8 August 2020, by Piet Nieman
Theoretically it indicates that there is an over-supply of unproductive funds in the marketplace, which inversely means that there is a shortage of productive investment opportunities in the marketplace.
In reality this theory can be attacked from both ends. A portion of the oversupply of funds belongs to a portion of the investment market that has saved and is still saving for the future when they will be unable to be productive, indicating an important time dimension. This oversupply status will be reversed to a demand status as soon as the contributor of the current oversupply reach his / her unproductive status.A framework (Basel Codes and Money Laundering Activities) which limits the ability of the banking industry to address potential productive investment opportunities have nullified the historical role of banks as the platform for the fusion of unproductive capital with productive investment opportunities.
Negative Interest rates force investors to take higher risks and venture into other forms of investment and it withholds unproductive capital from entrepreneurial skills, which in turn undermines the growth potential of any market driven economy.
Such a scenario contributes to the worrying development of increased global inequality, since extreme sums of capital are now in the hands of a small percentage of individuals. Because they are the holders of unproductive capital and they do not need banks to distribute their capital, they secure entrepreneurial skills and returns and therefore become even wealthier.
How do we make sure that people that have saved and are saving their funds get their fair share of the investment returns? We desperately need the institutions that were created to manage these funds to do their job. Banks needs to be enabled to provide secured lending to bankable opportunities. Investment managers need to be enabled to get involved in the real economy and not only relying on market trends linked to share prices on a stock exchange, which is highly influenced by sentiment and not necessarily real economic activities.
If we do not address this, we might be sitting on a time bomb which no one will survive. Not the holders of unproductive capital nor the owners of viable opportunities.
Piet Nieman is a banker by profession and a member of the NK International team. He currently resides in the Netherlands.