10 ms·

We will see the return of capital investment on a massive scale

81 points by programmarchy 4y ago

deleted 4y ago
[deleted]
xfour 4y ago
That was an extremely well written explanation of his viewpoint on the future. Government providing guarantees leads to a weaker central bank and all the ramifications that would have.
- eru 4y ago
  It doesn't just lead to problems for the central bank, it's also a waste of taxpayer money and shares many of the same issues as any other kind of central planning. High inflation also only makes a dent in existing long duration debt. It doesn't do anything to reduce existing short-term debt, nor to reduce the real cost of new debt that comes from new deficits (at least for government debt). (That is because short-term debt needs to be either paid off or rolled over.)
- manholio 4y ago
  I'm unconvinced that the power of those load guarantees can be in any way compared to the massive post war interventionism that, at least in Europe&UK saw large scale nationalizations in key areas. Sure, a green loan guarantee spurs investment in that area but the business model must still be sound or it will be falter in the marketplace. And if government steps in and, say, also guarantees an energy price, that's just another form of taxation for the consumers that must pay the costs of a political choice in energy. This will quickly hit a wall of resistance from consumers if that particular technology is a mallinvestment. Furthermore, the loan guarantees themselves might not be officially counted in the debt to GDP ratio, but rational investors will be aware of them and price government bonds accordingly. A state that over-guarantees bad loans will see trouble servicing their debt in the marketplace, and at least in Europe the well known structural fragility of the Eurozone will amplify those shocks and bring them into the foreground.
  - shawndrost 4y ago
    Would you approve of the comparison to postwar interventionism if you saw large scale nationalizations in key areas? Like if big EU energy companies, say EDF and Uniper, were to be nationalized?
    - manholio 4y ago
      Post war interventionism included energy utilities, which in many cases were rebuilt from the ground up, but also transport, rail in particular, telecommunication, extractive and heavy industries - and it happened in economies with a much smaller tertial services sector. I don't know what the equivalent contemporaries would be, but in any case we would need to see public spending or nationalization on a scale incomprehensible to the current neo-liberal european business climate, not just some puny guarantees & price ceilings, which are not very sustainable anyway.
alephnerd 4y ago
For reference, the conversation in the article has the Eurozone in mind primarily.
- eru 4y ago
  What's interesting is that before covid hit, Germany was in the midst of a successful project to pay off its government debt. They hit about 82% of government debt to GDP in 2010, and went below 60% in 2019. All with low inflation. See https://en.wikipedia.org/wiki/Debt_brake_(Germany) https://en.wikipedia.org/wiki/Debt_brake_(Germany)
  - fuoqi 4y ago
    It's important to note that it was done not in the small part thanks to the rising debt levels of other EU countries. In my opinion, you should view EU as one system.
    - imtringued 4y ago
      Yes because Germany exports to other countries by lending them money. The export strategy is entirely debt fueled but that won't stop it from being called export champion and it is really a lending champion.
      - Atheros 4y ago
        Why does that matter?
      - eru 4y ago
        What does this have to do with German government debt?
    - eru 4y ago
      How is that mechanism supposed to work? Are you somehow assuming that the total amount of government debt is fixed?
julianlam 4y ago
As an armchair sceptic — ask 100 economists how the world in economy will fare in the next 20 years, and not only will you get 100 different answers, you'll still manage to find one that hits the mark every single time. That doesn't necessarily mean they knew what they were talking about. Could be they just got really lucky. In a recession we're always looking for a way out, a silver bullet, someone to whom we can hitch a ride (and our money) to.
- hotpotamus 4y ago
  If you only get 100 opinions, I'd say you've managed to pick the 100 laziest economists in the world.
- jkhdigital 4y ago
  You're not wrong, but that's why you always listen to their explanations for their predictions. The mental models that generate these predictions are where the wisdom lies.
pickovven 4y ago
So he's getting credit for predicting high inflation in 2020?
- programmarchy 4y ago
  More importantly his analysis describes this inflation as the result of structural changes, not cyclical changes. He describes how the managerial class is overpowering the financial class, and what the results are likely to be in the short term (capex boom) and long term (stagflation).
