WSJ.com CFO Journal
This article originally appeared in WSJ.com's CFO Journal (may require subscription).
It’s time to forget much of what you know about finance, starting with the basic idea that capital is scarce.
On the contrary, capital is now superabundant. The world is awash in money, yet many executive teams are still using an outdated rulebook.
Global growth in output of goods and services has been slowing while the volume of financial assets has soared. By the end of this decade, total global financial capital will reach some $900 trillion in 2010 prices and exchange rates, according to analysis by Bain & Company’s Macro Trends Group. That is a 450% increase since 1990 and 10 times the projected value of total world economic output in 2020.
The consequences for companies, investors and policymakers are profound. In a world where the real economy is dwarfed by the accumulated financial capital, real interest rates remain low and capital allocation grows inefficient. Bubbles grow as investors chase yield.
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Andrew Schwedel is a partner in Bain & Company’s Financial Services practice in the Americas and leads the Bain Macro Trends Group. Karen Harris is director of the Bain Macro Trends Group.