A kink in global productivity?
We have a problem today: we have almost no productivity growth across the globe. Productivity was growing at over 2.5% going into 2005/06. It is now barely above 0.5% and in many countries it is negative. Economists have no answer to this problem, but we will deal with economists later.
This is not the first time that productivity has kinked. It did so in the early 1970s. Throughout the 60s, the usual format was wages up 5%, productivity up 3%, inflation 2% and interest rates at 4%. Early 70s wage growth remained at 5%, productivity fell to 1% and inflation rose to 4%. The next year wages rose by 7%, productivity by 1%, inflation 6% and interest rates were on the move.
By 1979, years of refusing to address the issue because it would have involved a recession and higher unemployment, meant, at least in the UK, coal miners were going on strike for a 20% wage increase, when UK coal was already twice world prices. Who governs Britain?
Just as the communists were preparing for government, along came Friedman and inspired by Hayek said that the problem was not capitalism but corporatism and collectivism. Allow market forces.
Both Thatcher and later Reagan were quick to free up credit and extend it to the common man. In the US it was Regulation Q which was repealed. Maggie freed exchange controls in 1979 and globalisation was let out of the bag.
Globalisation was never very popular. However, the effect of keeping wages down allowed interest rates and inflation to fall. With everyone encouraged to own their own houses, asset prices rose. Poor people were rich for the first time. Everyone could enjoy inheritance tax!
However, in 2006, asset prices and, in particular, house prices had become too expensive for individuals to buy them out of wages. That is when the problems began.
To begin with it created a bubble. Higher prices were necessary to keep the bubble going and that could only be helped by laxer and laxer lending standards. Boom/Bust. In 2009, faced with large potential falls in house
prices, governments turned to central banks to get them out of the mess. Interest rates fell to zero, asset prices first stabilised and then started to rise. To begin with relief was palpable.
Seven years on it is less obvious that this has been all good news. What started out as a temporary last-resort has become the only way to keep things going. By keeping asset prices high and encouraging them to go higher, by underwriting these prices, the rich have got richer without it helping the economy. So now the politics starts to get messy. The 'Haves' against the 'Have Nots'.
Meanwhile, putting all this power into the hands of the central bankers, aka 'economists', turns out to be dangerous. Economics, like physics, has been going backwards over 30 years. In 1974, Hayek in his Nobel address warned that only a few of the variables that effect macro outcomes can be numerically ascribed. As mathematicians took over economics, he predicted that they would be intent on coming out with exact outcomes rather than rough outcomes. Forty-two years later, Romer, the World Bank chief economist, is accusing economists of inserting Bayesian ‘priors’ in as constants to make their models work and in the process destroying any chance of forecasting correctly macro outcomes. Andy Haldane has only recently and bravely admitted to such. But economic policy has been handed over to these mathematicians. Cash has been poured into the world economy without seeming to have any beneficial effects on growth.
Finally, the political leaders are turning towards activity to beget activity and now come the dragging effects of excessive debt. No one really has a clue what outcome this will spawn. Nature, wisdom without reflection, has not been allowed to solve these problems. With productivity so weak, the chances that activity merely begets inflation are high. All of these uncertainties would pose problems even if asset prices were not high, but to have such uncertainty allied with such high prices courts disaster. This economic cycle is now seven years old. It has become old, but like King Lear, not wise.
December 2016 fund update