Capital investment since 2001 has dropped more than it has at any time since the Great Depression. As a background to this, central banks around the world (particularly our own Federal Reserve) have continued with stimulatory monetary policy, ensuring that the world is flush with cash. Private banks and credit card companies have done their bit as well; consumer debt in the US is about $2.5 trillion.
When all this money sloshing about drives up the price of equities or homes, people feel flush. When the money goes after commodities like rice or oil, people feel pinched. Money has continued to go after what already exists, driving up prices. Until we get better at exploiting all this money to create what doesn’t already exist (using money for public, private, and charitable entrepreneurship), stimulatory monetary policy will just result in various kinds of inflation.
A glut of money can be a good thing if it goes into start ups as varied as a new retail outlet or alternative fuel or new school or welfare program. These ventures are destined to fail. At least some of then. A glut of money can be used to cover those losses until new ventures emerge that more than compensate for the failures. This is the strategy for turning credit into jobs and progress rather than goods and debt.
By 1900, an abundance of capital had laid the foundation for a new economy: an information economy led by advances in knowledge and knowledge workers. One key to keeping this economy in motion was the periodic Keynesian stimulus, injecting credit into the system, and unprecedented funding for education and information technology.
By 2000, an abundance of knowledge and knowledge workers had laid the foundation for an entrepreneurial economy. Key to this will be unprecedented funding in new ventures, in IPOs and government projects (like the interstate highway program or human genome project). We’ll need massive amounts of capital to realize this potential. The good news is that we have the capital already and once it is diverted into start ups that introduce something new rather than existing equities, homes, and goods in a way that feeds inflation, we’ll be back on track for genuine progress.