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Summary:  We may debate the economics of the world over the last decade, which have been largely driven by growth in emerging markets (where 85% of humanity live), but the fact is that many corporations now have huge cash mountains and no idea what to do with it.

Trillions of dollars of cash is sitting in bank accounts of large companies doing nothing at all - more than $2.3 trillion in large Japanese companies alone. $12 trillion was made available a few years ago by Central Banks to the largest banks in their own nations. $3.7 trillion was by the US Federal Reserve alone. In addition $10 trillion of government bonds were issued with negative rates of interest (see below). Yet despite all this, many banks have refused to take cash offered by governments to help stimulate their economies, even when they are effectively fined by Central Banks for doing so...

Here is a strange paradox: the world is flush with very low cost cash, yet borrowing money from banks has become far more difficult – almost impossible in many cases where loans would have been agreed in the past.

Why is this? What is going to happen next?

My question today (October 2018) has been triggered by a very significant conversation with a senior banker, about difficulties in securing development funding for a real estate pipeline of over $500m in several nations, linked indirectly to one of my companies, Global Innovators Ltd

Here is the shocking and bizarre truth about bank lending and money supply

$12 trillion was made available a few years ago by Central Banks to the largest banks in their own nations.  $3.7 trillion was by the US Federal Reserve alone.

A lot of it was supplied to commercial banks at very, very low rates of interest, but banks have been very reluctant to take it and to lend it out.

In addition $10 trillion of government bonds were issued with negative rates of interest (see below).

This was all done by a mechanism called Quantitative Easing – which is just a way to print money digitally, pumping cash into the economy in a controlled way.

In a digital age, no government needs to print actual money.  All it takes to make extra cash is a few mouse clicks on an Excell Spreadsheet.

At least that was the original idea.

More cash in the economy kept prices higher than otherwise, with the aim of preventing deflation in the midst of economic crisis. 

There is little doubt that it helped cushion many developed nations from a far worse situation, and protected jobs.

Many economists warned of risks that never materialised

Of course, many economists argued that pumping cash in like this was irresponsible and foolish, and would only put off the crisis into the future, as nations became addicted to cheap money.  

Especially when combined with the lowest interest rates seen for thousands of years.

But many their predictions were totally wrong – for example that such cheap money would lead rapidly to hyper-inflation, when the reality has been low inflation over the last decade and even threats from deflation in some nations.

Although I have been forecasting global trends for 30 years, for over 400 of the world's largest corporations, with a track record which you can check for yourself, I am not an economist.  I have to say that I have been surprised that inflation rates in many developed nations have not been higher by now, almost 10 years on, with all those cash injections.

It is clear that more cash chasing the same assets meant that property prices and share prices rose, together with commodity prices, but inflation rates have remained very low in historic terms. 

It is also true that a full decade after the crisis, many economies are still struggling in developed nations, interest rates remain at very low levels, and almost all that extra cash is largely still in circulation.

The world economy as a whole has continued to grow, but by only around 2% a year.

The trouble is that is really impossible to be certain what would have happened without all that economic stimulus. 

To be certain, we would have to rerun the identical global situation as it was back in 2008, respond in a very different way, and track the results over a decade or more.

Trillions of dollars sitting idle in banks of multinationals - why?

We may debate the economics of the world over the last decade, but the fact is that many corporations now have huge cash mountains and no idea what to do with it.

Trillions of dollars of cash was sitting in bank accounts of large companies doing nothing at all at the end of 2017 – more than $2.3 trillion in large Japanese companies alone.

Through the years of so-called economic downturn, many large corporations continued to make good profits, but ran out of good ideas about how to spend that money without taking added risks, which scared them because of recent events.

As a result, they piled up cash reserves, or even gave spare capital back to shareholders. 

This has been a strange situation indeed. 

Why giving a lot of cash back regularly to shareholders is a bizarre thing to do

The purpose of listing a company on the Stock Market is to raise capital to invest in marketing, research, product development, new factories and so on. 

So when a business keeps on giving money back to shareholders their leaders are admitting that their boards have run out of strategy; run out of good ideas to turn that cash into growth. 

What they are really implying is that they think that the cash would be better invested by individual shareholders in other companies, which is a terrible admission of failure.

But at the same time many industries and smaller companies are still very short of cash for things like financing property deals, or property developments, as I say.

Still short of cash for things like Real Estate Development

So then, the truth is that in many areas, the world is still very short of corporate finance.  How can that be?

Take real estate:  property prices are higher than they were in 2009 in many nations, yet a huge number of new developments in some cities have been completely frozen for many years because of lack of development finance.

A land owner can have planning consent, a developer and project management team lined up, (and even a signed contract to buy the entire property for a fixed price the moment the building is complete), yet the project cannot raise a loan to cover the costs of the development itself.

I have seen this story repeated over and again – whether in parts of the EU or the Middle East or in other parts of the world.

Yet many banks also have more money than they know what to do with

Yet at the same time, the banks are awash with cash that they don’t know what to do with.

That is why so many banks have parked literally hundreds of billions of dollars of cash from Central Banks, back in the same place. Yes, back with the Central Banks. 

This is not what Central Banks intended. 

Their original aim was to lend to banks at very low interest rates, in the hope that banks would in turn lend to businesses, real estate developers and other entities, which would create jobs and speed economic recovery and GDP growth.

