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Capital Is No Longer Scarce

112 points by sinak 11y ago

deleted 11y ago
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mifreewil 11y ago
> That means we have massive amounts of capital available to invest in new endeavors. It explains why interest rates are low and there is fairly little that central banks can do about it unless they figure out a way to dramatically reduce investable capital – they can certainly shorten their balance sheets but even that impact is likely to relatively small in the overall scheme of things (eg US Fed about $3 Trillion). I'll never understand this line of reasoning. It's completely backwards. Does anyone really think it'd be so easy to borrow money for consumer goods with suspect credit or outlandish business ideas without central banks pumping liquidity into the economy? Anyone looked into savings rates lately? You know, where natural capital formation occurs?
- mdemare 11y ago
  Just imagine what would have happened if the Fed would have used their current strategy in 1995, or 2005. The same as what's happening now? Sure, then blame the Fed. Something dramatically different? Then maybe there's something else going on, and the Fed is merely responding to that.
  - mifreewil 11y ago
    How the Fed interacts with the economy, I don't think is too different from any other speculator in the market. They just look at different charts, have more degrees, and have greater propensity for groupthink.
vlehto 11y ago
High frequency trading gets shat on frequently. It's stupid. This is only a tool that evens out price differences across geological distance. If someone buys significant amount of AAPL stock in New York, the price goes up in NY. Then someone from London can profit by buying small amount of AAPL stock in London and selling it in NY. High frequency trading is this, but with very high speeds and lots of competition. This means they have to exert value out of almost infinitesimal price changes. >As HFT strategies become more widely used, it can be more difficult to deploy them profitably. According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about $1.25bn in 2012. That's 0,007% of U.S. GDP. And probably going down. >"DEFINITION OF HFT: 1. a strategy which trades for investment horizons of less than one day 2. a strategy which seeks to unwind all positions before the end of each trading day thus HFTs can't deploy large amounts of capital" http://www.sec.gov/comments/s7-02-10/s70210-129.pdf http://www.sec.gov/comments/s7-02-10/s70210-129.pdf
- csrm123 11y ago
  Yes the value of notional sizes of derivative trades have little to do with either their actual values (which net to zero for all the parties involved), their risk or the amount of capital actually involved.
- endymi0n 11y ago
  Oh, and another round of "we HF-Traders are just misunderstood benefactors of the general public and helping markets being more efficient". There are heaps of evidence HFT ruins markets, economies and nations, so I call BS. http://www.zerohedge.com/news/2015-03-20/how-hft-destroys-markets-50-pages-evidence http://www.zerohedge.com/news/2015-03-20/how-hft-destroys-ma...
  - icebraining 11y ago
    I'm not really knowledgeable to have an opinion on HFT, but there's something I'm still not clear about. HFT firms are not that big; the ones I've seen pointed as the largest have net incomes of less than $100M. Why wouldn't the other market participants, particularly the largest Wall Street firms, allow HFTs to ruin their game? The link you posted mentions "corrupt SEC regulators", but why would they be corrupt in favour of HFTs?
    - pzone 11y ago
      Large Wall Street firms view these guys the way a rhinoceros views the birds snatching bugs off its back. It's not a competitive relationship, they coexist. To push the analogy, sometimes the rhino gets annoyed and pecked too hard, but overall it's happy to live without as many bugs everywhere.
  - HiLo 11y ago
    >there are heaps of evidence >links to zerohedge credibility = destroyed
    - CJefferson 11y ago
siscia 11y ago
The point of the article seems solid, however I am wondering if there are any figure to compare. How much was the "global investible capital" in the 1980's and in the WWII ? What about the Global GDP ?
- bluetomcat 11y ago
  The huge capitals and the companies drowning in cash are certainly there, but the potentially profitable investment opportunities are scarce. Most of the infrastructure in the West has already been built, fertility is declining and no new groundbreaking tech is able to spur a new economic revolution. That gives rise to all kinds of speculative economic activity that are, at best, a zero-sum game. Contrast that to the post-WWII years: you had an increasing population and a huge demand for new infrastructure. The Cold War space race was also a huge technological boost.
deleted 11y ago
[deleted]
jondubois 11y ago
Misallocation is a massive problem. I think a significant amount of money is going into advertising, pointless startups, entertainment and social media. Basically, we are spending huge amounts of money getting numbed out of our minds instead of solving real fundamental problems. In general, I think it reveals a deeper problem about capitalism; none of us understand value anymore (we have more junk in our lives than we could possibly need)... So we struggle to allocate capital properly. We just blindly follow trends. The people who are getting rich now are not those who want to make the world a better place; the winners are those who just want to make quick cash (short-term thinkers who take insane risks). Does society prefer Snapchat or a cure for cancer? In the current economic environment, investors prefer Snapchat because Snapchat is pretty likely to get a ROI within the next 5 years. The return on investment for a cancer cure is probably small (especially given the large amount of recurring revenue that big pharmaceuticals are currently making by selling cancer drugs). Also, it's much riskier than Snapchat... Could take 5 years, 10 years or 20 years. Ultimately, we are satisfying people's short-term 'wants' at the expense of their long-term needs. We're a society of addicts who just want to get a quick buzz.
