most recently and gigantically in U.S. Treasuries. The last-mentioned is perhaps the most perplexing bubble of all. With inflation substantially positive and threatening to be accelerated by rising commodity prices and the import of Chinese and Indian inflation, and the U.S. Treasury running record deficits and threatening to increase them further, it is irrational for 10-year U.S. Treasuries to trade on a yield little above 2.5%. Only the global liquidity glut has made such pathetic real returns, with substantial risk to principal from both interest rate moves and potential default, appear attractive.... (continued . ... http://www.prudentbear.com/index.php/thebearslairview?art_id=10426).
