Saturday, April 07, 2007

Capital - and the imminent oversupply of it

I often wonder what will happen to the ever-growing stock of capital in the global economy. I mean, it is one thing that hardly decreases if at all and through professional management is generating more returns than ever before. Especially in a globally integrated economic order, opportunities to generate decent risk adjusted returns on capital are likely to find a lot of takers. With the integration going up with time, often aided further by technology and the zeal of professional fund managers to locate new opportunities.
I am not exactly worried but am just curious about what may happen to this huge stock of globally mobile capital. Will return on capital inevitably come down as a secular trend. Companies will increasingly run out options to invest and will hand over the extra cash to shareholders who would not need much of it for consumption and would invest it elsewhere - only to be told that there are not many opportunities there either. Inevitably they will settle for lower returns and the cycle would continue - till such time that the capital is almost freely available and no-one really has an incentive to postpone consumption. People will save only for rainy days or contingency. Capital will be held by mighty corporations which will jump at any opportunity to generate that 1% return. There would of course be not much of investment. Is this likely?
Or is it that the cost of capital - though it would come down - would never go below a certain level. Savings rate globally would drop but people will still save in large absolute quantities since the incomes will be much larger. The investments would then only be in technological upgradation and productivity improvement since in this world there would be equilibrium in terms of what it produces and what is demanded. Can it ever happen? Can the thirst for consumption be fully satisfied? Will organizations try to generate consumption demand to sustain their growth? Or will consumption shift to higher margin higher price activities such as leisure, spiritual upliftment etc?
My take is that the manufacturing sector would reach a steady state - with little investments required save new technology. Services will stabilize at a higher level. And then there would be a race to innovate businesses and services which satisfy needs of the next order. Consumers will have moved to much higher levels of maslow's heirarachy.
Even if that be the case, it would be driven by services which will be very capital light. So where will the capital go?
Unless major space expeditions are taken up, there does not seem to be much of use for it, does there? In fact, an excess of capital itself could bring in the age of space expedition as a business!!!

The much hyped asset bubble and flawed monetary policy of RBI

Indian economy thesedays is characterized by a quiet revolution - growing investments, growing confidence and growing aspirations. There is - almost as a byproduct - much talk of an asset bubble. A friend of mine summarized the underlying feeling behind this bubble to me the other day - "I feel uncomfortable with the slope of growth curve". This to me seems the primary driver of the perception of the so called asset bubble in India today.
Nobody is quite keen on examining the fundamentals. And of course with selective perceptions there are always events to justify one's stance. My personal observation is that the talk of bubble is stemming from the inability of most Indians to deal with their country's potential. It is the inherent discomfort with non-linear growth however robust it is. One such Indian also happens to be the governor of the reserve bank and has used his power to revise downwards what has been a fairly robust growth story.
There has always been much of comparison between india and china. A key difference often cited is the difference in the governance model. In addition to that, i believe there is a deep rooted difference of attitude. Chinese attained 10% growth sustainably over the decade partly on account of the reforms, partly FDI and partly the sheer confidence to bulldoze growth through resistance to it. Indian policy makers on the other hand get fidgety if growth numbers start to look above their mental blocks. 9% is enough, now let us focus on inflation instead - is the wisdom. Very counterintuitive to me. India has tried the license permit raj for long enough to know that growth is the starting point of any hope for elevating millions of its populace out of poverty. The desperation to control inflation looks more politically driven than by sound and ambitious policy making. India was just poised to break free of the lower orbit growth rate of 6-7% and move to a much useful 10%. But 1% too much inflation was enough to rattle our policymakers into slamming the brakes on a decently accelerating car. Cowardly by a long shot.
The issue is that the growth impact takes much too long to show its benefits while inflation bites much earlier. And makes politicians lose elections as well. I would not be surprised if the real wages have indeed remained constant and have in fact gone up during last three years. If that be the case, who is really worried about inflation - especially if it is tiny 1% more than the "comfort zone" - much arbitrarily defined. Agreed, too much of inflation redistributes wealth - typically against the poor. But reducing growth is making everyone pay as much or more price. It is the age old mantra of keeping everyone poor in a bid to increasing equality. I do not care much about equality. I worry more about the absolute standard of living of the poor. If that is above say Rs. 5,000 per month per person, I am ok with there being a hoard of rich who are getting richer.
Indians can be blamed for complacence - especially now when they should have demanded much stronger reasons (than inflation control by 1%) for putting unnecessary and counterproductive brakes to the economic growth.
8% is good enough for us. 9% is a bonus. 10% is probably too much. Here is where Chinese differ. I presume their policy makers would be saying, anything below 10% is underperformance. It really boils down to the attitude. If you do not feel like growing at 10%, you probably never will. The issue is that the ultimate price for your suboptimal attitude is paid by the millions of unemployed or underemployed who could not find enough work in your low inflation economy!
We have cheaper food, but no money to buy it - problem solved.