(Disclaimer - my understanding of economics has been gained from basic reading of the popular press and a few more detailed online resources. I am very happy to stand corrected on any of the following :-))
Last week the International Monetary Fund met in Lima. Commentators agree that the outcome of their talks is worrying.
They have reduced their forecast for global growth again (for the 4th year in a row) and have concerns that the economy in emerging markets could prove very unstable if the USA raises interest rates.
(Christine Lagarde)The advanced markets in Britain and the US have achieved a level of stability following the crash of 2008 but it's been a long time coming and has required monetary policies (quantative easing, low interest rates) that haven't produced the rate of growth they were expected to:
"Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive," Maurice Obstfeld, head of research at the IMF.Reading about all this from my very naive level of economic understanding I must admit I agree with Larry Elliot
'These are indeed weird times. Share prices are rising and so is the cost of crude oil, but the sense in financial markets is that the next crisis is just around the corner...'There does seem to be a consensus amongst the people who "should know" that things could easily turn very rocky and a recession now would not be as easy to pull out of as it was in 2008. So why does the announcement that the Federal Reserve bank will not increase interest rates *just yet* have more power to raise the markets than serious data-driven announcements by reputable financial bodies has to depress it? (As was certainly seen in my portfolio last week). Is this just another example of the continuing (increasing?) trend towards short-termism in business and financial institutions?
There's an article from 2013 by David Kingman on the subject of short-termism which makes some very interesting points, one of which he quotes from " are now handing back a far greater proportion of their profits to investors than the amount they invest to grow the business. In the 70's 15 times more profit was invested than giving out in dividends, now it's just 2.
It's all seems to be down to the natural human tendency towards short term gain at the expense of long term well-being, a failing that anyone who is working towards FiRe recognises, and the damage that giving in to it too often can do. Companies (and individuals) are making money and then hanging onto it or paying it out as dividends, rather than investing it back in. On a global financial level this is causing growth to slow to the point of stagnation, and quite possibly stall as far as emerging markets are concerned because they need the demand that is produced by investment from the advanced economies. There is a massive amount of debt in emerging markets which has been fuelled by low interest rates and which needs servicing somehow. If growth diminishes and interest rate rise things could come crashing down.
Hanging on to cash and failing to invest is also one of the reasons that so much wealth is getting concentrated at the top, it's just sitting there in bank accounts and not doing any work to create growth or further the famous (and contentious) "trickle-down" effect.
(btw I would argue with his definition of socialism - I think he actually means "communism" here).
The IMF is advising public spending on infrastructure projects as one of the ways advanced market countries can ease the situation, but with so much emphasis (and brain washing of the public) about the dire need to cut deficits, governments may find funding difficult unless they bite the bullet and miss a few targets (nothing new there then:-)) (And maybe if there hadn't been so much "austerity" going on in 2010 - 2012 things might have moved a lot quicker.) It does look as though Osborne has taken this to heart and the news that the pooled pension pots in the LGPS could be used to help fund things is especially welcome.
But why has business (and Government) become so short termist? If I can see the big picture from my very low level of insight then surely it's no secret that this is happening and what the likely effects are, and will be. This is an interesting question and it may be that it will take another market crash to improve things, as some commentators suggest that the last one didn't actually change policy and practise very much at all.
No one could accuse FiRe seekers of short-termism, but without Governments that build for growth, encourage investment in the future and tax wisely, and discourage cash bonus payments for company managers and the stock-piling of cash by obscenely wealthy people, we're might soon start to struggle to reach our goals.