Capital Glut: The Reason for Financial Market Change

The trends in financial markets appear to have changed significantly over the past several years.

- HIROSHI WATANABE

The biggest change has been that external shocks are causing smaller price drops.

Since 1987, the U.S. stock market has crashed nearly once every 10 years. The Black Monday collapse, the Asian financial crisis, and the Lehman shock all fit more or less into that 10-year cycle. However, this trend seems to have subsided considerably since 2017. One theory is that the 2007-08 shock was so great that the markets have not fully recovered even 10 years later, leaving no room for them to slump any further. In reality, there have been structural changes beyond the shock.

Needless to say, as markets have grown in size, price drops have gotten larger in terms of absolute value. But, when looking at the percentage change, price drops have shrunk in size. Moreover, after a drop, prices now tend to recover relatively quickly to previous levels, so that slumps do not go on for months.

If this was the result of the financial system improving its resilience, that would be fine. But, in my view, there seems to be another factor at work.

I think the biggest reason why price drops have shrunk is a "glut of capital" that can be seen across the financial markets. The most significant source of the funds is increased savings. It is known that once income goes up, allowing individuals to save, growth in savings outpaces that of income. In the recent three decades or so, savings have risen sharply worldwide.

Let's take a look at the nominal value of the global gross domestic product, so that we can estimate the growth in income around the world.

The nominal GDP for the world rose nearly fivefold from $22 trillion in 1990 to $110 trillion in 2024. On the other hand, according to the United Nations, the global population only increased 60 percent over the same period, from 5.2 billion to 8.2 billion. When the GDP figures are divided by population, you find that GDP per capita nearly tripled, shooting from $4,200 to $13,300.