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Illustration by Sjoerd van Leeuwen
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Canada is planting 30 million trees this season. The goal is to build a powerful carbon sink.
Carbon is not the only thing modernity produces in excess. There is an excess of capital. Its absorption has become a major challenge and threatens financial stability. There are over $ 13 trillion of negative yielding bonds in the world. Despite claims of exorbitant privileges, the US government is paying around 1.5% interest to borrow for a decade, historically low and below the Federal Reserve’s inflation target. Japan and Germany, the second largest market economies, can borrow at considerably lower rates. Germany charges investors nearly 20 basis points, or 0.2%, per year for the privilege of lending to it. It is no coincidence that cryptocurrencies were born at a time when savings were plentiful.
Capital is subject to the same law of supply and demand as other sectors of society. Capital is cheap because it is plentiful. Big companies have more money than they know what to do with, so they return it to shareholders in the form of share buybacks and dividends. The drive to improve returns fuels mergers and acquisitions.
Equity valuations are strained. House prices in many countries are rising rapidly. Credit spreads, which measure the amount paid for a unit of risk, have been historically tight.
Excess capacity is another expression of excess savings, that is, overinvestment. The US economy is about the size it was on the eve of the pandemic. Yet about 7.5 million fewer people are working. Despite a booming economy, the United States uses just over three-quarters of its industrial capacity. Even at the end of 2019, it was just over 76%.
Capital is plentiful because market economies are huge creators of wealth. By applying science to production and finance, capitalism has achieved incredible success. And it turns out that to be successful, capitalism doesn’t need to allow slavery, employ children, or deny women the right to vote. It can provide unemployment insurance, social security, and head start services without being dictated or sacrificing personal freedom. Its plasticity disconcerts critics. It can be reformed.
However, capitalism’s greatest weakness comes from its most powerful force, the one that cannot be reformed. It produces wealth at levels hitherto inconceivable. We are living in a time King Midas would recognize. We are suffocating with our wealth. Even if the disease is not recognized (the idea of added value is still controversial in some circles), the symptoms are undeniable. The return on capital is low, whether it’s interest rates or profit margins. Redundant investment (excess capacity) is another symptom. Efforts to rationalize industries are part of the wave of mergers and acquisitions. Firms have become net providers of capital, not net borrowers. Speculation is vast and the gamification of investing began long before Robinhood and the legalization of sports betting in the United States.
If we do not address the underlying distribution problems and disparities in income, wealth and power, then we must divert surplus savings from those expressions that help fuel economic and political instability. What is needed is a vehicle that saves what trees do with carbon. Here is ! Enter crypto.
Some diehards continue to insist that crypto is money. President of El Salvador Nayib Bukele recently pushed through plans to recognize Bitcoin as legal tender. More than two-thirds of the country’s population do not have a bank account or credit card. Bitcoin rose about 270% from mid-December to mid-April and has since halved. The volatility makes it a dangerous experience. Let’s see if this lasts longer than Tesla’s offer to sell cars for Bitcoin.
Perhaps the function of crypto is to redirect savings resulting from rising stocks to even more stretched values, or falling nominal and real rates, or the creative destruction of goodwill in acquisitions. . Some have said that blockchain is a solution in search of a problem. The problem that crypto can attempt to solve is the need for a new asset to absorb wealth in a non-threatening and ideologically secure manner.
Crypto was born during a period of great concentrations of wealth, and it cannot help but reflect that origin. Despite the talk about decentralized finance, the ownership of crypto, not to mention trading, seems very concentrated. A recent study found that over 72% of Bitcoins (now around $ 33,000 each) are owned by those who own 100 Bitcoins or more, as well as miners and brokers. Almost 32% belong to those who own 1,000 Bitcoins or more. A recent survey by Gemini, a crypto exchange, found that the average crypto trader was a 38-year-old man with a household earning around $ 111,000, which is around 60% more than the median family income in the United States.
The volatility and environmental issues of some models (proof of work) suggest that even as a centralized store of value, the role of cryptos as a savings trap may be limited. It will not solve the challenge of capitalism’s unparalleled capacity to generate wealth. The current sharp decline in the face of strong price pressures weakens the arguments for inflation hedging and store of value. Ultimately, crypto is another expression of excess capital.
Marc Chandler is Chief Market Strategist, Bannockburn Global Forex.
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