Larry Summers Nails The Radical Economic Implications Of The Facebook-WhatsApp Mega-Deal

Larry Summers gave a speech today at the National Association For Business Economics (NABE) conference in Arlington Virginia.

In his speech he said some really sharp stuff about the significance of WhatsApp — the messaging company being purchased by Facebook for $US19 billion.

Here’s the exact language, via Bloomberg:

Ponder for example that the leading technological companies of this age, I think for example of Apple and Google, find themselves swimming in cash and facing the challenge of what to do with a very large cash hoard. Ponder the fact that WhatsApp has a greater market value than Sony with next to no capital investment required to achieve it. Ponder the fact that it used to require tens of millions of dollars to start a significant new venture. Significance new ventures today are seeded with hundreds of thousands of dollars in the information technology era. All of this means reduced demand for investment with consequences for the flow of – with consequences for equilibrium levels of interest rates.

In other words, if you hardly need any cash to start huge companies, then cash just piles up in investor bank accounts with nowhere to go. And if cash isn’t moving, because there’s no demand or use for that money, then interest rates will fall.

Summers notes that there are other factors putting downward pressure on real interest rates, including the aftermath of the deleveraging, the declining rate of US population growth, the unequal distribution of income, resulting in a lot of wealthy people who have a high propensity to save, and a global trend towards putting money into safe assets, especially dollar denominated ones.

Big picture, the trends we’re seeing in tech, with these companies becoming massive with relatively little need to burn cash is a major force towards ongoing low interest rates, as investors find fewer and fewer opportunities to deploy cash.

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