  - jkhdigital 4y ago
    > the managerial class is overpowering the financial class this is a fantastically succinct summary of his principal thesis, well said
  - matthewdgreen 4y ago
    At this point a 20-year capex boom focused on climate change followed by any level of financial pain sounds a lot better than a “financially well-managed” 20 years where we don’t make those investments.
    - programmarchy 4y ago
      I tend to agree, and if you add to that infrastructure essential to national security like chip manufacturing then sophisticated Republicans can get on board also.
eru 4y ago
I'm not quite sure why everyone always warns about high debt levels, but nobody seems to care about high equity levels? Both debt and equity are just different points on a spectrum that you mix-and-match from to can structure the liabilities side of your balance sheet. However as the linked article points out, the big difference here is not debt vs equity, but that governments step in with tax payer money to guarantee the value of debt in a way that they don't do for equity. Those government guarantees are the real deal, whether that's an explicit guarantee or the implicit 'too big too fail'.
- jjeaff 4y ago
  I'm confused, you don't go bankrupt from too much equity. There isn't an existential threat with too much equity. Why do we need to worry about it?
  - eru 4y ago
    Well, what is bankruptcy? Bankruptcy just means that the company's old equity is 'deleted' and that what used to be debt gets turned into equity. Nothing about how the company operates has to change. In principle, workers can still make the same products, customers can still buy those same products etc. Airlines are the prime example of this: airlines go bankrupt all the time, you could almost say it's part of their business model. Of course, the process of bankruptcy also often comes with big changes in how the company operates. But you also often see those big changes and turnarounds without any bankruptcy. (Those big changes can even include shutting the company down.)
    - jjeaff 4y ago
      Yes, but equity holders don't have mandatory service payments. So they can't force a bankruptcy. Too much and it might make it a poor investment, but it doesn't affect cash flow. It's not a public emergency if a big company becomes too diluted.
- jkhdigital 4y ago
  In the abstract, you're not wrong that the managers of a business have a lot of freedom to tweak debt/equity ratio to fund their operations and capex. But from the perspective of an investor, debt and equity are as different as night and day. If nobody wants your equity then you don't have a lot of room to adjust the ratio. High debt means high leverage. Low debt means low leverage. Whatever you are calling "high equity" is just low debt, because (as you said yourself) they have a direct inverse relationship. Unless I'm missing something here...
dzink 4y ago
According to Napier using his experience in Asia, governments will shrink the economy, making government debt the most attractive investment (especially for pension funds that need short term growth and stability) and then use that power to release government-backed credit to politically-favorable industries like energy, climate-change, construction etc. Effectively nationalizing the economy, pushing aside the central bank, and slowly eating up the savings of those who saved with inflation, while supporting companies who take on debt to build local (capital expenditures). That will keep going until people overthrow said government (most likely with another with a collection of favorite industries to subsidize), but that won't happen for a while because most people will enjoy the growth in local making at first. The failure points come because the government doesn't know what is actually needed and starts spending on stuff that is not needed (creating bubbles in construction like China with cities that stay empty) or starts a war (defense is an industry too, plus hard to overthrow a war-time government). Europe has started down this path already, while the US and Switzerland still stand as free market economies drawing in all the fleeting investment cash, until they bubble too much and lose their currency.
- WastingMyTime89 4y ago
  Your first paragraph pretty much describes what happened in France between 1946 and the beginning of the 50s (the war shrunk the economy but the rest). Why do you think the government would be overthrown? It’s merely redistribution. It will just last for a couple election cycles.
- another2another 4y ago
  "and slowly eating up the savings of those who saved with inflation" Do people really sit on cash as it's being devalued by inflation anymore? I thought savings of all types were at historical lows since the 90's where nobody saves, has debt (e.g. mortgage & credit cards), or invests in the stock market in some form - which has become incredibly easy to do over the last 2 decades.
fuoqi 4y ago
