Ben Bernanke concluded his Wednesday keynote at Schwab Impact with the mildly optimistic statement that “looking ahead to the medium term, the U.S. is still a good place to invest in.”
But addressing the same group of some 5,000 attendees of the annual investment conference on Thursday, international economist Dr. Dambisa Moyo offered a far less sanguine view, saying that the former Fed chairman was dealing with short-term problems for which there were temporary fixes such as quantitative easing.
“I’m talking about the long term,” she said. And while she recognized that the 200,000 jobs the U.S. economy has been adding over each of the past seven months that Bernanke spoke of is a short-term positive, she said that “nobody talks about the fact that they’re not good jobs.”
Indeed, the Zambia-born economist despaired that U.S. and world policymakers tend to focus on what she called “smoke and mirrors,” short-term fixes that may help politicians get re-elected rather than the “compelling long-term policies” that are needed.
“In the U.S., you have far too many elections,” Moyo said, acknowledging she is not a U.S. citizen and noting that countries such as Mexico, Brazil and Nigeria have in recent years changed their constitutions to broaden the electoral cycle and thus encourage longer-term thinking.
Overall, Moyo’s talk focused on the rapid accumulation of long-term problems that go unaddressed at our peril, and her central conceit was that today’s unprecedented short-termism makes us vulnerable to being blindsided by dangerous world trends.
She approvingly quoted Goldman Sachs CEO Lloyd Blankfein, who in 2004 (when he was the firm’s COO) said:
“Look, fortunes are going to be made. But the biggest risk is what you can’t see today. That’s why life is the ability to step outside yourself, to see that something that you can’t see today, something that one day you’ll hit yourself on the forehead and say, ‘Why didn’t I see it that way?’”
Moyo endeavored to paint that picture that might otherwise go unseen, describing the “disrupting trends” now in motion.
First among them is a global economy in decline. In just the past six weeks, she noted, the International Monetary Fund downgraded global growth, the E.U. slipped into recession, and Japan’s economy took a dire turn.
Meanwhile, major emerging economies with populations of at least 50 million — economies that must grow at 7% to escape poverty — are growing at much slower rates: 1.7% for South Africa, 1.9% for Russia, about 3% for India.
What that augurs is no less a threat than a global depression, saying “for the first time in a long time, arguably since the Great Depression, this time it is really different.”
What’s different are four stormy headwinds — including technological advancement, changing demographics, income inequality and resource scarcity — that policymakers lack the tools, “fiscal or monetary,” to address.
For all the wonders of new technology, a key downside is that it is putting people out of work, she said, citing data that 120 million young people across the world are jobless. Even in the U.S., robots have replaced people at institutions such as the Cleveland Clinic, where they deliver laundry and even play a role at the operating table.
While the robot economy disproportionately affects the unskilled, demographic change exacerbates the problem.
Moyo says the U.S. population is aging, even adjusted for immigration, and while that limits the quantity of workers, international tests that reveal U.S. students perform poorly in math and reading impair the quality of U.S. workers. “It is virtually impossible” to bring those workers up to snuff after having lost the opportunity to learn well at an early age, she says.
The demographic challenge is even more acute outside the U.S. Moyo says 90% of the world population lives in emerging economies, where 60% to 70% of the population on average is under 25. That means there are legions of young men with no prospects, and the problem is expected to grow, given a historically unprecedented population surge that is not expected to plateau until 2100, after the world population reaches 10 billion from its current 7 billion total.
Moyo expressed particular alarm about growing income inequality. As an economist, she recognizes the inevitability of disparate wages. “The problem,” she said, “is that we’re no longer creating social mobility.”
In this area, Moyo is particularly worried about the U.S., which she contrasted with China. The two economies are now nearly the same size. And though the U.S. has a market economy and liberal democracy, while China has a state-managed economy and is illiberal, she said both countries now have the same Gini coefficient, a measure of societal income distribution. This makes the U.S. less of a model, and democracy and market economics less compelling, to policymakers in emerging nations, she says.
“People really care about their livelihood; they don’t care who delivers it,” said Moyo, who has traveled to some 75 countries.
The international economist cited resource scarcity as the final headwind, noting that China’s president identified it as his country’s biggest problem.
“Our ability to provide food will be constrained by shrinking arable land,” the international economist said, noting that Barrick Gold, on whose board she sits, finds itself obliged to go into increasingly harsh terrains, politically as well as topologically, to extract ore.
Adding detail to her portrait of global gloom, Moyo noted other unwholesome trends, including an increase in global financial repression, noting capital controls in Indai, Cyprus and Brazil and some 130 documented instances in the past 18 months of governmental expropriations, sudden one-year taxes and protectionist measures.
Indeed, Argentina imposed capital controls on her own Barrick Gold, and she worries that the world’s shrinking GDP growth augurs more aggressive tactics by governments.
Returning to the global inequality theme, but this time pointing out labor productivity challenges, Moyo cited German Chancellor Angela Merkel’s worries about the fact that Europe is 7% of the world’s population, has 25% of the world’s GDP and accounts for 50% of its social spending.
She didn’t see how Europe, which doesn’t enjoy the U.S. status as bearer of the international reserve currency, could ever pay down its indebtedness. And she pointed out that in Britain over the last several years “every single sector of the economy has seen a decline in productivity.”
Saying she hates “to sound like more of a Sinophile than I actually am,” Moyo criticized left-leaning tax and spend policies exemplified by Europe and the trickle-down economics that has been practiced in the U.S., saying “neither has worked.”
But she saw no solutions for the growing social divide in the U.S., noting that the U.S. will become a “majority minority” country in 2025, and yet she is troubled that there are more Africans and Afro-Carribeans at Harvard than native-born blacks — the same statistic that held when she attended that institution in the ’90s.
The result of “disaffected, disengaged” low-income populations in the U.S. will be “more [income] transfers and a larger state to stave off unrest. We don’t have the engines to continue economic growth as we have had in the past.”
Yet she decried “systems that reward people for doing nothing,” advocated a smaller state and bigger market and indeed suggested the U.S. foreign policy would get better results promoting economic growth than democracy abroad, saying 70% of countries that engage in balloting are actually authoritarian in nature. Russia and Venezuela were two examples she cited of the trend toward “illiberal democracy.”
In contrast, countries like China, Chile and Taiwan demonstrate that nations can achieve significant improvements in inequality prior to the flowering of democratic institutions.
From an investment angle, Moyo favored investing in emerging markets that enjoy higher growth rates, but warned investors against the “quick trade” and counseled a long-term perspective.
That, she lamented, goes against today’s plague of short-termism, where CEOs now average a tenure of four years, down from 10 in 1990; where stock ownership has slipped from a holding period of seven years on average in 1970 to seven months now (officially; she thinks the real number is closer to three or four months); and where the average S&P 500 company remains in the index just 18 years in 2011 versus 90 years back in 1935.
“This churn will become a lot more aggressive,” Moyo predicts, adding that today’s investors make for poor investment partners “from a boardroom perspective” that seeks long-term funding.
With short-termism the dominant paradigm in the West, and long-term troubles mounting, Moyo warned investors to buckle up for the “pretty harrowing experience that we’re about to go through.”
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