Vol 9 (2012) - Issue 6

Article preview

Investing for the Future (or Principles over Populism)

I have spent a lot of time in the last five years or so contemplating (and talking about) the financial crisis. What would be the likely consequences of the period of credit contraction that started in mid-2007? Very few of my insights have had a particularly cheery theme – some of the memorable ones include the impending systemic financial turmoil (2007 and early 2008), the need to print money to try to stem the impending crisis (mid-2008 onwards), the likelihood of civil unrest (though admittedly I hadn’t spotted the Arab Spring as the earliest – or most likely – candidate) and the period of relative poverty that would be suffered by many.
It is the last of these insights that creates the biggest problem for today’s governments. In many countries, people are beginning to understand the true meaning of austerity (and the reason that their politicians have been using the word). Painful economic choices are being imposed which have a fundamental effect on people’s wealth and future prospects. Current economic forecasts show little positive news. How can a ‘growth agenda’ succeed when state spending is shrinking and the private sector deleveraging?
In early 2010, having dragged an audience at London Business School through a presentation of more thoughts on a similar theme, I did spend some time at the end of the presentation revisiting predictions I had made two or three years earlier. It was one of those few occasions that inspired the audience to ask searching questions. The final one I remember particularly well – what I would do if given control over fiscal and monetary policy in the UK? I would focus government spending on technology, infrastructure and research and development and if the public debt markets wouldn’t fund it, I’d fund that with printed money.
Easier said than done and a massive simplification. However, it embodies one of the key themes I believe needs greater review and emphasis – investment. The key to sustainable growth is through the allocation of capital resources to investment to spur development or change. Unfortunately, the innovation of the capital markets and the abundance of available credit created a fragile cycle of growth built upon the demand to lend, pushing asset prices and increasing wealth in a fashion that could not be sustained by earnings (whether at an individual, a corporate or a sovereign level). This created an easy route to riches for humankind, something that could not be resisted. The rest of the story is well known.