Welcome to Finance and Fury, The Furious Friday Edition

In this ep, we continue looking at the lucky country

look at a downward spiral in growth – low growth traps – and how it is created by what is meant to help growth?

 

Low growth trap

– The big problem comes from just looking at the numbers – and basing policy around models

  1. Major part of the modern economy – looking at the numbers – I do it as well
  2. Numbers can be inaccurate, or misinterpreted – sometimes the models being used for numbers don’t get the answers that were expected
  3. Such as the RBA and rates – lowering them to boost the economy

 

Nothing new as to why the RBA wants to drop rates

– major banks think it will go down to 0.75% –

  • Looking to take action to help stimulate Australian economic growth, employment, wage growth, etc.
    1. The question really is if this will work as the equilibrium models suggest – based around neo-Keynesian
    2. We should be seeing a pick up in inflation (CPI) rates – which is the trick – focus on a percentage which is ever compounding under the current system – another episode
  • At least – why aren’t we seeing GDP growth, improvement in productivity or wages and employment?
    1. Big puzzle which almost every first world nation is trying to solve at the moment – and economists
  • First – look at Productivity – this measures the quantity of the economy’s (or just a particular business’s) output of goods and services relative to its inputs of raw materials, labour and capital equipment – this is theory
    1. Productivity improves when a given quantity of inputs to the production process is able to produce a greater quantity of goods and services than before. It’s most commonly measured by reference to just one of the inputs, labour. So, it’s output per unit of labour, usually per hour worked.
    2. Main way to make workers more productive is to give them more or better machines and structures to work with. That is, to invest in more physical capital.
    3. Increasing workers’ education and training – “human capital” – also makes them more productive: better able to work with more sophisticated machines, to think of ways to make machines do better tricks, and think of more efficient ways to organise the work that’s done in a mine, farm, factory, office or shop.
    4. The main way to make workers more productive is to give them more or better machines and structures to work with – this is what theory says anyway – having something to measure
  • In the present information and communication technology revolution isn’t transforming the economy to the extent that earlier general-purpose technologies – such as electricity, the internal combustion engine, the automated production line, and even running water and indoor toilets – did
  • Why doesn’t the modern-day economy show the same levels of productivity or growth as in the past?
    • partial explanation – that much of the benefits coming from the digital revolution are going unrecognised by a system of national accounts (gross domestic product) designed to measure the industrial economy
      1. Also – low population replacement rates – birth rates not keeping up with the aging population
      2. If it keeps up – future of weaker growth in consumer spending = lower incentive for firms to invest
    • The increased complexity of a system requires a greater input to receive the same result
      1. Example – some of the smartest people finding new ways to get around laws/taxes – not picked up in GDP growth
    • but for the most part – due to Modern economy – focus on economies of scale for cost reduction – not massive R&D projects
      1. (synergy between companies – merge) – creates very large companies over time
      2. Apple – Jobs was an innovator – but just took existing technology and made it much better for us to use – First smartphone was by IBM more than 15 years before Apple released the iPhone
  • Can see this in the share buybacks occurring – UBS and Macquarie predicted Australian companies to do more share buybacks in 2019 – if Labor won the federal election – Franking credits, higher taxes – Dividends not valuable
    1. Not only doesn’t investor get that money to spend/invest – it just inflates the share price of the company
    2. US businesses have been using their profits not to reinvest but to pay big dividends and to buy back their shares on the stock market, hoping to boost their price

 

What gets us out of this – Innovation

– continue to increase our ability to create and we will be fine – new ideas, more people creating things that work to provide value to others lives –

  • This is where some policies have had dramatic effects on our lives – the policy decision is working from an equilibrium model that is long past it’s used by date
    1. I think for the worse- house prices as an example – thanks to the compounding positive inflation rate target – very short-sighted policy
  • Theory: key to productivity improvement is investment – particularly investment by businesses
    1. But to spur business investment – you need economic growth and the expectation it will continue
    2. But it can’t include a thing like innovation into an equilibrium model – could in a complex equation
    3. What the models are picking up –
      • Innovation is fine, but the main way some new technology is “diffused” throughout the economy is by firms replacing their old machines and structures with new ones that incorporate the latest advances.
    4. Business demand for new and better things spurs innovation – it isn’t just big companies that innovate – it is small startups that then get bought out by the big players – look at Alphabet, FB, etc. – why innovate if you can buy?
  • Innovation cant be forced – often accidents, or trying for one thing and getting something else –
    1. But if you are aimed at one goal and don’t get the result you want, you start again and disregard the by-product of the failed attempt –
    2. The government doesn’t directly invent anything – they find independent scientists and contract them to fund their research – researchers dream – recruiting people to continue doing what they were doing, but for you
    3. Investment is also an essential part of the continuous process of change in the industry structure of the economy, where changes in consumers’ preferences and other developments cause some industries to contract while others expand and new industries emerge.
    4. If firms are reluctant to invest, you don’t get enough expansion to offset the contraction.

 

But what is businesses’ main motive for investing?