Let's be honest: prolonged "financial repression" is effectively soft default of governments. It can work fine in the short term, especially with elevated instability abroad (as usual the US benefits quite immensely from it relative to other countries), but try to run economy in such mode for 5-10 years and investors will stop financing government deficits and the system devolves into government simply printing money for itself. It quickly (on historic scale) erodes trust in the financial system, leading to its accelerated degradation. Government's inevitable malinvestments financed by the printed money will only add fuel to the fire. Just look at Japan. Now remember that it's the world’s largest creditor nation, while the US and many EU countries are huge debtors. In the past foreign governments and investors were happily financing both of them, but now they are calling on the debt and sanctions against Russia only accelerated the process. If you think that in such conditions you will have enough leeway to finance the "capex boom", you probably will be quite disappointed. Japan and the UK are nothing more than the first cracks in the dam, I am more than certain that we will see much bigger events in the near future. All in all, it seems that we move according to the Ray Dalio's scenario of long-term debt cycles.
- WeylandYutani 4y ago
  It has been working for the US for a very long time and will continue to work as long as the US dollar is the world's reserve. Even the Chinese can't stop using it.
jesuscript 4y ago
Perhaps I’m taking too much of an American centric understanding of his opinion, but the political economy was in full swing during the Pandemic with vaccine subsidies, stimulus, followed by Democrats pushing through a social security increase, student loan forgiveness, and I think we extended unemployment for quite some time, along with rent assistance and eviction moratoriums, and that whole infrastructure deal. They want to do a bunch of other stuff too. “A third possibility would be voters telling their governments to stop these policies by voting them out of office.” In America we are about to go through a midterm where the Republicans will take back parts of Congress, effectively shutting down Democrats ability to continue that political economy. Our rhetoric and political climate is also setting up the foundation for another Trump presidency, and he won’t push for jack shit in terms of government programs (if anything, more tax cuts). It’s a bipolar situation, we are either going to hit the breaks entirely on the political economy with the Republicans, or go full swing with it with Democrats, which I think will leave us in a stagnant place as we shift between both parties over the next 20+ years. Not sure if this is good or bad.
- jillesvangurp 4y ago
  You are describing the past 20 years in terms of politics. Basically, we've had a sequence of relatively powerless presidents of both parties held hostage by a hopelessly divided senate and house failing to agree on much at all except printing more money to keep things going. Both parties have fueled their respective agendas with debt. That is indeed looking like it will extend into the near future.
  - matthewdgreen 4y ago
    I know it’s a lot to remember way back to the 90s, but the Clinton presidency was based on an aggressive program of deficit and debt reduction. It worked extremely well and without major inflation, to the point that the Federal Reserve chairman actually began to publicly fret about government debt levels becoming too low. But then in the 2000s it was completely reversed by a Republican President and away we went. Both Democratic and Republican administrations have accumulated debt since. But the lesson I took from this was (1) the US can reduce deficits if it wants to (and without inflation), and (2) don’t believe political rhetoric about spending or fiscal responsibility unless you see action. Also makes me wish the Iraq war spending had been put into climate change prevention. Can only imagine how much better off we’d all be today.
imtringued 4y ago
The operation "paying off debt" doesn't exist. This is because positive interest rates imply demand for debt outstripping savings. For debt to be paid off, the interest rate would have to reflect savings outstripping debt and forcing a reduction of savings as there cannot be monetary savings without debt, it would be just an empty piece of paper otherwise. In such a scenario, you would need a negative interest rate but since that isn't politically feasible. The only path you can take is through inflation and positive interest. This is what Keynes meant by gold digging, if private business and political interests prevent the obvious and rational solutions, then even the dumbest solution will be better than nothing. So, rather than implement a mechanic that allows a nominal reduction in debt, we need a central bank that constantly keeps inflation high enough to not let ourselves drown in debt, which is why the target is 2% and not 0%.
pkrumins 4y ago
Inb4 global hypermegainflation

