Goodbye | The economist
IT IS a tremendous privilege and responsibility to prescribe The economist and get a little piece of attention from the readers. All told, there are over a thousand posts on this blog (the site’s history spans 98 pages) and 546 printed columns (the last one coming out at the end of the week). The first message, in February 2009, was written in the depths of the crisis and “searched for signs of hope, although without any confidence it can call just the bottom”. In fact, the market bottom did not occur until a few weeks later. There have been some bumps along the way, but that bull run still goes on. The irony would be that just as the beginning of this blog heralded the uptick, the latest post could spell the demise of the great bull market.
This blogger has been a bit gloomy during his tenure, too gloomy as it turns out. So in addition to three signs of danger, I wanted to close with three signs of optimism. First the concerns.
We’ve had the party, but not the hangover. One of the reasons I was concerned about quantitative easing (QE) was that it was a continuation of the policies that had been followed since 1987; whenever markets faltered, central banks changed monetary policy to help them. This became known as the “Greenspan pit”. In the long run, this approach helped fuel speculative bubbles; traders tend to take more risk because they can rely on the authorities to bail them out. This, in turn, makes successive crises worse and worse. That’s why we ended up with QE, and such a long period of low and negative interest rates. And we still have very high debt-to-GDP ratios, along with developed economies that are not growing as fast as they were before the crisis. We warded off the hangover by drinking more. Central banks, led by the Fed, are trying to dry us out very slowly. But a lot can go wrong if they try.
Politics is more important than investors think. The best rule of thumb for investors over the past 30 years has been to ignore geopolitical developments; two Gulf wars, 9/11, civil wars in the Middle East and presidential changes from Republican to Democrat (and vice versa) have had little impact. But the fact that financial markets have outperformed the economy has left many voters dissatisfied. The result is the rise of populism. Admittedly, populism is too easily used as a collective term for “policies we don’t like”. However, there is something very disturbing about recent developments; they defy rational analysis. In America, working-class voters who supported Donald Trump have seen the government target tax cuts not at them, but at the wealthy; this fiscal stimulus came into a boom for nearly nine years. Many of those who supported the tax cuts opposed Barack Obama’s 2009 stimulus measures when the economy was in trouble. US trade policy is driven by the bizarre mercantilist idea that imports are a burden and that a deficit means “cheating” other countries; these views were refuted in 1776 by Adam Smith. In Britain, the two main parties are led by ideologues from the right and left who seem to relegate the nation’s economic health to second place. In a world that depends on cooperation, there is too much nationalism. This will not end happily.
We have been better at creating claims to wealth than wealth itself. The financial industry is incredibly resourceful. But it always overdoes it. The market swing in February was tied to bets on the continuation of low volatility. These types of products do not play a useful economic role; they are the financial equivalent of people betting on the score at halftime in the Super Bowl or the name of the next Royal baby. Let these things run long enough and they get too big, just like the structured products linked to subprime mortgages that caused the latest collapse. A related concern is that we have promised generous pensions to people in their old age (particularly public sector employees) but have not set aside enough money to pay them. This claim to wealth is yet to come, but when it does, the only options are higher taxes or broken promises.
But there are hopeful signs.
Technology reduces financing costs. Volatility-based exchange traded funds are a stupid idea for most people. But a broad ETF that lets people own the S&P 500 for a fraction of a percentage point is a boon (ignore the “passive funds are socialism” notion). It’s the kind of low-cost innovation that has brought technology to other fields. Similar things have happened in terms of payments and money transfers. Technology is also enabling more people around the world to access simple financial products through their mobile phones.
And technology could improve other parts of our lives. One thing the internet does well is connect people and give them access to a huge wealth of information and ideas. We focus on the ugly stuff: the internet trolls and the conspiracy theorists. But good ideas can also spread much faster. Chinese society before 1400 was an immensely fertile source of ideas; now that it is connected to the world again, it can be like that again. Self-driving cars can reduce the number of accidents and the need for large parking garages; gene editing can enable us to tackle nasty diseases; renewable energy can help us tackle climate change and so on.
Emerging markets are actually on the rise. As writers like Steven Radelet, Stephen Pinker and the late Hans Roslin have explained, there is plenty of good news in the world. The proportional rate of extreme poverty has been halved, people are living longer, have more access to basic services such as electricity and girls are attending school longer. Economic power may be shifting to Asia, that continent is home to the majority of the world’s population. From the average person’s point of view, things are getting better and better. That is ultimately more important than what happens to the markets.
And that’s it. The Von Trapp family (pictured above) were known to sing their goodbyes, but they escaped to another country. And this blogger will be popping up elsewhere as well, writing a new column on work and management in a few weeks called Bartleby (with accompanying blog). I hope some of you will migrate with me.