Investing is looking over the horizon and trying to see what might be next. The very best investors are about 60 per cent right. I wonder how policymakers will respond to the growing schism between the city and the countryside worldwide. While responses will vary, in the United States, the regulation of misinformation and some form of wealth redistribution seem likely.
The split evident in the US presidential electoral map is mimicked in many countries. The elite in New York and Beijing have more in common with each other than their countrymen in the countryside. This schism is fed by powerful emotion. In a recent poll, 77 per cent of Donald Trump voters believe he won the election.
Compared to these internal rifts, international conflict almost seems like a distraction. Take the US-China trade dispute. The US exports about US$100 billion worth of goods to China. Given that the US is a US$20 trillion economy, this amounts to just 0.5 per cent of its gross domestic product – even if it manages to double its exports to China, this would have virtually no impact on US growth.
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The schism within countries coincides with a miraculous period of global economic disruption. Ideas considered the stuff of science fiction when I was growing up, like being able to see people when you talk to them on the phone, are now banal. Fleets of driverless trucks or goods-delivering drones are within reach. These inventions both create and destroy jobs, fomenting at once wealth and insecurity.
Not surprisingly, those getting rich are more sanguine about these shifts than those whose livelihoods are being threatened. Changes in thinking in turn disrupt social institutions. Nothing new here. Nearly 400 years ago, the Catholic Church censured Galileo for suggesting the Earth revolved around the sun.
Amid change, how much of the old do we keep? The Catholic Church is still here and a source of inspiration for more than a billion people.
If you work in sectors that are at the forefront of today’s shift, such as in technology, medicine, entertainment or finance, you get paid to embrace change and adopt a set of social norms. Work teams are endlessly combined and recombined, like Lego bricks.
Sharp-edged views on religion, race, politics or sexual preference hamper productivity and are stamped out. Politicians can then use religion, racism and jingoism to stir up support among those left out. This dynamic is exacerbated by an explosion of information services customised to confirm and encourage an addiction to entrenched perspectives.
In response, a China-type regime needs to provide incentives for enough capitalism to create wealth while redistributing it and prohibiting the free flow of information. It seems like a delicate balancing act. Too much pressure and inventiveness slows, too little and the system quivers. Scientists asking for Google present a real conundrum.
A US-type regime needs to bring the Balkanised information process to heel and redistribute wealth while protecting the rule of law, also a delicate balance. Of the two policies, the reregulating of information is easier to accomplish. A Federal Trade Commission antitrust lawsuit against Facebook is the latest step. Redistributing wealth, on the other hand, is more complicated to engineer.
The universal basic income suggested during the presidential campaign would cost more than the national spending on defence and health care, and could discourage work. It’s not good or realistic. Monetisation would be more likely, and stealthy.
This is already under way in Japan, where debt as a percentage of the GDP is among the highest in the world yet interest rates are zero. The finance ministry issues debt and the Bank of Japan buys it. When the debt matures, the central bank repays the principal to the ministry and government debt is extinguished via the printing of money.
If the US and other countries with very low interest rates pursue this policy aggressively enough, it will create inflation, which will redistribute wealth from lenders to borrowers, quietly easing some of the social strain. Boosting inflation has now moved from a fringe idea to one endorsed by major central banks.
Yet inflation creation is not guaranteed. Today’s profitable industries do not require much capital, which is one reason that real US interest rates are at their lowest ever.
The potential US GDP, which is the rate at which the economy can theoretically run without inflation, is around 1-2 per cent. To create inflation, the economy would need to grow faster than that, which suggests that fiscal stimulus would need to increase by about US$400 billion a year for a few years when the economy is already growing at potential!
Given that discretionary spending in the US$4.8 trillion US budget is only around US$700 billion, this is a lot of stimulus and would reflect a real shift in policy.
Look for telltale signs of policy change in market pricing. Facebook stock underperforming would be significant. If the fall in the dollar (and consequent rise in the yuan) already under way is followed by a rise in US bond yields that forces the Federal Reserve to intervene and buy long bonds, this would also be significant.
Paul Podolsky is an investor and author of Raising a Thief. For 20-plus years he worked on Wall Street, most of that time for Bridgewater Associates. See: paulpodolsky.com
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