- humanrebar 11y ago
  > Does society prefer Snapchat or a cure for cancer? I generally share your concerns, but oncology and the market for donations to cancer-focused charities are surely bigger than Snapchat. I'm not sure counting unicorns is a good heuristic for importance.
- Ashendar 11y ago
  ' I think a significant amount of money is going into advertising, pointless startups, entertainment and social media.' My suspicion is that a lot of it is going into housing, driving up the costs for home buyers with no productive benefit for the economy.
  - laotzu 11y ago
    Well that is obvious after 2008. Last I checked there are around 5 vacant houses for every homeless person in America. According to anthropologist David Graeber, the real original (pun intended) meaning of the phrase "real estate" was royal estate, referring to the British monarchies' royal estate in the 17th century.
sunsu 11y ago
I know several local bankers who are retiring early because its too hard to make loans. They are sitting on tons of cash, but there are too many regulatory hurdles to lend the money. Loans which would have made total sense 20 years ago are no longer feasible. Many of our small businesses in this country are dying on the vine.
lordnacho 11y ago
- I don't think you can use notionals to say that HFT is allocated a lot of capital. In general, if you're hedged, you don't have to put up all the capital. A typical figure is if you're long 1M and short 1M you have to post ~200K capital. - Having said that the financial people I speak to seem to be swimming in capital. They all seem to want someone to trade it for them, or find deals to put the money in. On the other side, it's probably never been easier to get capital for certain kinds of project, but not every project qualifies as investible due to a certain kind of bureaucratic conservatism (old fashioned CYA requirements, lack of imagination, and so on). In particular stuff that banks are retreating from is leaving a big gap in the market. - He makes a good point that when you get smarter about using capital, you need less of it. Perhaps that's where the missing productivity went?
mohanmcgeek 11y ago
The article overlooks the sovereign debt. The world has a total sovereign debt of about 50 trillion. The Government bonds and their derivatives account for most of the difference between available capital and GDP. "Capital is no longer scarce" sounds very absurd. There will always be more people chasing limited resources and whenever less men (labor) are required for a task, the society directs that "capital" to either arts or research
- tootie 11y ago
  But are they really chasing a limited resource? If investors think you're product is going to be profitable, you're virtually guaranteed to get funding. The only reason chasing capital is difficult is because that's frequently a hard sell. Lots of capital doesn't mean investors are going to throw money at losing propositions.
  - LyndsySimon 11y ago
    > But are they really chasing a limited resource? Of course. There is not infinite value in existence, nor is there a means of creating value from nothing. > If investors think you're product is going to be profitable, you're virtually guaranteed to get funding. Well... this is always the case. The only difference is that as capital is more scarce, potential investors are more critical in their analysis of the product's potential. > Lots of capital doesn't mean investors are going to throw money at losing propositions. Right. As available capital approaches infinity, the expected ROI of ventures which obtain successful funding approaches zero. This is an oversimplification of course - if an asset is deflationary, the limit is the rate at which the asset gains value; if an asset is inflationary, the limit is the rate at which the asset loses value (i.e., a negative rate). The mechanic holds true, though.
- graeham 11y ago
  One man's capital (credit) is another man's debt.
  - mohanmcgeek 11y ago
badsock 11y ago
And yet there's a 50% tax break for capital gains in my country. What possible reason is there for such a massive subsidy for something that we don't need, other than corrupt influence on the political system by the wealthy to give themselves a tax break?
- joshuaheard 11y ago
  Letting you keep your own money is not a subsidy. That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes.
  - fnovd 11y ago
    >Letting you keep your own money is not a subsidy. While this is semantically true, reducing taxes as a vehicle to put money in the right hands is by all means a subsidy.
  - dragonwriter 11y ago
    Doing so selectively is absolutely a subsidy, and calling it anything else is sophistry.
  - natrius 11y ago
    Labor has linear returns. Capital has compounding returns. They're different. We should tax consumption instead, but the current tax distinction isn't madness.
  - goodcanadian 11y ago
    I can see lots of reasons to distinguish between labour and capital. A big part of me thinks it would be appropriate to reward productive labour by reducing taxes and to discourage rent seeking by increasing taxes on investment income. There are practical reasons, of course, not to do this as we would rapidly chase investment from our country, but it is definitely worth thinking about these things.
