Bain & Co.: Capital Niagara Will Flood Planet. What Is Market Monetarism’s Response?

A Guest Post by Benjamin Cole

What a world—the “problem” is too much capital.

Through recorded history, man has but eked out a living, with little extra labor or capital to improve standards of living.

Mere survival was a 24/7 life.

Tsunami of Money

But a new report issued by famed consult-a-rama outfit Bain & Co. says the globe is glutted with money, and flood-tides will worsen.

“[For] the balance of the decade, markets will generally continue to grapple with an environment of capital superabundance,” writes Bain, in a report entitled A World Awash in Money. (BTW, kudos to the Bainers for speaking English—the report is good read, sans the stilted language or oblique messaging common in the financial industry).

Do you like the number $900 trillion? That’s how much capital the globe will have in 2020, up from $600 trillion in 2010, says Bain & Co.

Low Yields and Bubbles

Low yields are the future, and perhaps bubbles, as investors chase yields. The Bainers have a lot of good ideas how to construct Noah’s Arks to survive pending (and probably long-term) capital high tides in their report.

One takeaway: It is better to be smart than rich. People with good business or technological ideas will have more leverage with Mr. Moneybags. Investors are a dime a dozen. But how to make money on the money?

I just wish I had some good ideas….

Market Monetarism?

But for Market Monetarists, what does a money-soaked world mean, in terms of policy?

1. Central banks need to think about growth, not yesteryear’s war on inflation. That major central banks have engineered weak aggregate demand through monetary asphyxiation has been a Market Monetarism plank. That still stands. More aggregate demand and larger economies would put the huge reservoirs of capital to productive use. Bottlenecks and the supply-side will be widened quickly, thanks to capital abundance. The price signal works.

(Side note: Higher rates of inflation would allow a  market signal that capital markets are glutted. If inflation is 6 percent, then a 2 percent interest rate sends a signal to savers: “You are a chump.” When inflation is zero, then a zero percent interest rate sends no signal).

2. Interest rates are dead as policy tool. They will be low, flatline. Think Japan, or think Jimmy Hoffa. Market Monetarists are comfortable with that, as quantitative easing has always been accepted by MM’ers, even if QE gives central bankers (and inflation hysterics) the heebie-jeebies.

Quantitative Easing?

There might be a question about QE, which I pose to readers. After all, when a central bank buys bonds (or other assets), the central bank injects money into capital markets. It is hoped the private sellers of the bonds spend the money they get from the central bank. But if the bond sellers reinvest or save, they only add to capital gluts. Maybe the money ends up in excess bank reserves. Inert.

The specter of permanent capital gluts raises an uncomfortable cure to the sickness of weak aggregate demand: federal spending. It may be that federal deficits, financed by QE (to avoid increasing the national debt ad infinitum) is the right response in a non-inflationary world glutted by capital.

Of course, the federal budget is defined by venal political considerations, and so this “cure” promises more ills than benefits.

An Answer?

Still, there may be a cure.

Tax cuts on the wealthy promise little effect as well. They have a higher propensity to just save the money.

So the answer is tax cuts on the middle class, financed by QE, but no increase in federal outlays. This might even be a winner, politically.

What say ye, readers?

5 thoughts on “Bain & Co.: Capital Niagara Will Flood Planet. What Is Market Monetarism’s Response?

  1. Great blogging!
    My preference is something like the second half of the 1990s – tight fiscal and with NGDPLT or Hetzel’s TIPS level targeting that Lars detailed in his latest post. I don’t really remember taxes being that large of an issue back then. I really got socked by the tax man last year, the worst ever; so if that could roll back, then that would qualify as a tax cut.

      • Dajeeps—
        I am all in on Hetzel. But different from the 1990s is the “superabundance” of capital. Running federal deficits balanced by QE promises to cut taxes but not do much on inflation and even reduce debt to GDP ratios.

      • Are you referring to the Cochrane thing., blasting away on QE and adjusting IoER?

        I am not sure about the statement about capital. I’d probably have to see it to believe it because I was remember the 90s; capital was flying all over the place. It was a time when having employees was a status symbol; the more employees, the bigger your mojo – or something like that.

  2. Dajeeps–
    Even in the 1990s there was capital…but there is more today. Indeed see Marcus’ next post.
    Cochrane’s ideas are interesting. My guess is stay with QE and cut taxes on middle class.

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