Their expectations of increased demand for whatever they’re selling – marketing, higher production

  1. What happens to business investment when a recession/depression occurs, or they think it might?
  2. The recovery has been particularly weak in the 2007/8 crash compared to the great depression though
  3. Some of our GDP growth is the product of fiscal stimulus from governments – either liquidity or spending packages
  4. Low unemployment conceals a marked fall in the proportion of the population (particularly less-skilled middle-aged men) participating in the labour force – given up looking for another one – skills “atrophied” – loss of human capital to the Aus economy

 

Get it? Weak economic growth in the advanced economies is discouraging businesses from investing. Weak investment means weak productivity improvement and skills atrophy. But weak productivity means more weak growth.

  1. Business investment in physical capital, and growth in human capital are key drivers of the economy’s “potential” growth rate in future years.
  2. Neglect them and the economy loses its ability to grow – starts to decline and go backwards –
    • Or remain in a low-growth trap

 

What stops drive for innovation?

  • No demand from companies for new and better products –
    1. Either no money to afford it – costs/taxes high or low revenues = low profits
    2. Limited access – barriers to entry through regulations
    3. Short term focus on maximising GDP and shareholder values –
  • What compounds this – Protectionist policies – fight against creative destruction
    • Example – The invention of electricity – a much bigger event in our human history than the internet –
      1. People were freaking out seeing Tesla use his body as a conductive material to power a light bulb
      2. It also created unrest in labour markets – the reason why we don’t see the leary’s dancing in the street going from gas lamp to gas lamp (like Mary Poppins) – they were made redundant
  • Think about it – 100% of our jobs today are vastly different to the past – almost all don’t exist, but those that do are very different looking – unless your job is to dress up like a historical recreation
  1. Theory – if an economy is weak, you must help protect it through subsidies or benefits
  • These elements together just add to stagnation of the economy

 

 

Summary

– low growth trap requires innovation – attracting the best and brightest

Sadly – innovation is stagnated when so are the individuals who would otherwise be innovating – through the choice

Why do you think Communist/socialists countries crumble in every case – hard to innovate on a new engine you are working on when you are moved to a collectivised farm and given one farm animal to plough fields with – but you have to eat it as you don’t know anything about farming –

 

Next episode will dive deeper into the concept of an inflation trap – and policies to get out of it

 

Thanks for listening, if you want to get in contact, you can do so here.

 

 

How accurate are economic statistics and do they really matter in our daily lives?

Welcome to Finance and Fury, the Furious Friday edition. Today we’re look at if economic data really means anything. I was thinking – and do any of these numbers really matters to you? Or even to me? Think about this – talk about a lot of the metrics – GDP, Inflation,...

What are the best methods of accessing gold and what are the opportunity costs to growth and income returns?

Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question comes from Mario “Loving the podcast on the central banks. I have a question about purchasing gold as part of my investment strategy. My core investment strategy is to invest in high...

The mother of all f**kups – Assumptions and their unintended consequences

Welcome to Finance and Fury, the Furious Friday edition Going to run through the last part of the Lucky country – and that is how we can best turn our luck around Through – innovation, freedom of choice, and ignoring narratives based on assumptions Going to skip...

What happens when a family trust comes to the end of its life? What happens with the assets and are there CGT or stamp duty liabilities?

Welcome to Finance and Fury, The Say What Wednesday edition.  Today's question comes from Gab. Hi Louis, thank you (as always) for the great content. I've got another question that I've struggled with recently, and I'm hoping you can shed some light on the topic. I've...

How to turn down the media noise in investment markets and focus on what matters

Welcome to Finance and Fury 2020 has seen a very noisy start to the year – But what’s new? The media is constantly reporting on one major event after the other – fear sells better than nice stories – The more fearful the event – the more traffic that is driven on...

What has created a system where the share market can go down so quickly?

Welcome to Finance and Fury, The Furious Friday edition What has created a system where the share market can go down so quickly? The perfect storm – Panic, OPEC agreement breaking down – computer algorithms kicking in, mass sell-offs of index funds The recent collapse...

Starting an online business or franchise

Welcome to Finance and Fury, the Say What Wednesday edition John’s Question: I thought a useful topic could be about pros and cons off starting a business and starting your own business vs buying a franchise system etc. and using a business to achieve financial...

Is it time to jump into or get out of the tech bandwagon?

Welcome to Finance and Fury. A lot of people may be feeling regret right now - regret for not holding technology shares like Afterpay – it is up around 850% from the low in March Was not buying tech shares a bad decision? And is there potential from here? Look at this...

The Cash Bill – stabilising the financial system for negative interest rates, Bail Ins and more, all at your expense

Welcome to Finance and Fury Last Monday's ep – Cash Restrictions Bill – Went through black economy and outline of regulations Today – Go further into implications of this – along with other considerations such as bail-ins and negative rates why bill needed – not for...

Can following insider’s trades lead to better investment returns?

Welcome to Finance and Fury. In this episode be looking at one piece of information in the share market – insider trading There is a lot of information in the markets that can be looked at – can look at the fundamentals of an individual company – can also look at...

Pin It on Pinterest

Share This