Shiny and Scarce

The secrets to sustainable growth and wealth

Photo by Jingming Pan on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter where growth is elusive, everyone is still rich, and gold is risky.

Growth wins

Well, not when it comes to our actual policy choices—just what’s considered prize-winning economics. The Nobel Prize is hardly a leading indicator of the future of economic research, let alone policy. But here’s hoping this one is different.

I doubt it, because while economic growth is the only free lunch in the economy, it requires embracing things policymakers are increasingly uncomfortable with. I wrote for Bloomberg about the five things I learned from Joel Mokyr on growth. His work shaped how I understand why some countries are richer than others.

1. People tend to resist growth because it means change and uncertainty—and people hate that.

2. Innovation takes time to find its best use, let alone show up in productivity numbers.

3. Growth is unpredictable; it changes the economy in ways we can’t yet fathom. So we just don’t know what the new AI jobs will be.

4. Growth is about more than economics. A culture that fosters innovation and risk-taking is critical. You can’t just spend money-on-infrastructure-and-industrial policy your way to sustainable prosperity.

5. Growth is not inevitable. The high growth rates we’ve seen are unusual—and not guaranteed in the future.

These are timely lessons as Europe ponders what to do about its low growth rates, and as others look wistfully at the Chinese economy.

Not so hard, is it? And yet countries are running from growth. I get it—like anything else, there’s a growth/risk trade-off. Growing economies also mean more risk, and that means recessions and wealth destruction. The role of policymakers for the last seventy-odd years has been to make us safer, not richer. But that’s an expensive trade-off.

Merton always said to me: if you need more money for retirement, there are three things you can do:

1. Save more.

2. Take more risk.

3. Work longer.

That’s it. And economic growth is the same. If we want growth, we must also reduce our debt, work longer (or get younger), and take more risk. I wrote for Bloomberg about how our policymakers will resist this and look for an easier way out. I suspect their next move will be yield curve control—because it will juice consumption and make our debt feel cheaper.

We already hear rumblings about lowering rates across the curve. Maybe they’ll lower rates through repression, maybe through QE. But you only need to look at Japan to see why that’s a mistake. For years, Japan was supposedly the poster child for why it’s fine to run up lots of debt and have no problems at all. But they could only do that by holding down interest rates—and that created lots of zombie companies and all sorts of distortions. It’s one big reason their economy grew so slowly.

You might say, fine—low growth and a decent standard of living is good; I’d take it! But it’s not sustainable. Now that inflation and rates are up, Japan can’t keep repressing rates. And all those zombie companies are going out of business.

What does rich mean?

I have a few hard rules when it comes to personal finance. One is: never look at your account balance for risky, long-term investments. But lately I can’t help myself—at least on the days markets are up. With the soaring stock market, I’m starting to feel a little rich—and I get a little rush looking at that balance.

But I shouldn’t. For one, markets are a bit expensive right now. While I still believe in long-term stock investing, no one should get too attached to any number right now. Also, almost all my money is in retirement accounts that I still owe income tax on. I’m also years away from accessing that money without paying a penalty. I’m not nearly as rich as my Fidelity balance suggests.

And I’m not alone. We are entering the age of the illiquid millionaire. One in five Americans now has a net worth of $1 million or more—but not really, because most of that wealth is illiquid and subject to large tax liabilities. $1 million doesn’t mean what it used to. Realistically, it’s more like $700,000—if you’re lucky with markets.

Besides what can you do about asset risk? Invest in gold? Why is that the safe haven? Nothing about it is safe—or a haven. Gold prices are more volatile than stock prices.

And its correlation with stocks isn’t even stable. The only reason I can come up with is that gold is both scarce and shiny—and those two qualities satisfy our primal need for security. It’s remarkable that in the modern financial world, shiny and scarce is what we revert to—rather than, say, an inflation-linked bond.

Until next time, Pension Geeks!

Allison