
Capital Is No Longer Scarce - sinak
http://continuations.com/post/134920840275/capital-is-no-longer-scarce
======
jondubois
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.

~~~
merpnderp
Capitalism has never been about making the world a better place. All systems
deal with humans and humans inevitably prefer helping out themselves and
people close to them over others, which leads to corruption regardless of the
system. And capitalism seems the best method for controlling innate human
corruption (see China's incredible economic growth once socialism was all but
abandoned for capitalism in the 80's pulling a billion people out of abject
poverty).

As for investors preferring Snapchat to curing cancer? The amount of money
invested in cancer dwarfs Snapchat's investments by magnitudes. You don't just
cure "cancer" you find cures for the hundreds of different diseases that fall
under the umbrella of cancer. There's so much money invested in cancer there
are often not enough candidates for a new clinical trials.

If we have a shortage of anything, it is medical research scientists. And the
way to get more of those is to change the regulations so there is more room
for profit medical research.

~~~
erikpukinskis
> capitalism seems the best method for controlling innate human corruption

Capitalism seems better than past failures. But it is surely a local maximum.
We have thousands of years of social evolution in front of us. Experiments
have hardly been exhaustive, and material conditions seem to be changing
faster than ever.

~~~
amelius
The best way to control corruption is transparency. Eventually, IT systems
will solve large-scale corruption.

~~~
legulere
Technology rarely solves social problems. It often changes society but not
only in the good way and how it does is mostly unforeseeable.

~~~
badsock
It may happen rarely, but the positive impacts of things like, say, the
printing press are too profound to be dismissed that easily

~~~
legulere
The printing press was one of the main factors making the reformation
possible, which later on led to the thirty year's war. So it's actually a good
example of how technology has unintended consequences.

~~~
clock_tower
Recent historians have been looking at how the printing press was more an
instrument of state power than anything else. Remember that printing shops
were state-controlled and heavily censored (_The Great Cat Massacre_ has a
chapter on print shops in 18th-century Paris); most of their output was royal
decrees, propaganda pamphlets, and books friendly to the regime in question.

The Reformation began for good reasons -- the Church had been dragging its
feet on internal reforms for hundreds of years, and finally implemented these
reforms in the Council of Trent, after the Reformation began -- but its spread
was normally something that governments did to their people, not something
that people chose for themselves. It wasn't an extension of liberty. Henry
VIII and Edward VI flooded England with mercenaries, for example; in the
Germanies, whether to turn Protestant or not was a decision made by rulers
(who were legally entitled to compel their subjects to follow them; some
converted to Lutheranism, seized Church property, and then switched back to
Catholicism, and persecuted subjects who were slow to make the change each
time). First-wave Protestants -- Lutherans and Anglicans -- generally had less
religion rather than a different religion; even today, there are conservative
branches of the Lutherans and Anglicans who are negotiating with the Catholic
Church to return as whole congregations.

Calvinism was (if I remember rightly) never imposed from the top down, and
typically took power through revolts by the middle class or the lower
aristocracy; but Calvinist states tended to be oppressive, warlike,
aggressively-middle-class theocracies -- very bad places to be poor or
dissident. (_Albion's Seed_ is revealing on this; the modern Islamic Republic
of Iran is a less theocratic, less anti-commercial, less oppressive place than
17th-century Puritan Massachusetts was.)

------
vlehto
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)

~~~
endymi0n
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-
ma...](http://www.zerohedge.com/news/2015-03-20/how-hft-destroys-
markets-50-pages-evidence)

~~~
icebraining
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
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.

------
ryandrake
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
those few who have disproportionate capital consume and invest. they don't
stuff the money in their mattresses.

~~~
vannevar
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.

------
peter303
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
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.

------
mifreewil
> 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
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
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.

------
sunsu
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.

------
badsock
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
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.

~~~
dragonwriter
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.)

------
norea-armozel
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
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
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).

------
siscia
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
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.

------
lordnacho
\- 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?

------
vonnik
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.

------
tpeo
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.

------
mohanmcgeek
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
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
> 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.

------
EvanPlaice
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.