81 points by programmarchy 4y ago

deleted 4y ago

[deleted]

That was an extremely well written explanation of his viewpoint on the future. Government providing guarantees leads to a weaker central bank and all the ramifications that would have.

eru 4y ago
It doesn't just lead to problems for the central bank, it's also a waste of taxpayer money and shares many of the same issues as any other kind of central planning. High inflation also only makes a dent in existing long duration debt. It doesn't do anything to reduce existing short-term debt, nor to reduce the real cost of new debt that comes from new deficits (at least for government debt). (That is because short-term debt needs to be either paid off or rolled over.)
manholio 4y ago
I'm unconvinced that the power of those load guarantees can be in any way compared to the massive post war interventionism that, at least in Europe&UK saw large scale nationalizations in key areas. Sure, a green loan guarantee spurs investment in that area but the business model must still be sound or it will be falter in the marketplace. And if government steps in and, say, also guarantees an energy price, that's just another form of taxation for the consumers that must pay the costs of a political choice in energy. This will quickly hit a wall of resistance from consumers if that particular technology is a mallinvestment. Furthermore, the loan guarantees themselves might not be officially counted in the debt to GDP ratio, but rational investors will be aware of them and price government bonds accordingly. A state that over-guarantees bad loans will see trouble servicing their debt in the marketplace, and at least in Europe the well known structural fragility of the Eurozone will amplify those shocks and bring them into the foreground.
- shawndrost 4y ago
  Would you approve of the comparison to postwar interventionism if you saw large scale nationalizations in key areas? Like if big EU energy companies, say EDF and Uniper, were to be nationalized?
  - manholio 4y ago
    Post war interventionism included energy utilities, which in many cases were rebuilt from the ground up, but also transport, rail in particular, telecommunication, extractive and heavy industries - and it happened in economies with a much smaller tertial services sector. I don't know what the equivalent contemporaries would be, but in any case we would need to see public spending or nationalization on a scale incomprehensible to the current neo-liberal european business climate, not just some puny guarantees & price ceilings, which are not very sustainable anyway.

alephnerd 4y ago

For reference, the conversation in the article has the Eurozone in mind primarily.

eru 4y ago
What's interesting is that before covid hit, Germany was in the midst of a successful project to pay off its government debt. They hit about 82% of government debt to GDP in 2010, and went below 60% in 2019. All with low inflation. See https://en.wikipedia.org/wiki/Debt_brake_(Germany) https://en.wikipedia.org/wiki/Debt_brake_(Germany)
- fuoqi 4y ago
  It's important to note that it was done not in the small part thanks to the rising debt levels of other EU countries. In my opinion, you should view EU as one system.
  - imtringued 4y ago
    Yes because Germany exports to other countries by lending them money. The export strategy is entirely debt fueled but that won't stop it from being called export champion and it is really a lending champion.
    - Atheros 4y ago
      Why does that matter?
    - eru 4y ago
      What does this have to do with German government debt?
  - eru 4y ago
    How is that mechanism supposed to work? Are you somehow assuming that the total amount of government debt is fixed?

julianlam 4y ago

As an armchair sceptic — ask 100 economists how the world in economy will fare in the next 20 years, and not only will you get 100 different answers, you'll still manage to find one that hits the mark every single time. That doesn't necessarily mean they knew what they were talking about. Could be they just got really lucky. In a recession we're always looking for a way out, a silver bullet, someone to whom we can hitch a ride (and our money) to.

hotpotamus 4y ago
If you only get 100 opinions, I'd say you've managed to pick the 100 laziest economists in the world.
jkhdigital 4y ago
You're not wrong, but that's why you always listen to their explanations for their predictions. The mental models that generate these predictions are where the wisdom lies.

pickovven 4y ago

So he's getting credit for predicting high inflation in 2020?

programmarchy 4y ago
More importantly his analysis describes this inflation as the result of structural changes, not cyclical changes. He describes how the managerial class is overpowering the financial class, and what the results are likely to be in the short term (capex boom) and long term (stagflation).
- jkhdigital 4y ago
  > the managerial class is overpowering the financial class this is a fantastically succinct summary of his principal thesis, well said
- matthewdgreen 4y ago
  At this point a 20-year capex boom focused on climate change followed by any level of financial pain sounds a lot better than a “financially well-managed” 20 years where we don’t make those investments.
  - programmarchy 4y ago
    I tend to agree, and if you add to that infrastructure essential to national security like chip manufacturing then sophisticated Republicans can get on board also.

eru 4y ago

I'm not quite sure why everyone always warns about high debt levels, but nobody seems to care about high equity levels? Both debt and equity are just different points on a spectrum that you mix-and-match from to can structure the liabilities side of your balance sheet. However as the linked article points out, the big difference here is not debt vs equity, but that governments step in with tax payer money to guarantee the value of debt in a way that they don't do for equity. Those government guarantees are the real deal, whether that's an explicit guarantee or the implicit 'too big too fail'.

