New Economic Paradigms

It’s hard to believe that we are more than half way thru 2013 already.  Time is indeed flying.  It seems like only yesterday, I was complaining about the terrible winter weather.  I remember last November focusing on the December 21st 2012 milestone for two reasons.  Firstly in my line of work (technical price calculations), December 21st signaled the implementation of a particular piece of European legislation that was to dramatically impact a particular industry.  Secondly, the media was filled with pessimistic interpretations of the Mayan calendar.

Fortunately the world did not end in 2012 but 2013 has been just as dynamic as 2012.  Worldwide, political and economic turmoil seems to be the new norm.  Despite the continued challenges, I somehow remain extremely optimistic about our collective future.  The economy remains my key area of focus both personally and professionally, and there are three points I wanted to speak to.  Three alarmist economic paradigms that are fortunately, being disproven.   

Firstly, there is the debate on austerity versus quantitative easing with too many believing that austerity was the way to go.  In April this year, the discovery of an arithmetic mistake in an economics paper coupled with several other flaws in the analysis—not only became the talk of the economics profession, but made headlines.  It marked a key moment in shifting the debate away from an obsession with socially divisive austerity measures.  “Growth in a Time of Debt,” was written by Harvard economists Carmen Reinhart and Kenneth Rogoff.  Many cited its alleged findings to defend their position and attack their critics.  Again and again, suggestions that, as John Maynard Keynes once argued, “the boom, not the slump, is the right time for austerity”—that cuts should wait until economies were stronger—were met with declarations that Reinhart and Rogoff had shown that waiting would be disastrous.  Yet the performance of economies that are embracing austerity stands (such as the southern Europeans) in such contrast with the UK and the US who (despite political rhetoric) have clearly avoided the typically harsh spending cuts associated with austerity.  Do not get me wrong, the UK and the US economies are by no means healthy but they have thus far avoided the social melt down with depression-era unemployment levels seen in southern European economies.       

Secondly, US/UK type monetary policy was predicted to inevitably lead to Zimbabwe type hyperinflation.  In fact, many economic historians were fond of saying that every single fiat currency in history ended in the same way.  Yet we have not seen any evidence of the currency collapse predicted by the gold and silver brokers.  As noted in the Atlantic this month – “The anti-Bernanke crowd has tried not to notice that prices haven't gone parabolic. They've mostly succeeded in this epistemic closure -- and even when they haven't, they've quickly discounted reality as just a fad. Their excuses have been as predictable as they have been wrong: either the official numbers are irrelevant, or miss "real" inflation, or will show more inflation in a few more years (just wait and see!). But with core PCE inflation, the Fed's preferred measure, now at an all-time low going back 50 years, it's getting harder and harder to get anyone to listen.”  Again, do not get me wrong, I am not naïve enough to ignore the manipulation of both the official government statistics (thank goodness for Shadowstats.com) and the markets but that does not detract from the fact that the predicted doomsday scenario has not materialized. US Expat Singapore

Thirdly, the collapse of high street, brick and mortar retailers was supposed to be indicative of deeper economic malaise.    The Economist touches on the subject this week.  As sales migrate to Amazon and other online vendors, shop after shop is closing down, chain after chain is cutting back. Borders bookshops, is gone. So is Comet, a British white-goods and electronics retailer. Virgin Megastores have vanished from France, Tower Records from America. In just two weeks in June and July, five retail chains with a total turnover of £600m ($900m) failed in Britain.  Yet in Britain, Germany and France 90% of the rather modest growth in retail sales expected between now and 2016 will be online.  I have previously written about the technology driven decoupling of productivity from employment.  Technology is racing ahead and leaving more and more people behind as venture capitalist Marc Andreessen, who famously said: “The spread of computers and the Internet will put jobs in two categories: People who tell computers what to do, and people who are told by computers what to do.”  We know that only one of these two job categories will be well paid.  The rise of powerful technology companies is hard to ignore.

Who knows what the second half of 2013 will bring us?  Maybe my three positions above will be thrown out after being shown to be misguided?  Regardless, I remain positive that we are on the cusp of an exciting new economic paradigm.   

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