Behind the monetary curtains

Luckily, I stumbled upon the website of Research Affiliates owned by the respected Rob Arnott. The pieces I read were two: ‘Lies, damned lies and statistics’ (link) and ‘Echoes of 1999: the tech.-bubble and the Asian flu’ (link). The second one is very useful for those thinking about asset allocation for the next half decade, full decade or more.

I will cite something from the first one. You should read the rest of the stuff and it is worth it:

Since 1995, the average year-over-year inflation rate for energy has been 3.9%, for food, 2.6%; for shelter, 2.7%; and for medical care, 3.6%. If we strip out all other items and recalculate the index based exclusively on these four components, we find the average rate has been about 2.9%, right in line with households’ expectations….

If we focus on the “big four” over the last decade, the inflation that Americans experienced was about 0.5% more…..

… Officially, GDP has grown 1.4% a year, over and above inflation. Over the same period, the U.S. population has grown by 0.9% a year. Thus, real per capita GDP has risen by a scant 0.5% a year. Subtract the 0.5% measurement bias—probably a conservative estimate—and the average American has experienced zero growth in personal spending power over the past decade….

…. Then, in a towering act of hubris and hypocrisy, the central bankers collectively deny they played any role in widening the income and wealth disparity, or in hollowing out the middle class. Ouch.

Actually, this massive inequality and the hollowing out of the middle explain the so-called productivity paradox. Indeed, the latter is a ruse to deflect attention from the former. There is no productivity mismeasurement or understatement. It is merely captured wholly by profits. Gains, whatever there are, from technological advances have accrued to those who have capital. To get an idea of these arguments, see the simple paper by Syverson of Univ. of Chicago. A ‘skim the surface’ piece by Neil Irwin in NYT took me to that paper in my ‘downloads’ folder!

Neil Irwin links to a Brookings paper written by three Fed researchers whose conclusions are similar to Syverson’s but they typically state it in such anodyne terms that you are bound to fail to absorb their import. I have not read the full paper. I skimmed it.

Technologies might result in time saving and how it is spent determines whether it improves labour productivity. IF it results in more leisure, consumption and production of leisure goods will rise.

Indeed, the so-called ‘Fourth Industrial Revolution’ is going to accentuate this phenomenon greatly. Gains from the revolution will be captured disproportionately by capital, as workers are displaced. Their profits and standards of living will rise. Labour productivity will rise thanks to labour displacement. Check out this VoxEU piece that arrives at this conclusion, based on evidence from construction and cement industry from an earlier era.

Thanks to my friend, Gulzar Natarajan, I read the ‘China’s robt revolution’ in FT. Could be behind a paywall. The impression I had on reading it was this:

There is a certain robotic (pun intended) excitement about these new gizmos (like children with new toys). Neither the Boston Consulting Group folks, nor governments understand what they are unleashing. China itself is not yet ready for robotics. It may have a declining workforce but the number is huge. Robotics will ensure premature de-industrialisation. It is a huge economic and social risk for India and Indonesia, just to name two.

Incidentally, that is why the piece by Sanjay Joshi of ORF is misplaced and premature. Prescriptions about how to handle the upcoming ‘industrial revolution’ cannot be made loosely and certainly not based on euphoria and excitement about the new toys. It is a phenomenon that is scarcely understood in terms of implications and consequences at many levels.

In the final analysis, the needle of suspicion for the missing productivity and for the uncertain and unintended consequences of the ‘fourth industrial revolution’ points to monetary policy in the West that has lowered cost of capital so much that whatever little investment that takes place is not of employment-generating variety but of employment-displacement variety.

Of course, much of the investment that takes place is of speculative nature, in asset markets. That is why there is no output growth and there is no wage growth of any meaningful degree, certainly not to the extent that should have been seen in the light of the ridiculously easy monetary policy that has been followed for such a long time.

Indeed, one should even wonder if even the reported GDP growth rates- low as they are – are not already inflated by statistical sleight of hand. No, this is not a conspiracy theory but just check out the Rob Arnott piece cited earlier.

We are now back to a world when what we see as market prices are not market prices at all but manipulated prices. Whether the manipulation is open or secretive is the only topic for debate.

Only when we return to the normal world of capitalism where prices reflect the true economic value of the good/asset, can we assess the conditions that prevail in the world – productivity, the fair remuneration for labour and capital – and their future trajectories.

Until then, there is no difference between the kind of the world that prevailed behind the iron curtains and the one we have now in the world, behind the monetary curtains.


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