Humans are used to progress. Of course there were setbacks, like communism. But even the Black Death delivered an upside: higher wages for low-skilled labour.
Overall, you’ve got to admit things are getting better, a little better, all the time.
But I’m growing worried we’re shooting too many of the geese that have laid golden eggs for millennia. That we’re pushing our luck a little too far for investors to rely on the upward trend of history anymore.
Things may have gotten better over time. But some of the setbacks along the way lasted an investor’s lifetime…
So, after last week’s rather awkward dalliance with optimism, it’s back to worrying about what could go wrong…
Population pyramids have never
been turned upside down before
One reason humanity’s lot always got better was a growing population.
That’s an anathema to many people today. They think more people means a smaller share of the pie per person.
But only an overcrowded country like Australia, without space for further development, would think this way…
In truth, larger populations benefit more from the things that give us prosperity. Division of labour, specialisation, innovation and trade, for example.
Today, populations in many developed countries are doomed to begin falling for the first time ever.
Again, that sounds like a good thing to the ‘fixed pie’ crowd. They think we’ll get a larger share of the country’s GDP each if there are fewer people. But there are many reasons this might not be the case.
Smaller populations will get a larger share of the national debt, for example. If nominal growth doesn’t have the tailwind of population growth, then debt becomes a real problem. It’s no longer just a matter of time before the debt burden becomes sustainable simply because of population growth.
Besides, it’s not the absolute numbers that matter for a population pyramid. It’s the dependence ratio – the number of people of taxpaying age per tax-receiving age.
Just as an upside-down pyramid is unstable, so too is an upside-down population pyramid.
What does politics look like when the voting power of the taxpayers are outweighed by the voting power of retirees?
Babies, bathwater and immigration
As a spouse visa holder, I may have dodged Japan’s new immigration crackdown. But the immigrants I know are rather grumpy that the country that invited them in so enthusiastically is suddenly having second thoughts.
While the reasons for cutting immigration are even more obvious here in Japan than Australia, the costs of the crackdown that’s capturing the developed world are not yet clear.
Wealthy countries didn’t quite realise what they were getting themselves into by opening up to too much immigration. Now they don’t seem to understand the consequences of cutting it either.
We didn’t have a plan for dealing with a wave of immigration. Now we don’t have a plan for what our economies will look like with significantly less immigration.
At its heart, immigration is a quality, not a quantity, question. But governments just can’t seem to separate the babies from the bathwater. Which is bizarre. It’s easy to tell who should stay and who should go. You’re just not allowed to say it. Even in Japan.
And so the world’s developed countries are turning against immigration without a plan to deal with the problems that immigration was supposed to fix.
It’s not like they’re embracing AI and robots to deal with labour shortages…is it?
The luddites are back
It’s a tale as old as time. No doubt the Sun-Dryers Union once opposed the use of fire in cooking. And the porters held a picket line against the wheel.
Today, the services workers are panicking over AI. And the workers who produce goods are worried about humanoid robots.
It’s only a matter of time before governments crack down on these innovations.
We’ve always managed to overcome the Luddites in the end. The benefits are just too good to give up. Humanoid robots were spotted at Haneda Airport, pushing cargo onto planes.
But, as so many times before, there’s a worry that the latest new technology is a different beast altogether. AI and robots really do seem like they could leave us humans with precious little to do.
Who would’ve thought most humans are little better than robots and AI at work…?
The trouble with rejecting innovation is simple. Not every government will restrict or ban AI. The countries that put their foot down will get left behind.
Historically, such countries eventually get invaded by those who embraced the new technology. Japan and China learned this the hard way. That’s why their economic model is to copy and improve on superior Western goods today. They won’t be left behind.
So, what sort of country will Australia be? One that embraces new technology despite the instability it causes, or one that gets left behind?
The golden egg, literally
Geese don’t lay golden eggs. Mining companies do. And yet they are vilified for it. Alongside the gas companies that keep the lights on, the oil companies that keep us moving and the chemicals companies that keep us healthy.
Can an economy remain prosperous when its consumers vilify its producers?
The relationship goes beyond providing the resources we need to live. It includes our Super fund investments, our jobs and the tax revenue that pays our welfare.
When the political system runs on narratives that are so blind to reality, an economy is in trouble. Soon, you and I will long for the days when the key political debate was about the definition of a woman.
Not to worry, though. There’s always a Chinese company willing to take an Australian one’s place.
Free trade and globalisation weren’t only bad
For decades now, Chinese taxpayers have been subsidising our solar panels, cars and gadgets. Yet we had the temerity to complain about it.
Of course, there are reasons why relying on imports might be a bad idea. The kill switches found in cars and solar panel equipment, for example. They’re a hint we may be giving up more than our car manufacturing industry.
But the point is one that the economist Thomas Sowell is famous for: there are no solutions, only trade-offs. If you don’t like cheap Chinese goods, you’d better be ready to pay higher prices.
Which begs the question, why Australian consumers didn’t just ‘buy Australian’ in the first place? Why do we need a politician to protect us from our own choices?
We can’t end the era of free trade and globalisation without paying a price. In this case, the price will be higher prices.
Death and taxes
You can’t eat the rich. But you can tax them. At least governments have been trying to. But it doesn’t work out very well very often.
It turns out the Laffer Curve applies beyond income tax. Inheritance tax, private schools, childcare subsidy cutoffs and countless other crackdowns are failing to bring in the money. The rich leave, obfuscate or give up.
Not everyone thinks this is a bad outcome.
And it’s tough to entice them back. BP is considering leaving the North Sea by selling its remaining assets. The goose that lays the golden eggs is leaving before it gets killed.
What happens next?
If you’re feeling as gloomy about all this as I am, what’s an investor to do?
The answer is very simple. It’s not the first time humanity has faced such setbacks. Even if they are looking dangerously bad. And some challenges really are unique.
There is one asset that benefits from chaos. It’s the traditional way to sit out bad periods of history. A way to try to keep your wealth intact when other investments are at risk.
Find out what it is here.
Regards,
Nick Hubble,
Strategic Intelligence Australia
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