So, how do we fund British industry then?

The Jobs Foundation has a report out mulling over how we fund British industry. The analysis is, in one form, typical of the reports that have been issued over the decades. We have vague memories of the Wilson Report which said some of the same things. There’s a gap in getting the savings of the people into the equity of small and growing businesses, a gap that we’d really like to try and fill. Stock markets are more places to save, rather than to raise investment, these days. Or, even, to cash out from successful investments. This then means that the equity investing in the small and growing businesses is done in private rather than publicly where all may contribute.

This then leads to “too many” saving “too much” in simple cash and this is something we’d like to change.

The analysis is fine - fair and accurate. We would add one little point which is that cash savings fund the loan books of the banks - yes, we’re aware of modern monetary theory, banks just create credit when they lend and so on. But it is still true that deposits fund loan books even if the loanable funds theory isn’t quite so. The funding of a loan comes after the loan is made that is - deposits still fund loans. So in the grander sense cash savings are not a waste to the economy, they are deployed, through the banks. But as the report also makes clear - and is correct upon - the rates on cash savings are distinctly worse than they’d likely be in equity investments. Cash saving, above a certain prudential level, is money wasting for the investor.

Our own starting point here is that raising equity just costs too much. That there should be at least some prudential regulation against the usual spivs is logical. But the costs of equity raising quickly climb into the hundreds of thousands even for a modest capital raise. Meaning that there’s no point in trying to raise sums less than some millions - the very issue we’ve got being that we desire to solve the equity raising problem for those trying to fund things smaller than the main capital markets will look at. As this report says things like crowdfunding aid in filling this gap.

There have been varied attempts in this space, trying to fit in underneath the AIM market but they’ve usually suffered from both a lack of liquidity and also a creeping of rising costs which obviate the very point.

The report should be read because the analysis is spot on. This is a problem we do want to solve.

Tim Worstall