The three reasons why capital will become scarce in the world in the coming years
LONDON.– The forecasts for this year in financial matters will be wrong; Of course yes. In the markets there are many ways to err, in terms of direction, timing or speed of change. A year is too long and too short at the same time. Too long, because the extremely fast pace of the current financial business cycle means that even a well-identified idea is developed in a matter of weeks. Too short, because deep trends take years to become fully apparent.
So let’s leave the immediate perspective in the drawer and ask ourselves how things might change in the next decade. Today capital in the world is abundant. A middle-aged workforce has abundant savings to put to work. Long-term interest rates are low and expensive assets point to a shortage. Startups are often idea-based and don’t need a lot of capital. It is hard to imagine this state of affairs ending, but over time capital will become less abundant. The greatest demand will come from three sources in particular: economic populism, the need for investment to shorten supply chains, and the energy transition.
Let’s start with economic populism. Thirty years ago, two academic economists, Sebastian Edwards and Rudiger Dornbusch outlined its key elements. Above all, it is an approach that sees no constraints – such as debt or inflation – on economic growth. The Latin American populists studied issued money to pay for large public expenses. That ended badly. But economic populism lives on. It is in its purest form in Venezuela. Turkey seems determined to embrace one version. And Argentina never got to eliminate it completely.
A watered-down form of economic populism is also becoming more apparent in rich countries. One sign of this is the revival of discretionary fiscal policy. The $1.9 trillion package signed in March by US President Joe Biden is the ultimate example. The European Union’s recovery fund of €750 billion ($900 billion) is more modest, but still significant. Fiscal stimulus has again been favored because economic policy constraints, such as budget deficits, carry less weight when interest rates are low. But, over time, deficit-financed spending will begin to absorb excess savings. There has also been a change in monetary policy. This is seen in the change of goals and personnel. The old-style central banker – detached from politics and paranoid about inflation – is all but extinct in the rich world. The new breed worries about inequality and finds reasons to remain calm about inflation risks.
Investment firm Marko Papic of the Clocktower Group calls the turn to stimulus the “Buenos Aires consensus,” in contrast to the Washington consensus, which advises caution.
“The old-fashioned central banker, aloof from politics and paranoid about inflation, is all but extinct in rich countries”
A second factor is the increase in investment to continue business. Global production chains are likely to be shortened, in part, to avoid the bottlenecks that affected production in 2021. And bringing production plants a little closer to each company’s home country will require more capital. It seems likely that there will be a general increase in working capital. Companies lost sales in the pandemic due to lack of stock. A national security imperative also works in favor of more redundant capacity in production lines, as Papic points out. The rivalry between the United States and China is leading each country to double capacity in certain key industries, such as semiconductors. Those shares will absorb capital.
A third reason to anticipate capital scarcity is climate change. The transition to greener energy is essentially a capital spending issue, argue Eric Lonergan and Corinne Sawers in a forthcoming book. Any serious attempt to contain global temperature rise requires shedding the assets that sustain the carbon-based economy—oil rigs, coal-fired power plants, gasoline pumping stations—and building new infrastructure based on electric vehicles and wind power. and solar and in battery storage. You have to pour a lot of capital into creating these assets.
None of these three trends fully develops in a calendar year. The paradox of the forecasts is that 2022 can provide evidence against the thesis of scarcity of capital. If the Federal Reserve raises interest rates it will do so early in the business cycle, which would run counter to the idea of a populist policy turn. The “Build Back Better” spending bill (Build Back Better) of Biden may be left gathering dust.