  - dragonwriter 11y ago
    EDIT: I recognize this is a second reply to the same comment, it focusses on a different and important aspect and isn't really related to my other reply. > That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes. At least in the US system, there are two main distinctions made (there are some others, too, but these are the biggies) between labor and capital income, and both have some logic though better options, I think, exist. (1) Between labor income and all other income (including, but not limited to, capital) -- labor income alone is treated as qualifying for certain social safety net program eligibility and benefits calculations (Social Security and Medicare), and is therefore subject supplemental taxes to fund those benefits. Alternative: make all income qualifying for those programs, and tax all income to fund them. (2) Between long-term capital gains and most other income (including both short-term capital gains, labor, and other taxable income sources). Because the former are earned over a period of greater than one year, in a system with progressive marginal taxation on annual income, taxing them the same as the latter with no mechanism for accounting for the period over which they were earned -- especially when they are returns earned by sale of holding that aren't regularly repeatable, rather than sales of small subsets of a large pool of assets structured so that long-term gains can be extracted every year -- results in overtaxation when compared to regularly repeatable income streams like labor income. Alternative: tax all income equally, but allow taxpayers unlimited freedom to recognize (and pay taxes on) income in advance of realization, and limited -- but some -- freedom to defer recognition and taxation of some portion of windfall income for a period of years after realization. (This stops long-term capital gains from being a dodge to get low taxes on repeatable income from large holdings, while not unfairly taxing non-repeatable long-term gains, and also more fairly treating irregular labor income.)
tpeo 11y ago
The author seems to be referring to financial definitions of capital rather than an economic definition of capital. It would surprise me if the physical capital stock of any country weren't at least 5 times larger than it's GDP. A global capital stock of USD 100 trillion against a world GDP of USD 80 trillion strikes me as too low. Also, how does one add up the values of financial instruments? The capital he's referring to includes stocks, bonds and loans. What if I take a loan so that I might buy some bonds? Lastly, not all assets are traded in each period, and some might never be sold, such that their values cannot be observed in financial markets.
norea-armozel 11y ago
I follow @Damn_Jehu and I've been talking with him about it. What I find scary about the situation is the fact that if all that "dead money" ever gets into the wider economy you can kiss the current capital valuations goodbye. It could possibly result in the largest devaluation in history (larger than the Great Depression and the several panics/scares before then combined). For me this is amusing in a way since I work in financial services as a developer. So if/when that shoe drops my job is first to go for sure. Oh joy!
- bluetomcat 11y ago
  Such heaps of money could only be meaningfully invested in case of a large technological breakthrough that would enable the emergence of entirely new industries, skill-sets and supporting businesses. Think of the internal-combustion engine, electricity, and (we are already exhausting the potential of this one) the Internet. Otherwise, the mere existence of that money (even if it never gets spent) serves no other purpose than to reinforce the status-quo.
  - norea-armozel 11y ago
    Problem is that effectively if you spend that money you wind up devaluing any capital you already have invested in. So, why risk the devaluation? If I were Apple or Microsoft I would just quietly hum to myself and pretend it didn't exist. Or that I'm saving it for occasional dividend payouts. But beyond that, I'd stay as far away from active investment as possible. In many ways this is akin to a mathematical singularity where all economic models break down. Can't tax it out of the economy or deficit spend it, both will cause misallocations from the speculative markets as they'll assume the dead money has worth which incentivizes them to spend it which again devalues existing capital invested which causes the markets to collapse. So, what to do? I assume at this point we're heading into a situation that's similar to a post-scarcity economy, so it's inevitable that prices will have to collapse whether we want them to or not. And that means certain norms such as property rights go away (along with the State institutions that prop it up). We'll get a Star Trek future, but only after the Mad Max nightmare between now and then is my guess (purely speculative and not of substance imo).
peter303 11y ago
Central Banks have been pumping it out with near zero interest rates on and off for the past 14 years. The US Fed alone created about four trillion during quantitative easing. This cycle doesnt seem to have caused consumer inflation, but asset inflation: unicorns, high stocks, high houses.
- rm_-rf_slash 11y ago
  Because those banks lend to banks, who lend to other institutions, which are owned by institutions or directly by wealthy people. Aside from pension funds and such, the vast majority of financial markets stand to benefit wealthy individuals almost exclusively. It wasn't always this way. Citizen stock ownership in the US was quite significant in the 50s. It's been on a downward trend ever since.
