Even without the Fed, we are awash in cash.
FROM SLATE | JUNE 11, 2014
n the past few months, stock markets around the world have continued to rally modestly while bond yields around the world have continued their quiet decline. This is not what most expected, especially after December, when the Federal Reserve began paring back its hypereasy money policy of “quantitative easing.”
The question is why. Part of the answer is that the Fed is only one aspect of a world awash in capital. We are in the midst of a cycle with no end in sight, one characterized by a supply of money that might not be endless and is surely not infinite but which is showing no signs of waning. The result has been and likely will continue to be a world where capital thrives (pace Piketty) without any countervailing force. In this Golden Age of Capital, financial assets are in a prime position to thrive and have constant new sources of fuel. And there is nothing evident on the horizon—no backlash beyond rhetoric, no movement powerful enough to curtail or channel the flow of capital to labor—that will halt this movement.
Just as the Fed has slowly begun a shift from very easy money to just easy money, other spigots around the world have opened. At the end of last week, the European Central Bank, led by its president Mario Draghi, announced its own version of quantitative easing, focusing less on the Fed’s approach of asset purchases and more on incentives to get banks to lend more. The central bank of China then unveiled a program designed to boost lending to small businesses. While the exact dollar amount of these measures is unclear, they represent a new injection of liquidity into a global system that has hardly lacked for it.
Yes, the U.S. Federal Reserve has been an active supplier of easy money, with its various forms of quantitative easing since 2009 amounting to more than $4 trillion. But it is hardly the only source of liquidity. The Japanese government of Shinzo Abe has been actively pumping money into Japan’s economy in attempt to jump-start what has been a rather moribund system. Now Europe and China are adding to the mix. The mandate of Narendra Modi to reform the Indian economy could well mean that India will soon add to the global liquidity cornucopia.
And then there are pools of money sitting in cash or less than fully invested, from the $5 trillion on U.S. corporate balance sheets alone (nearly $2 trillion of which is held by nonfinancial companies, i.e., not banks), to the more than $6 trillion controlled by sovereign wealth funds such as those of Norway, Saudi Arabia, Singapore, and Abu Dhabi. On top of that are the vast cash reserves of global savers, who have been wary of financial markets and prefer instead to keep cash savings in banks and money market funds ($2.6 trillion in the U.S. alone).
Add it all up, and you have a lot of capital. And it is growing. because financial assets are thriving, because the global economy is expanding, and because banks are creating more capital in an attempt—whether guided or misguided—to bolster subpar growth. Whether or not you believe the explosion of liquidity to be a good thing or a profoundly not good thing, it is happening. As long as it continues to happen, chances are that financial assets will continue to thrive.
Of course, thriving is not synonymous with absent of volatility. Nor does it mean everything will go up, up, up. It does mean, however, that unless there is some global wave of terror attacks that halt global finance and commerce, and unless there are remaining ripple effects from the unfinished business of 2008–2009, there is little that will halt this relentless creation of capital or prevent it from pooling inequitably.
As the debates over income inequality and maldistribution of capital have amply shown, this Golden Age of Capital is hardly serving everyone’s needs. Capital begets capital, and in that insular sense, it is indifferent about who holds it, where it is held, and who benefits. But the sense that this cycle is primarily a product of post-2009 crisis management by the Fed—and that it will therefore draw to a close as the Fed recedes as a primary source—is belied by the facts.
What’s more, this Golden Age hasn’t even been that heady when it comes to returns, so the notion that we are in a bubble doesn’t hold up. Yes, U.S. stocks have soared since their nadir in March 2009, by as much as 170 percent. But since their peak in March 2000, they have gone largely nowhere. The Nasdaq is still about 15 percent below its high, and just about where it was in December 1999. The Dow and S&P 500 are a bit above, though, when you factor in inflation, barely. Home prices in the U.S. are up overall close to 40 percent since 2000 but are still well below their mid-2000s peak. Bond yields, meanwhile, are far lower. Europe and Japan show similar trends, though real estate has lagged far more in Southern Europe and has never recovered from its 1980s bubble in Japan.
So while financial assets (and home prices are part of the mix insofar as they are enabled by mortgages) have done decently, especially compared with labor and wages, they have hardly been consistently frothy nor have they generated spectacular returns. The greatest period of capital creation has been in the past five years, and even then, it has only led to a recouping of what was lost in 2008–2009.
That means that we have a world where there are massive amounts of capital that have not produced massive returns. You could attribute that to the bursting of two major bubbles—in stocks in the late 1990s and in housing in the mid-2000s. Yet even if that’s the case, we’re left with trillions upon trillions of dollars that are readily available and generating decent returns for investors (including pension funds and municipalities) without any strong evidence that those returns are so excessive as to be unsustainable. There is no parallel today with the 1999 run-up in stocks or the surge in home prices in 2004–2005. There is only cash and more cash, generating steady gains far in excess of wages, inflation, or the growth rate of so many national economies.
And there is no national government able to tax capital without it going elsewhere and no international authority (again, pace Piketty) able to mandate some type of equitable distribution. The focus on the U.S. Fed has obscured how global and ubiquitous the liquidity trend is. Absent a systemic shock—always possible, never predictable—this is the world we are in and will be in for the foreseeable future.