The writer is a former banker and author of “A Banquet of Consequences Reloaded” and “Fortune’s Fool”As the hip hop group Wu-Tang Clan rapped in their 1994 hit “C.R.E.A.M”: “cash rules everything around me”. That is, actual funds are needed for consumption or investment. The world’s “savings glut” is ephemeral. The amounts available are lower than assumed.
Savings are represented by assets — cash, bank deposits, debt securities, shares, real estate, collectibles — or their derivatives. The amount available for exchange into real goods and services depends on the realisable value of the asset, and the cash income from it.
Over time, interest coupons and dividend yields have decreased. The shift away from income reflects low rates, the concessional taxation of capital gains, the ability to defer tax, businesses that do not produce distributable earnings or cash flow, and low earnings on cash discouraging monetary distribution unless needed. This means much of the world’s savings — estimated at more than $500tn — are unrealised “paper” capital gains.