ryandrake 11y ago
It's a sad situation. The world, in total, has more money than it needs, distributed to a wildly disproportionate few, who have no idea what to do with it, yet there are billions of people who suffer and struggle with issues that that money could solve. But "redistribution is bad", so we all just accept the status quo.
- lintiness 11y ago
  those few who have disproportionate capital consume and invest. they don't stuff the money in their mattresses.
  - vannevar 11y ago
    But those who have disproportionate amounts of cash don't consume as disproportionally as they earn. An individual can only personally consume so much. As more wealth is concentrated in fewer and fewer people, the money that trickles down as consumption declines. And as investment becomes more and more abstract, you've got algorithms passing money back and forth between algorithms, and the rate at which cash actually makes it out into the rest of the population also slows.
  - danans 11y ago
    This is true, but if you take Piketty's argument that historically the return on that capital is greater than overall economic growth, then labor, being primarily reliant on economic growth for increasing their wealth, never catch up to the capitalists.
vonnik 11y ago
The real question is: Scarce for whom? And that's the paradox at the heart of capitalism. It generates surpluses on the condition that they can belong, in large part, to a tiny minority. Solving for scarcity in the aggregate by no means solves for scarcity on the ground.
EvanPlaice 11y ago
Capitalism has 2 fundamental weaknesses that people universally ignore. 1. A corporation is a living organism (ie in the abstract, not biological sense) that needs to be fed to survive. In a system where resources are scarce (ie there's a hard limit on how much that can be extracted from the market), dominated by organisms that are expected to grow indefinitely or die; eventually one of three things are going to happen. First, the market becomes completely saturated, the organism quits growing, capital is devalued, and the organism suffers a slow/painful death at great cost to the stakeholders. Second, the organism diversifies and grows in size/power beyond the limits of the market so it starts consuming other organisms and/or artificially raises prices to extract more value at the current expense. Ie asset inflation which acts as a hidden tax on the entire ecosystem. Third, the organization buys back the its shares, converts to a private company, and adjusts operations in a manner that emphasizes long-term sustainability over growth. This almost never happens 'in the wild' and never happens in the interest of 'sustainability'. Offering to buy off the existing stakeholders without uncontested majority voting rights is the same as handing them a blank check. A realistic 'best case' is that the value-producing stakeholders fork off and create a new private company. People seem to be shocked that large companies act in an amoral manner. I'd be shocked to see a corporation continue to act in a moral manner after growing to sufficient size. Just try to see the corporation as a living organism. In terms of life-or-death decisions, survival is paramount to morality every time. What's worse, when an organization grows sufficiently large enough to challenge/undermine the authority of governments. They can stimulate changes in government policy via corruption, park/move capital/operations to locations lacking restrictions, purchase large quantities of government debt and profit from the shortfall of the system that they've been actively starving of resources. Capitalism is an amazingly successful model for fast-paced growth but self-defeating in terms of long-term (read multi-generation) sustainability. 2. In pure capitalistic terms, people are assets. What happens when a market becomes diluted with more assets than demand can justify? The value of those assets goes down. By virtue of competitiveness, companies will always strive for efficiency. To produce more value with less. It's a basic fact that with increases advances in technology, it requires fewer people to maintain and/or increase the current standard of living. High-earning capitalists perceive themselves as winners of the race, and rightly so. Unfortunately, the greater their ratio of success the greater that success taxes the sustainability of the wider ecosystem. In an ecosystem of scarcity we can either have fewer people with a higher median standard of living operating at a higher level of efficiency, a greater population living at a lower median standard of living, or a mix of the two where efficient producers are incentivized with special privilege to subsidize the non-contributing existence of the rest. Either way, we're approaching an upper limit to the quantity of useless shit we can realistically expect people to willingly consume. Capital is being concentrated at an ever-increasing rate and it's being used to purchase assets at artificially inflated values and charge high rates for access. In California specifically. Capital is being parked in 'investment properties', in many cases by foreign investors. Ever increasing rent rates are being leveraged to extract more from the working class. The people responsible for purchasing the most goods/services have less to spend. Even people who make double the national median income struggle to afford rent and have zero prospects of purchasing in the near and long term. Companies that produce goods suffer as their consumer base is starved. The cycle of capital concentration continues.

