Patience is a virtue when it comes to economic growth
“Savers either have an irrational belief in what will happen next or a heroic cheerfulness that things will turn out OK”
IMF managing director Christine Lagarde. The organisation is about to downgrade its economic forecasts for global growth this year
Patience, we are often told, is a virtue. The main reason why sustained global economic growth began only 250 odd years ago was that there was no way to express, financially, hope or belief in the future: that was a matter for philosophers, not investors . The economic future - growth - is created by refraining from spending today. That’s the saving part, which is perhaps the easiest bit. Money, gold or whatever can always be buried in a hole in the ground. Such processes are not part of the growth story. Rather, the resources we don’t consume today - saving - are somehow transformed into bigger and better assets that give rise to increased consumption in the future. That’s the investing part, the bit that didn’t really happen in any serious way until financial markets were invented, markets that transformed saving into serious, productive, capital accumulation.
A belief in the future and an accompanying desire to affect its shape is an almost unique feature of human beings. There is virtually no evidence that suggests any other species is even aware that the next minute exists. Even those creatures that seem to have a plan that involves the future are genetically hard-wired to behave in this way; they do not, it seems, make conscious choices.
In some ways, this is all pretty amazing, particularly when we acknowledge that the future is utterly unforecastable. Savers either have an irrational belief in what will happen next or a heroic cheerfulness that things will turn out OK, even if we have no idea how or when. Most economic decisions, particularly those made by investors in financial markets, are made by people who fall into one or other of these camps. The majority of people seem to believe that we can forecast the economy to a reasonable approximation: the main reason why there is so much financial and economic volatility is that each and every one of those forecasts always turns out to be wrong. At which point investors believe they have to do something.
We really do get to choose whether our economies grow. The more financial patience we display, the better our chances of an enhanced economic future.
Apparently, it has something to do with the pre-frontal cortex, the bit of the brain that has only (relatively) recently evolved. The chief economist of the Bank of England, Andrew Haldane, has written about all of this and suggests that economic growth, globally, correlates well with the development of ‘the patience gene’. He very circumspectly points to studies that suggest countries associated with the ‘Protestant Ethic’ have had faster economic growth, via more patience, than have Catholic countries. “Asian values”, which embody thrift and patience, most notably (but not exclusively) in China over the last three decades have also been associated with faster economic growth.
We can marvel at the investment story. But it is important to realise that at its core is a series of choices. The first,and most important, is whether or not we defer to our instincts for instant gratification. We then need to decide where and how much to invest in our futures. In this sense, we get to decide our future.
The IMF is about to downgrade its economic forecasts for global growth this year (it will leave 2015 estimates unchanged). It is interesting to look at its most recent data and projections for capital spending. For ‘Advanced Economies’ the average rate of investment over the period 1996-2005 was 3.5 per cent. Over the period 2006-2015 it is likely to turn out to be 0.5 per cent of GDP.
There has been a collapse in investing in our future. There are lots of reasons for this. First, a lot of this fall has been driven by the public sector: austerity has led to cuts in capital spending. For all the furore about spending cuts, most of the cutbacks have fallen on government investment. Second, companies have not been investing, at least at anything like the rates that might have been expected. Short-termism is a disease that has spread, via stock markets, to company management teams. Paradoxically, too many investors reward companies that don’t invest with higher share prices. Here, patience is a sin.
Nobody will be surprised to learn that while investment is expected by the IMF to recover next year, it is only in the US, UK (particularly) and Germany that anything interesting is expected to happen.
Wittingly or not, we are making choices about our future. We are choosing not to invest, just as the cost of doing that investment - those low bond yields we keep hearing about - is currently at or close to all-time lows.