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April 28, 2022

Approaching a shift in the global economy and financial markets

The broad theme in the global economy over the past 50 years, as far as investments are concerned, is the easy access to cheap money – as manifested in the credit boom, the unfettered growth in money supply, and low interest rates. For the bankers greed was good. Ever since the demise of the Bretton Woods system, which set currencies free to float against each other, financial markets have been driven by easy access to money, the credit boom, growth in money supply and low interest rates. Generations of money managers grew up in this paradigm and know little else.

The good effects of greed

Looking back at recent history and looking for similar macro themes that dominated economies for 40 to 50 years, one can argue that the period before the easy access to cheap money was similarly driven by a macro theme – the rise of the middle class and the creation of the consumer culture in which General Electric, Walmart, Kroger and motor manufacturers dominated not only economies, but also financial markets. For middle-class consumers greed was good and colour television was king.

Similarly, the period before the creation of the consumer culture was dominated by the establishment of the corporate culture that dominated economies and financial markets (e.g. Standard Oil, US Steel and J.P. Morgan). For the titans of industry greed was good.

In the period preceding the rise of the corporate entities, economies were in turn driven by the railroads unlocking new markets for manufactured goods. The efficiencies of the Industrial Revolution and territorial expansion drove economies as the American hinterland was settled and the scramble for Africa played out. This was the era of the railroad. For the railroad barons greed was good.

Without reaching back to antiquity, one can always identify a large macro-economic theme that dominated the world economy for generations. For instance, the period before the era of territorial expansion and unlocking markets was driven by post-feudal awakening that resulted in colonialism.

Gradual change in the global economy and financial markets

The pertinent question today is whether the global economy and financial markets are amid a paradigm shift, where easy access to cheap money won’t drive economic growth and financial markets in the same way as it did over the past 50 years. A paradigm shift is never announced and never occurs overnight. It is a gradual shifting of the ground on which the economy is built.

There are currently several forces that may contribute to a potential paradigm shift – climate change, a renewed emphasis on the inherent goodness of mankind, a collective responsibility for mankind’s future, but also a revival of nationalism after 70 years of Pax Americana (the American age). It would be foolish to expect a summary conclusion to either the age of easy access to cheap money or the United States’ position as primus inter pares (leader of the free world), but retirement funds and especially younger members who save for retirement should at the very least pay attention to society’s growing desire for greater social justice. In the next 50 years, the world of retirement savings may be very different from the past.

The world has benefited from the dividends of globalisation and peace since 1989, and has seen tremendous wealth creation (e.g. growth in retirement funds) over the past 30 years. There is growing recognition that these dividends need to be shared and that power imbalances should be addressed.

The investment into infrastructure and education in unserved territories enabling them to share in the global prosperity, and the search for a common value system that avoids violent conflict and recognises and tolerates differences in language and religion, at the same time improving the living standards of many who are desperate for such opportunity, provide an opening for retirement funds to participate in and benefit from a paradigm shift.

Is the world moving to Pax Universalis, in which global prosperity can be shared and a common value system be advanced? Or will the nationalist trends of the past, in which Might Is Right, continue to prevail, as with Russia’s invasion of Ukraine? Economically, these uncertainties are reflected by pressure on supply chains at a global level and inflation at a local level. Higher prices and the scarcity of goods could contribute to the desire for a new world where greater fairness prevails.

The desire for greater social justice creates a new energy in the world. The Occupy Wall Street movement, the Stay Woke initiative, #MeToo and Black Lives Matter all tapped into this energy. It could affect the global economy, financial markets, as well as your retirement portfolio in years to come. The world around us is changing.