112 points by sinak 11y ago

deleted 11y ago

[deleted]

> That means we have massive amounts of capital available to invest in new endeavors. It explains why interest rates are low and there is fairly little that central banks can do about it unless they figure out a way to dramatically reduce investable capital – they can certainly shorten their balance sheets but even that impact is likely to relatively small in the overall scheme of things (eg US Fed about $3 Trillion). I'll never understand this line of reasoning. It's completely backwards. Does anyone really think it'd be so easy to borrow money for consumer goods with suspect credit or outlandish business ideas without central banks pumping liquidity into the economy? Anyone looked into savings rates lately? You know, where natural capital formation occurs?

mdemare 11y ago
Just imagine what would have happened if the Fed would have used their current strategy in 1995, or 2005. The same as what's happening now? Sure, then blame the Fed. Something dramatically different? Then maybe there's something else going on, and the Fed is merely responding to that.
- mifreewil 11y ago
  How the Fed interacts with the economy, I don't think is too different from any other speculator in the market. They just look at different charts, have more degrees, and have greater propensity for groupthink.

vlehto 11y ago

High frequency trading gets shat on frequently. It's stupid. This is only a tool that evens out price differences across geological distance. If someone buys significant amount of AAPL stock in New York, the price goes up in NY. Then someone from London can profit by buying small amount of AAPL stock in London and selling it in NY. High frequency trading is this, but with very high speeds and lots of competition. This means they have to exert value out of almost infinitesimal price changes. >As HFT strategies become more widely used, it can be more difficult to deploy them profitably. According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about $1.25bn in 2012. That's 0,007% of U.S. GDP. And probably going down. >"DEFINITION OF HFT: 1. a strategy which trades for investment horizons of less than one day 2. a strategy which seeks to unwind all positions before the end of each trading day thus HFTs can't deploy large amounts of capital" http://www.sec.gov/comments/s7-02-10/s70210-129.pdf http://www.sec.gov/comments/s7-02-10/s70210-129.pdf

csrm123 11y ago
Yes the value of notional sizes of derivative trades have little to do with either their actual values (which net to zero for all the parties involved), their risk or the amount of capital actually involved.
endymi0n 11y ago
Oh, and another round of "we HF-Traders are just misunderstood benefactors of the general public and helping markets being more efficient". There are heaps of evidence HFT ruins markets, economies and nations, so I call BS. http://www.zerohedge.com/news/2015-03-20/how-hft-destroys-markets-50-pages-evidence http://www.zerohedge.com/news/2015-03-20/how-hft-destroys-ma...
- icebraining 11y ago
  I'm not really knowledgeable to have an opinion on HFT, but there's something I'm still not clear about. HFT firms are not that big; the ones I've seen pointed as the largest have net incomes of less than $100M. Why wouldn't the other market participants, particularly the largest Wall Street firms, allow HFTs to ruin their game? The link you posted mentions "corrupt SEC regulators", but why would they be corrupt in favour of HFTs?
  - pzone 11y ago
    Large Wall Street firms view these guys the way a rhinoceros views the birds snatching bugs off its back. It's not a competitive relationship, they coexist. To push the analogy, sometimes the rhino gets annoyed and pecked too hard, but overall it's happy to live without as many bugs everywhere.
- HiLo 11y ago
  >there are heaps of evidence >links to zerohedge credibility = destroyed
  - CJefferson 11y ago

siscia 11y ago

The point of the article seems solid, however I am wondering if there are any figure to compare. How much was the "global investible capital" in the 1980's and in the WWII ? What about the Global GDP ?

bluetomcat 11y ago
The huge capitals and the companies drowning in cash are certainly there, but the potentially profitable investment opportunities are scarce. Most of the infrastructure in the West has already been built, fertility is declining and no new groundbreaking tech is able to spur a new economic revolution. That gives rise to all kinds of speculative economic activity that are, at best, a zero-sum game. Contrast that to the post-WWII years: you had an increasing population and a huge demand for new infrastructure. The Cold War space race was also a huge technological boost.