So you can imagine their dismay and disappointment when in some cases most of that very low cost cash came right back, returned by nervous banks who did not have the incentives to use it.

Central Banks start charging banks for cash that the banks refuse to use

So some Central Banks actually started fining banks – charging them for every hour that the banks deposited money with the Central Bank.

Usually Central Banks go to the markets, including large commercial banks, to raise money, and service their government’s debts.  They usually pay high rates of interest, to raise enough of their own finance, so that governments can go on spending more than they raise each year in taxes.

But now, some Central Banks are actually charging negative interest to commercial banks. 

This is a very strange concept and almost unknown in the whole of human history.

Negative interest rates are very strange and hard to understand

Imagine a shop selling the new iPhoneX with a negative price tag. 

That means they actually pay you in cash to take each new phone out of the shop. 

Of course you would be looking for the catch.  Maybe there are hidden charges.  Maybe it costs a fortune to make a call or download a website. 

And then you find there is no hidden catch at all.  They are literally giving the phones away, more than that even.

Or imagine if you were to buy a house with a mortgage / loan, and instead of being charged – say – 4% a year interest, the bank tells you the good news that instead, the bank will be paying YOU 2% interest every year, as a thank you for borrowing their money.

Such things sound completely bizarre, far too good to be true.  But that is indeed the truth about the current banking situation.

Banks are literally being paid by Central Banks for taking their money, and holding it in their own bank accounts.

Those same banks are literally being charged for handing that “free” money back.

Why banks are destroying some of their own profits every year

So a fast way for many banks to destroy their own profits each year, is to give back to the bank the money they supplied, even though they have to pay money to the Central Bank every day for doing this.

So why are they doing such a thing?  It sounds complete nonsense from any business point of view.

The reason is that so many large banks are paralysed by fear and by regulations.

Many of these banks were rescued with huge government bailouts, to save them from total collapse in the 2008-2011 banking meltdown and economic crisis.

And banking regulations also changed shortly after, to try to make sure that such bail outs were never, ever needed again. 

A lot of voters were very angry with banks - and still are

CEOs of banks were widely criticized for their poor decisions, bad risk management and for the high salaries they had been taking.

In the media there was a lot of anger against banks, month after month, so that many people working for banks became embarrassed to admit the fact to their own wider friendship groups.

That is why governments passed hundreds of new regulations – large and small.

As a result, these banks have less capital available for investing in their own right, rather than directly on behalf of clients.  They also have to take less risks with speculative investments.

Central Banks have forced them to be much more cautious in every way, setting aside huge amounts just in case there is another economic storm, or in case their leaders make mistakes. 

These are known as "Capital Adequacy Rules".

Governments do not want to risk more bail-outs from the State.

Many banks have had their “arms” and “legs” cut off

As a senior banker explained to me recently: the banking crisis was so huge, and new regulation was so fierce, that it was almost as if many banks had their arms and legs cut off. 

Yes they were still alive, breathing and outwardly surviving, but without the ability to grow new business, to assess new risks, to expand into new territories or markets – or even to grow back into areas of business they killed off during the crisis.

So even if a board of a bank has the courage to try to grow new business, their capacity may be very limited compared to the past.

So what does this all mean?

1) Banks are far more resilient to economic crisis than in the past

There are many new risks on the horizon which are hard to measure or fully understand – such as the fallout from Brexit, or over-dependence on borrowing in China.

2) Banks will not be able to return to scale of previous lending or investment patterns without regulations being relaxed

Central Banks have scored an “own goal” with huge regulations - passed with good intentions, but with unintended results.

By making it harder for banks to make money for shareholders, they have encouraged people and pension funds to sell their banking shares as risky investments compared to other sectors.

You can’t force people to invest in banks.  And you can’t force banks to lend money.

And you can’t force talented people to work for banks.  If you restrict the size of financial rewards that banks are allowed to pay, the most gifted leaders just move off to earn more elsewhere. 

If you place rules preventing any large corporation from paying as much as is needed to attract talent, those same people end up starting and owning their own businesses.

We have seen the same problem with taxes.  Governments can increase taxes to whatever level they like.

But if too much tax is demanded from citizens or companies, they either stop bothering to work so hard making money in that country, or they spend greater efforts doing things which are less heavily taxed.

3) Other ways will be found to finance business

In China we have seen huge growth of so-called shadow banking – a wide range of organisations that are stepping into roles that banks have traditionally held.

And in the same way in other nations we are seeing new kinds of investment funds, new kinds of sources of short term finance and other vehicles that are stepping into the huge gap caused by the shrinking bank sector.

We have also seen growth in social funding or crowd-funding platforms.

4) Governments are likely to ease some of the regulations on banks (eventually)

Vibrant, well-funded, dynamic and entrepreneurial banks are vital to the growth of every nation’s economy, and regulators will be under pressure to wind down some of the most onerous regulations.

But this cycle will take quite a while:  crisis, reaction, regulation, calm, deregulation, normality, risky behavior and new crisis.

And in it all, expect ongoing debate about how to serve society in the best way:  protect society from every banking risk and stunt growth; or accept greater risk and more normal economic growth.

These things will be debated by economics experts and their students for many generations.

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