PSG Konsult holds its annual investment conference

PSG Konsult holds an annual investment conference at which speakers from around the world share their insights with us. Over the last week, it has been my privilege once again to be a part of this event and to listen to these experts. With Covid-19 still a large part of our lives, and lockdown rules still restricting gatherings, the conference took place online through the exemplary application of technology.

I would like to share with you – condensed into a nutshell – the insights of two of the international speakers:

David McWilliams – Economist, author and journalist at Trinity College, Dublin

David recognises the pivotal role economics plays in our daily lives and it is his mission to make the ‘dismal science’ as captivating and accessible as possible. A prominent international economist, David is one of the most influential and insightful members of his profession in Europe. He is widely regarded for his brave and accurate forecasts and predictions and has a rare capacity to demystify economics and make the topic accessible to all. He is co-founder of the Dalkey Book Festival in Dublin, as well as of the world’s only economics and stand-up comedy festival, Kilkenomics, described by the Financial Times as “simply, the best economics conference in the world”. The David McWilliams Podcast is ranked as one of the most listened-to podcasts in Ireland. David has written four bestsellers and is an influential columnist with The Irish Times. He is also a Young Global Leader with the World Economic Forum, and a regular contributor to Google’s famed Zeitgeist conference, as well as other leading think tanks around the world.

He noted that we are on the brink of a new phase in global economic conditions.

There are large-scale seasonal phases affecting economic events and these can last for 10 or 20 years, or even longer. They include intellectual, idealistic and political factors that drive the way in which the economy functions and responds – and then determine the outcomes we see in, among other things, the behaviour of financial markets.

At the moment, we are entering a new phase of economic thinking and decision-making. This has its origins in the United States of America (USA) and, as is widely accepted, anything that starts in the USA tends to spread to the rest of the world.

There have been four major phases in the history of economic development:

1860 to the First World War

During this era, exchange rates were tied to gold, intervention by the state was limited, and businesses were able to grow. While it was a period of strong economic growth, a great deal of inequality came about.

1920 to 1940

As regards economic decision-making this was truly a time of chaos, coming as it did on the heels of the strong recovery of the world economy after the First World War (1914–1918) and the Great Flu of 1918. These events led to extremely high inflation in Europe (Germany in particular), followed by the Great Depression of the 1930s. State intervention increased in what we refer to as a Keynesian economy.

1945 to 1980

This was a period of mixed economic policies. The state further increased its spending, and we could start referring to the concept of a welfare state. The policies set by central banks were intended to make it easy for the state to finance this approach. While the focus was on health care and education, the era ended with the high inflation rates that followed the oil crisis in the 1970s.

1980 to 2020

During this period of monetarism, the central reserve banks took up the role of watchdog of economic decision-making, with their focus on lowering inflation. President Ronald Reagan and Prime Minister Margaret Thatcher supported Paul Volcker's approach to curbing inflation through imposing high interest rates. As part of this process of lowering inflation, workers' wages began to fall while company profits started to rise. This explains why the period was so positive for stock exchanges and bond markets. The long-term interest rates in the United States over the past 40 years have been part of a huge bull market. However, a consequence of all these events has been an enormous increase in the inequality of the distribution of wealth. The middle class has stagnated – especially when compared to the top 1% of the world’s wealthy.

All this brings us to a new phase that we are now entering, and which could well be with us for the next 40 years. This new phase is known as modern monetary theory (MMT) and it is driven by the White House in the USA.

President Joe Biden is becoming a major player in the changes taking place in economic decision-making. His approach – focusing on the large US middle class and on America’s so-called blue-collar workers – has come as a surprise. Biden is not concerned with the wealthy top 1% and this is seen as a radical departure from the approach taken by the previous six US presidents.

Biden is determined to address inequality in wealth, and he is doing so by increasing government spending, even if this leads to larger budget deficits. Additional money is simply being printed and, while inflation remains low, this will not be a problem. The role of the Federal Reserve Bank (Fed) will diminish, and the state will once more play an important role in the USA.

