Capital is no longer scarce. This is an assertion I made a while back in my post “Land, Capital, Attention: This Time it Is the Same.” Today I want to elaborate on that a bit.
Estimates put global investible capital at north of $100 trillion. Global GDP by comparison is around $80 trillion and as an approximation global gross output is likely around $160 trillion. It is important to keep in mind that the capital needed to just operate a steady state economy is meaningfully less than gross output, because it is really just the working capital needs of firms and households.
Our portfolio company C2FO estimates that global working capital for firms is about $40 trillion. My first order estimate of household working capital is GDP / 12 (meaning about 1 month), which puts it at $6 trillion.
This means that global investable capital exceeds by 2x the capital required to operate the economy. In fact working capital needs have been declining substantially due to just in time manufacturing, faster electronic payments and better working capital management (eg. through C2FO). If you can reduce the working capital needs of firms by 25% you would move investable capital to close to 3x of required operating capital for the economy.
That means we have massive amounts of capital available to invest in new endeavors. It explains why interest rates are low and there is fairly little that central banks can do about it unless they figure out a way to dramatically reduce investable capital – they can certainly shorten their balance sheets but even that impact is likely to relatively small in the overall scheme of things (eg US Fed about $3 Trillion).
We can see this vast availability of capital also in the ability of private companies to raise extraordinary sums in private markets. Not just companies such as Uber that have rapidly growing businesses but also highly speculative companies such as Magic Leap that have not even launched yet. We even have the private capita to finance space exploration.
So all is good then? Well not really because the overall allocation of investible capital is still way off. In particular, too much capital is allocated to purely financial speculation such as high frequency trading and derivatives trades with a total notional amount in excess of $500 trillion for OTC alone.
Why does this matter? Because these types of financial trades are largely zero sum trades. They shuffle money around but they don’t expand the technological capability set of humanity. Only investments in basic and applied research and investments in the commercialization of new technologies do that.
In two follow up blog posts I will link this misallocation of capital to the more fundamental problem: we are misallocating our attention.