deleted 11y ago

[deleted]

jondubois 11y ago

Misallocation is a massive problem. I think a significant amount of money is going into advertising, pointless startups, entertainment and social media. Basically, we are spending huge amounts of money getting numbed out of our minds instead of solving real fundamental problems. In general, I think it reveals a deeper problem about capitalism; none of us understand value anymore (we have more junk in our lives than we could possibly need)... So we struggle to allocate capital properly. We just blindly follow trends. The people who are getting rich now are not those who want to make the world a better place; the winners are those who just want to make quick cash (short-term thinkers who take insane risks). Does society prefer Snapchat or a cure for cancer? In the current economic environment, investors prefer Snapchat because Snapchat is pretty likely to get a ROI within the next 5 years. The return on investment for a cancer cure is probably small (especially given the large amount of recurring revenue that big pharmaceuticals are currently making by selling cancer drugs). Also, it's much riskier than Snapchat... Could take 5 years, 10 years or 20 years. Ultimately, we are satisfying people's short-term 'wants' at the expense of their long-term needs. We're a society of addicts who just want to get a quick buzz.

humanrebar 11y ago
> Does society prefer Snapchat or a cure for cancer? I generally share your concerns, but oncology and the market for donations to cancer-focused charities are surely bigger than Snapchat. I'm not sure counting unicorns is a good heuristic for importance.
Ashendar 11y ago
' I think a significant amount of money is going into advertising, pointless startups, entertainment and social media.' My suspicion is that a lot of it is going into housing, driving up the costs for home buyers with no productive benefit for the economy.
- laotzu 11y ago
  Well that is obvious after 2008. Last I checked there are around 5 vacant houses for every homeless person in America. According to anthropologist David Graeber, the real original (pun intended) meaning of the phrase "real estate" was royal estate, referring to the British monarchies' royal estate in the 17th century.

sunsu 11y ago

I know several local bankers who are retiring early because its too hard to make loans. They are sitting on tons of cash, but there are too many regulatory hurdles to lend the money. Loans which would have made total sense 20 years ago are no longer feasible. Many of our small businesses in this country are dying on the vine.

lordnacho 11y ago

- I don't think you can use notionals to say that HFT is allocated a lot of capital. In general, if you're hedged, you don't have to put up all the capital. A typical figure is if you're long 1M and short 1M you have to post ~200K capital. - Having said that the financial people I speak to seem to be swimming in capital. They all seem to want someone to trade it for them, or find deals to put the money in. On the other side, it's probably never been easier to get capital for certain kinds of project, but not every project qualifies as investible due to a certain kind of bureaucratic conservatism (old fashioned CYA requirements, lack of imagination, and so on). In particular stuff that banks are retreating from is leaving a big gap in the market. - He makes a good point that when you get smarter about using capital, you need less of it. Perhaps that's where the missing productivity went?

mohanmcgeek 11y ago

The article overlooks the sovereign debt. The world has a total sovereign debt of about 50 trillion. The Government bonds and their derivatives account for most of the difference between available capital and GDP. "Capital is no longer scarce" sounds very absurd. There will always be more people chasing limited resources and whenever less men (labor) are required for a task, the society directs that "capital" to either arts or research

tootie 11y ago
But are they really chasing a limited resource? If investors think you're product is going to be profitable, you're virtually guaranteed to get funding. The only reason chasing capital is difficult is because that's frequently a hard sell. Lots of capital doesn't mean investors are going to throw money at losing propositions.
- LyndsySimon 11y ago
  > But are they really chasing a limited resource? Of course. There is not infinite value in existence, nor is there a means of creating value from nothing. > If investors think you're product is going to be profitable, you're virtually guaranteed to get funding. Well... this is always the case. The only difference is that as capital is more scarce, potential investors are more critical in their analysis of the product's potential. > Lots of capital doesn't mean investors are going to throw money at losing propositions. Right. As available capital approaches infinity, the expected ROI of ventures which obtain successful funding approaches zero. This is an oversimplification of course - if an asset is deflationary, the limit is the rate at which the asset gains value; if an asset is inflationary, the limit is the rate at which the asset loses value (i.e., a negative rate). The mechanic holds true, though.
graeham 11y ago
One man's capital (credit) is another man's debt.
- mohanmcgeek 11y ago

badsock 11y ago

And yet there's a 50% tax break for capital gains in my country. What possible reason is there for such a massive subsidy for something that we don't need, other than corrupt influence on the political system by the wealthy to give themselves a tax break?

