A Macro-View, Part 1 - Growth

A couple of weeks ago I went to cash by selling all of my equity positions (I didn't have anything else).  It was partially reactionary - there was a lot of bullish sentiment and it was partially based on the research that I had done in order to produce those three infographics. 

Once out of the market, I could be more objective and think about what was going on and what was likely to happen.  Every morning for the past two or three weeks, I've been mocking up different macro-economic scenarios, looking at interest rates, money supply, inflation, exchange rates etc.  Frequently, I just get over-whelmed.  There are so many moving parts, so many possibilities.  I think, maybe I should just sit this one out.  But it's too interesting.

Of particular interest to me is quantitative easing.  Let me go over some of the questions that arise from this subject:

• Why didn't low interest rates stimulate the economy (making some governments turn to QE)?
• What are the effects, intended and not, of QE?

The first question is the focus of this blog.  My theory, based on the infographic work, is that low interest rates didn't work because, at least for the time being, our economies have grown all they are capable of growing.  Innovation is the main driver of growth because innovation can make us more productive.  More productivity, more growth.

There are some remarkable technological developments happening without a doubt, and they'll continue to happen, but they aren't going to move the needle on productivity the way, say, indoor plumbing did, or the electric light, or the car.  Let me illustrate graphically:

The invention of the telephone made huge productivity gains.  The cellphone made gains, but not as much as the telephone did.  And smartphones add comparatively little.  This is the law of diminishing returns in action, applied to technological development.

<As an aside, in my opinion, I think it is possible to get negative gains from technology in certain cases, smartphones being a good example.  The reason stems from distraction, the illusion of multi-tasking usefulness, and blurred boundaries between work and recreation.>

So perhaps we've hit a bit of a plateau for a while in our ability to grow our economy.  There are other reasons why this might be the case SUCH AS AN AWFUL LOT OF DEBT, and for more information I direct you to Robert J. Gordon's work on the subject.

However, we've been growing consistently for a number of generations, we've come to expect it.  I think governments are not prepared to face a non-growth environment and will attempt to grow by any means possible.  One of those means is what we have now - quantitative easing.

My next posting will discuss the impacts of this policy.