It’s been another year since my last round of economic predictions. I’ll comment on the status of various economic topics and give my thoughts on how I think they’ll end up. If any ideas seem incongruous you may have to read the previous year’s article to get the context.
Brexit: The fact that so few people even knew it was happening until it happened is likely what lead to much of the panic and exaggeration surrounding this still mostly unknown event. The people of the United Kingdom have voted that they feel their country will be better off not being under the thumb of the European Union. Except for those who voted for leaving in Britain, it seems the whole world assumes that this event will be terrible for everyone and lead to catastrophic events in the future. What I found comical in the aftermath of the event, was that every major stock market exchange fell much further than Britain’s! Maybe the Brits are on to something… Somehow Britain leaving the EU is more devastating to the United States and Japanese economies than it is to Britain’s, at least according to the recent movement of stock prices. Something seems fishy to me. These last few days have all the hallmarks of an irrational market full of irrational actors and I’m willing to bet that this event will have close to zero of an overall long-term economic effect on the world. Maybe it will spark some political and cultural changes, maybe the EU will be dissolved, maybe the Euro currency will be abandoned, maybe many more effects, but still: how will this stop the fact that every day the world needs more energy, more goods, more services, and that everyday Brits, and all other industrious peoples wake up and do what it takes to lead a happy life for them and their families?
China: Here is a good place to talk about the largest global macroeconomic shift I see taking place, which is the increase in manufacturing productivity versus demand. Just like the shift 100 years ago from an agricultural society to a manufacturing one, we are in the midst of a shift from a manufacturing economic system to a servicing one. What this means is that just as was the case with food 100 years ago, it takes fewer and fewer workers every year to satisfy the global demand for goods. Over the course of this century, the amount of people employed in manufacturing jobs will continuously decrease even as the demand for the quantity and quality of goods will continuously increase. Robots, AI, and other innovations continue to make human employment obsolete in this area. The world can then be split into two types of economies, manufacturing-centric, and servicing-centric. With a few exceptions, the servicing-centric economies are starting to pull ahead of their counterparts. The U.S. dominates the world in the service sector and is hence leading the major economies in growth, despite it already being the largest economy in the world. Japan, China, and other manufacturing-heavy economies are struggling to keep pace and despite the writing on the wall, are struggling culturally come to terms with impeding changes, as evidenced by reluctant policy shifts. China remains in the news with various economic struggles as was discussed in the previous post, but this underlying issue seems to me to be what is truly at heart beneath all the layers of politics and controls.
A side-effect of this huge shift will be that capital owners (investors, capitalists, business owners, etc) will continue to capture an increasing portion of the overall economic wealth of the nation versus capital operators (workers, especially low-value added employees). At some point the government will be forced to step in to…”redistribute” the wealth, either in the form of Universal Basic Income, a huge Earned Income Tax Credit, or some other mechanism to artificially place wealth in the hands of non-value adding citizens. At some point in this century, there simply won’t be the need for that many workers: the basic needs of every citizen will be able to be provided by a relatively small portion of the labor force. The rest of the population simply won’t have any job opportunities. And yet the overall wealth of the nation won’t decrease, it will just simply be concentrated among a small subset of the population, that is, before the government forcibly redistributes it. If my tone doesn’t convey it, let me be clear: this is a highly desirable outcome to the average person. What I’m telling you is that by the end of this century or the next, you’re basic needs will be easily met by the state simply by right of birth, and you’re whole life will be about deciding what to do with all your free time.
Oil/Energy: World appetite for energy continues to increase, and oil as a source continues to dominate. Despite the slowdown in demand-growth for oil from China and the decreasing demand from Europe, overall world oil demand continues to grow at a decent clip. In the meantime the collapse of oil prices have caused a massive decrease in Capital Expenditure spending by oil companies. At least 50% of the total CapEx budget for oil exploration and development has been cut. Currently oil demand and supply are in near equilibrium, with the world producing just under one million barrels of excess oil per day, a fairly small excess by historical standards. However with such a dramatic decrease in projected oil production, the coming decade could be very volatile for oil, with the possibility of significant production shortages.
At the same time, renewable energy continues its meteoric growth, making up a now significant portion of new energy production capacity. Some countries, like Norway, are in the process of passing law to outlaw fossil fuel vehicles over the coming decade. The decrease in demand for fossil fuels for vehicles from switching to electric could offset the upcoming decrease in oil production. Or not at all. It’s impossible to guess. The only thing I’d be willing to say for certain is that the world will need more and more energy every day. How the energy is sourced will be a big jockeying between cultural, political, and economic forces. My guess is that fossil fuels will remain the most significant source for the next few decades and then begin to taper off and mostly disappear by the end of the century.
Bitcoins/cryptocurrencies: Since last year the price of a coin to USD has increased to ~$650 per coin from $250 (all-time high of ~$1,000). However my negative feelings on the cryptocurrency have increased greatly. The utility of the system as discussed in previous posts is still there, and more and more companies continue to adopt them as a potential form of payment, but the worthlessness of the coin is ever more apparent to me. It remains to be only as useful as a means of exchange, and an extremely dangerous one at that. Criminals are finding the anonymity and convenience of the coin increasingly more powerful as a weapon, as demonstrated in the recent massive Ransom-ware attacks plaguing the world right now. I still have yet to see a valid economic argument why the coin should hold any value passed the utility of an anonymous secure electronic payment (which I guess to criminals would indeed carry substantial value).
Social Media/ New Tech: It may be time to finish the Social Media aspect of this discussion, as most of these companies (with the huge exception of Facebook), have done extremely poorly. The likes of Twitter, LinkedIn, Groupon, etc. have had their stocks tank despite what remains strong brand names (LinkedIn just received a buyout offer from Microsoft at a large premium, but still at a permanent loss to most who purchased over the previous few years). Their ability to monetize their brand is where the issue lies and investors are growing weary of waiting around. The lone exception of Facebook has shown some ability to monetize their platform by massively growing ad presence. However I still do not see their platform as indefensible and despite some classical economic barriers to entry like ‘network externality’, it’s just too easy for me to vision a world where I log into FacePlace.com instead to get my daily fix of Keeping Up With The Joneses (or not at all since as of late I log in very infrequently only to find myself bombarded with ads and political declarations).
The New Tech side of this is still raging. Venture Capital is pouring into Silicon Valley start-ups and industry game-changers such as Uber and AirBnB. I’m typically in favor of systemic shifts that reduce overall costs to the consumer but I’m not yet convinced that swapping regulated services (hotels and taxis) with an army of unregulated part-timers will be the final correct form to address the bloat and inefficiency of the transportation and hospitality industries. And even if it is, picking the winner (Uber vs Lyft, etc.) has historically proven very difficult, nearly to random status.
That’s all the predictive power I can muster! I’ll check back in with these next year and see how they’re playing out. Thanks for reading and feel free to comment or question!
-Shai