joshuaheard 11y ago
Letting you keep your own money is not a subsidy. That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes.
- fnovd 11y ago
  >Letting you keep your own money is not a subsidy. While this is semantically true, reducing taxes as a vehicle to put money in the right hands is by all means a subsidy.
- dragonwriter 11y ago
  Doing so selectively is absolutely a subsidy, and calling it anything else is sophistry.
- natrius 11y ago
  Labor has linear returns. Capital has compounding returns. They're different. We should tax consumption instead, but the current tax distinction isn't madness.
- goodcanadian 11y ago
  I can see lots of reasons to distinguish between labour and capital. A big part of me thinks it would be appropriate to reward productive labour by reducing taxes and to discourage rent seeking by increasing taxes on investment income. There are practical reasons, of course, not to do this as we would rapidly chase investment from our country, but it is definitely worth thinking about these things.
- dragonwriter 11y ago
  EDIT: I recognize this is a second reply to the same comment, it focusses on a different and important aspect and isn't really related to my other reply. > That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes. At least in the US system, there are two main distinctions made (there are some others, too, but these are the biggies) between labor and capital income, and both have some logic though better options, I think, exist. (1) Between labor income and all other income (including, but not limited to, capital) -- labor income alone is treated as qualifying for certain social safety net program eligibility and benefits calculations (Social Security and Medicare), and is therefore subject supplemental taxes to fund those benefits. Alternative: make all income qualifying for those programs, and tax all income to fund them. (2) Between long-term capital gains and most other income (including both short-term capital gains, labor, and other taxable income sources). Because the former are earned over a period of greater than one year, in a system with progressive marginal taxation on annual income, taxing them the same as the latter with no mechanism for accounting for the period over which they were earned -- especially when they are returns earned by sale of holding that aren't regularly repeatable, rather than sales of small subsets of a large pool of assets structured so that long-term gains can be extracted every year -- results in overtaxation when compared to regularly repeatable income streams like labor income. Alternative: tax all income equally, but allow taxpayers unlimited freedom to recognize (and pay taxes on) income in advance of realization, and limited -- but some -- freedom to defer recognition and taxation of some portion of windfall income for a period of years after realization. (This stops long-term capital gains from being a dodge to get low taxes on repeatable income from large holdings, while not unfairly taxing non-repeatable long-term gains, and also more fairly treating irregular labor income.)

tpeo 11y ago

The author seems to be referring to financial definitions of capital rather than an economic definition of capital. It would surprise me if the physical capital stock of any country weren't at least 5 times larger than it's GDP. A global capital stock of USD 100 trillion against a world GDP of USD 80 trillion strikes me as too low. Also, how does one add up the values of financial instruments? The capital he's referring to includes stocks, bonds and loans. What if I take a loan so that I might buy some bonds? Lastly, not all assets are traded in each period, and some might never be sold, such that their values cannot be observed in financial markets.

norea-armozel 11y ago

I follow @Damn_Jehu and I've been talking with him about it. What I find scary about the situation is the fact that if all that "dead money" ever gets into the wider economy you can kiss the current capital valuations goodbye. It could possibly result in the largest devaluation in history (larger than the Great Depression and the several panics/scares before then combined). For me this is amusing in a way since I work in financial services as a developer. So if/when that shoe drops my job is first to go for sure. Oh joy!

bluetomcat 11y ago
Such heaps of money could only be meaningfully invested in case of a large technological breakthrough that would enable the emergence of entirely new industries, skill-sets and supporting businesses. Think of the internal-combustion engine, electricity, and (we are already exhausting the potential of this one) the Internet. Otherwise, the mere existence of that money (even if it never gets spent) serves no other purpose than to reinforce the status-quo.
- norea-armozel 11y ago
  Problem is that effectively if you spend that money you wind up devaluing any capital you already have invested in. So, why risk the devaluation? If I were Apple or Microsoft I would just quietly hum to myself and pretend it didn't exist. Or that I'm saving it for occasional dividend payouts. But beyond that, I'd stay as far away from active investment as possible. In many ways this is akin to a mathematical singularity where all economic models break down. Can't tax it out of the economy or deficit spend it, both will cause misallocations from the speculative markets as they'll assume the dead money has worth which incentivizes them to spend it which again devalues existing capital invested which causes the markets to collapse. So, what to do? I assume at this point we're heading into a situation that's similar to a post-scarcity economy, so it's inevitable that prices will have to collapse whether we want them to or not. And that means certain norms such as property rights go away (along with the State institutions that prop it up). We'll get a Star Trek future, but only after the Mad Max nightmare between now and then is my guess (purely speculative and not of substance imo).

peter303 11y ago

Central Banks have been pumping it out with near zero interest rates on and off for the past 14 years. The US Fed alone created about four trillion during quantitative easing. This cycle doesnt seem to have caused consumer inflation, but asset inflation: unicorns, high stocks, high houses.

