4. Age of Capital Abundance
The global increase of wealth is creating a capital abundance that together with money dematerialisation, online transactions, market accessibility and funding platforms facilitate access to capital. Crowdfunding, see first graphic, is an example of the power of access to distributed capital. Notice that although this relatively new capital access is growing rapidly and it is indicative of a new wave of funding, its global value is very very small when compared to the overall money circulation. It is, nevertheless important in showing the impact of Digital Transformation in Finance. Long gone are the times of the industrial revolution were capital was concentrated in a few hands that basically took decision of its investment.
The development of an effective banking system has made money within the reach of many more people (of course the system was and is far from perfect, with the funny but sadly true statement that banks tend to give money to those that already have money!).
In these latest years we have seen that the cost of borrowing money has decreased to the point that in some cases (in banking transaction) it has actually become negative (see graphic).
The abundance of money is both a cause and a consequence of this situation. As more money becomes available the interest rate goes down, and conversely as the interest goes down more money becomes available.
The availability of “cheap” money clearly has an impact on borrowers and lenders;
- borrowers find quick and cheap availability of money to sustain investment, hence they tend to accelerate investment and this in turns stimulates innovation. Small amount of money can be found via crowdfunding (previously mentioned) or through specific Government sustained measures, whilst large investment takes the form of more structural agreements with long terms investors (banks and pension funds, as an example);
- lenders look for investment that can generate returns in the medium long term, since short term investment will lead to a “negative” return and tend to become part of the investment (i.e. buying shares rather than just lending money).
This money availability, coupled with long term returns is particularly conducive to support infrastructure building (since these have a longer lifespan and can ensure returns over several years, even decades.
We are seeing this phenomena in the growing interest in funding radio stations, a business that is seen by investors as long term and likely to generate a steady return, The result is that companies in that business find themselves with an easy access to funds that can sustain a redesign of the tower market, placing more intelligence in the towers and thus accelerating the shift towards edge computing, smart antennas and networks at the edges.
The overall situation has clearly changed as the pandemic keeps raging (watch the clip with the interview to Daniel Lacalle, discussing possible recovery. Notice that the interview took place before the second wave of the pandemic). The impact is different across regions both because of the severity of the pandemic (and of the countermeasures) and because of the fundamental clocks of the economy in a specific region. In the US, as an example, technology is an important clock, whilst in Europe the banking system plays a more significant role, in Asia the regional demand can serve as a throttle regulating consumption and hence recovery.
In Western Europe the banking system has stepped in to provide low cost money to counteract the loss of earning of a big chunk of the working force (this has been done in the US as well but to a much lower extent). The problem with this is a decrease of money availability in the long term (you cannot keep printing fresh money to sustain spending) and the fact that a good portion of that money did not go to sustain production but to sustain access to basic resources (food, rent,…). In other terms. from a productivity standpoint, this is wasted money (that, of course, does not mean that it is not needed!).
The long term impact of the pandemic are still under discussion. The general feeling is that a full economic recover will not be seen till 2024, although a few sectors may see a rebound starting 2021 (actually companies developing vaccine, if successful, are going to see sharp turn over increase early 2021). The need for returning the money that has been printed to sustain the economy distress will decrease the amount available for quite a few years, particularly in Europe. However, on the long term, this Megatrend of capital abundance should prove to be correct.
For sure the pandemic has accelerated (is accelerating) the Digital transformation and this, in turns, is furthering efficiency in capital movement and management, freeing resources and making it easier to access resources, including capital.