24 May 2014

Financial Markets and a New Definition of Taking a Bath

Global financial assets are well over $200 trillion, doubling every decade since 1990. In 1990, total debt and equity outstanding was $50-some trillion. By 2000 it was over $100 trillion. By 2010, it was over $200 trillion.

Between 1995 and 2007, only one quarter of this additional financing went to corporations and households. This money is not being used to start or expand businesses or even to finance purchases by households of everything from refrigerators to university educations.

Every decade we double our financial assets but of late those assets are merely going into speculative sorts of enterprises as opposed to financing actual economic activity.

The result is something akin to water in a bathtub, waves sloshing about in a closed system. Financing is used to finance financial activity and it rushes in and then out, creating odd turbulence without actually flowing into anything new.

The problem is not the volume of financing. That's actually a wonderful thing. The problem is that our limit no longer lies in the quantity of financing; that financing is limited by where it can go. We still haven't created enough viable opportunities for that financing, from public to private sector ventures. Until we do, we'll keep trying to predict the movement of waves in a tub.

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