rm_-rf_slash 11y ago
Because those banks lend to banks, who lend to other institutions, which are owned by institutions or directly by wealthy people. Aside from pension funds and such, the vast majority of financial markets stand to benefit wealthy individuals almost exclusively. It wasn't always this way. Citizen stock ownership in the US was quite significant in the 50s. It's been on a downward trend ever since.

ryandrake 11y ago

It's a sad situation. The world, in total, has more money than it needs, distributed to a wildly disproportionate few, who have no idea what to do with it, yet there are billions of people who suffer and struggle with issues that that money could solve. But "redistribution is bad", so we all just accept the status quo.

lintiness 11y ago
those few who have disproportionate capital consume and invest. they don't stuff the money in their mattresses.
- vannevar 11y ago
  But those who have disproportionate amounts of cash don't consume as disproportionally as they earn. An individual can only personally consume so much. As more wealth is concentrated in fewer and fewer people, the money that trickles down as consumption declines. And as investment becomes more and more abstract, you've got algorithms passing money back and forth between algorithms, and the rate at which cash actually makes it out into the rest of the population also slows.
- danans 11y ago
  This is true, but if you take Piketty's argument that historically the return on that capital is greater than overall economic growth, then labor, being primarily reliant on economic growth for increasing their wealth, never catch up to the capitalists.

vonnik 11y ago

The real question is: Scarce for whom? And that's the paradox at the heart of capitalism. It generates surpluses on the condition that they can belong, in large part, to a tiny minority. Solving for scarcity in the aggregate by no means solves for scarcity on the ground.

EvanPlaice 11y ago

Capitalism has 2 fundamental weaknesses that people universally ignore. 1. A corporation is a living organism (ie in the abstract, not biological sense) that needs to be fed to survive. In a system where resources are scarce (ie there's a hard limit on how much that can be extracted from the market), dominated by organisms that are expected to grow indefinitely or die; eventually one of three things are going to happen. First, the market becomes completely saturated, the organism quits growing, capital is devalued, and the organism suffers a slow/painful death at great cost to the stakeholders. Second, the organism diversifies and grows in size/power beyond the limits of the market so it starts consuming other organisms and/or artificially raises prices to extract more value at the current expense. Ie asset inflation which acts as a hidden tax on the entire ecosystem. Third, the organization buys back the its shares, converts to a private company, and adjusts operations in a manner that emphasizes long-term sustainability over growth. This almost never happens 'in the wild' and never happens in the interest of 'sustainability'. Offering to buy off the existing stakeholders without uncontested majority voting rights is the same as handing them a blank check. A realistic 'best case' is that the value-producing stakeholders fork off and create a new private company. People seem to be shocked that large companies act in an amoral manner. I'd be shocked to see a corporation continue to act in a moral manner after growing to sufficient size. Just try to see the corporation as a living organism. In terms of life-or-death decisions, survival is paramount to morality every time. What's worse, when an organization grows sufficiently large enough to challenge/undermine the authority of governments. They can stimulate changes in government policy via corruption, park/move capital/operations to locations lacking restrictions, purchase large quantities of government debt and profit from the shortfall of the system that they've been actively starving of resources. Capitalism is an amazingly successful model for fast-paced growth but self-defeating in terms of long-term (read multi-generation) sustainability. 2. In pure capitalistic terms, people are assets. What happens when a market becomes diluted with more assets than demand can justify? The value of those assets goes down. By virtue of competitiveness, companies will always strive for efficiency. To produce more value with less. It's a basic fact that with increases advances in technology, it requires fewer people to maintain and/or increase the current standard of living. High-earning capitalists perceive themselves as winners of the race, and rightly so. Unfortunately, the greater their ratio of success the greater that success taxes the sustainability of the wider ecosystem. In an ecosystem of scarcity we can either have fewer people with a higher median standard of living operating at a higher level of efficiency, a greater population living at a lower median standard of living, or a mix of the two where efficient producers are incentivized with special privilege to subsidize the non-contributing existence of the rest. Either way, we're approaching an upper limit to the quantity of useless shit we can realistically expect people to willingly consume. Capital is being concentrated at an ever-increasing rate and it's being used to purchase assets at artificially inflated values and charge high rates for access. In California specifically. Capital is being parked in 'investment properties', in many cases by foreign investors. Ever increasing rent rates are being leveraged to extract more from the working class. The people responsible for purchasing the most goods/services have less to spend. Even people who make double the national median income struggle to afford rent and have zero prospects of purchasing in the near and long term. Companies that produce goods suffer as their consumer base is starved. The cycle of capital concentration continues.