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!!!

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