The Fed can borrow money but cannot spend it. This means that the Fed currently lends money to the state and that the state spends it. Consider the cheques for $ 1,400 per household that were recently handed out to US citizens by the state. In the aftermath of the restrictions that followed the outbreak of the pandemic, as well as in the run-up to the US presidential election and the period after the election, US government spending amounted to an incredible $ 4 trillion. This is radical. McWilliams suggests that it may be nothing other than Marxism that Biden is pursuing.

The change reflects the MMT principle of spending first and paying later by raising taxes. This is contrary to the way in which the role of the state has previously been thought of. There appears to be a movement afoot to pump capital into the economy and spend it, with the only concern or focus being to keep an eye on future inflation.

At the same time, we must also be cognisant a new cold war between the USA and China is a possibility. China is currently very unpopular on the world stage, and Biden has surprised observers with his strong disapproval of China's way of doing things.

The African population is growing strongly and, in a positive sense, will need to be watched in the future. Such growth is likely to create opportunities in agriculture, food preparation and training. Technology is increasingly being used for teaching and in creating opportunities for more people to have access to training. This is creating potential for economic growth in the future.

Dr Ben Bernanke – US economist and former head of the US Federal Reserve

Dr Ben S Bernanke is a Distinguished Fellow in Residence with the Economic Studies Program at the Brookings Institution. From February 2006 up to January 2014, he was Chairman of the Board of Governors of the Federal Reserve System, having been appointed to that position by both Presidents Bush and Obama

Most reserve banks are mandated to achieve stable prices and set low inflation targets. In 1977, however, the US government instructed the Federal Reserve to pursue an additional mandate, that being full employment. Stable, low inflation averaging 2% (as opposed to 0%) is targeted along with maximal employment so as to ensure

that the economy is able to grow and that most people will be employed.

In recent years, inflation has been kept below this target of 2% and, in addition, there have been large numbers of jobs lost due to the Covid-19 pandemic. Therefore, a policy of very low interest rates; deliberate capital expenditure and the provision of aid packages is currently being applied in the US. The idea is to try to stimulate the economy so as, on the one hand, to increase inflation, but on the other, also to increase the employment rate once more.

Unequal distribution of wealth is a concern in the US and the pandemic has had a major impact on this matter. People in occupations that allow them to use technology to work from home have managed to weather the pandemic reasonably successfully, but people who have to assist customers in person – waiters, for example – have had a difficult time over the past year.

However, the Federal Reserve, in its guidelines and executive decisions, can hardly distinguish between the various groups and this means that it cannot easily address the problem of inequality. What the US can do, though, is keep employment strong and this is the approach they have recently been taking again. When the workforce is strong, a variety of people have more opportunities open to them and people can move into better careers, all of which means that the overall well-being of the community is improved.

Aid packages and fiscal policy are important in an economic crisis. This is because monetary policy, in an environment where interest rates are already very low, offers too little room to manoeuvre to stimulate the economy. Inflation in the US is already low and interest rates cannot be cut further. The Federal Reserve thus allows the state to borrow now and distribute a lot of money to stimulate the economy. Even though government debt is rising, this is an acceptable compromise in the time of crisis we are currently experiencing.

The concern, though, is that inflation might well rise and this needs to be monitored. However, since inflation is currently below the 2% target, a little extra inflation will not be bad for the economy. There is a possibility that inflation will rise above this target for a short period before the necessary steps are taken to lower it. It is this line of thinking that will help keep inflation closer to the 2% target over a longer period.

Short-term interest rates may be held down for the foreseeable future – that is, until inflation is closer to the 2% target. Bond rates may start to rise; something already being seen in the 10-year US government bond rate. Bernanke is of the opinion that the increase will take place slowly and over an extended period.

PRETORIA EAST | Lynnwood Bridge Office Park, Kaaimans Building, 4th Floor, Lynnwood Manor | Postnet Suite 96, Private Bag X025, Lynnwood Ridge 0040 Tel: 0861 774 000 | Fax: 012 349 5300 | pretoriaoos@psg.co.za 

The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG and do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken on information in this newsletter.
PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.