jjeaff 4y ago
I'm confused, you don't go bankrupt from too much equity. There isn't an existential threat with too much equity. Why do we need to worry about it?
- eru 4y ago
  Well, what is bankruptcy? Bankruptcy just means that the company's old equity is 'deleted' and that what used to be debt gets turned into equity. Nothing about how the company operates has to change. In principle, workers can still make the same products, customers can still buy those same products etc. Airlines are the prime example of this: airlines go bankrupt all the time, you could almost say it's part of their business model. Of course, the process of bankruptcy also often comes with big changes in how the company operates. But you also often see those big changes and turnarounds without any bankruptcy. (Those big changes can even include shutting the company down.)
  - jjeaff 4y ago
    Yes, but equity holders don't have mandatory service payments. So they can't force a bankruptcy. Too much and it might make it a poor investment, but it doesn't affect cash flow. It's not a public emergency if a big company becomes too diluted.
jkhdigital 4y ago
In the abstract, you're not wrong that the managers of a business have a lot of freedom to tweak debt/equity ratio to fund their operations and capex. But from the perspective of an investor, debt and equity are as different as night and day. If nobody wants your equity then you don't have a lot of room to adjust the ratio. High debt means high leverage. Low debt means low leverage. Whatever you are calling "high equity" is just low debt, because (as you said yourself) they have a direct inverse relationship. Unless I'm missing something here...

dzink 4y ago

According to Napier using his experience in Asia, governments will shrink the economy, making government debt the most attractive investment (especially for pension funds that need short term growth and stability) and then use that power to release government-backed credit to politically-favorable industries like energy, climate-change, construction etc. Effectively nationalizing the economy, pushing aside the central bank, and slowly eating up the savings of those who saved with inflation, while supporting companies who take on debt to build local (capital expenditures). That will keep going until people overthrow said government (most likely with another with a collection of favorite industries to subsidize), but that won't happen for a while because most people will enjoy the growth in local making at first. The failure points come because the government doesn't know what is actually needed and starts spending on stuff that is not needed (creating bubbles in construction like China with cities that stay empty) or starts a war (defense is an industry too, plus hard to overthrow a war-time government). Europe has started down this path already, while the US and Switzerland still stand as free market economies drawing in all the fleeting investment cash, until they bubble too much and lose their currency.

WastingMyTime89 4y ago
Your first paragraph pretty much describes what happened in France between 1946 and the beginning of the 50s (the war shrunk the economy but the rest). Why do you think the government would be overthrown? It’s merely redistribution. It will just last for a couple election cycles.
another2another 4y ago
"and slowly eating up the savings of those who saved with inflation" Do people really sit on cash as it's being devalued by inflation anymore? I thought savings of all types were at historical lows since the 90's where nobody saves, has debt (e.g. mortgage & credit cards), or invests in the stock market in some form - which has become incredibly easy to do over the last 2 decades.

fuoqi 4y ago

Let's be honest: prolonged "financial repression" is effectively soft default of governments. It can work fine in the short term, especially with elevated instability abroad (as usual the US benefits quite immensely from it relative to other countries), but try to run economy in such mode for 5-10 years and investors will stop financing government deficits and the system devolves into government simply printing money for itself. It quickly (on historic scale) erodes trust in the financial system, leading to its accelerated degradation. Government's inevitable malinvestments financed by the printed money will only add fuel to the fire. Just look at Japan. Now remember that it's the world’s largest creditor nation, while the US and many EU countries are huge debtors. In the past foreign governments and investors were happily financing both of them, but now they are calling on the debt and sanctions against Russia only accelerated the process. If you think that in such conditions you will have enough leeway to finance the "capex boom", you probably will be quite disappointed. Japan and the UK are nothing more than the first cracks in the dam, I am more than certain that we will see much bigger events in the near future. All in all, it seems that we move according to the Ray Dalio's scenario of long-term debt cycles.

WeylandYutani 4y ago
It has been working for the US for a very long time and will continue to work as long as the US dollar is the world's reserve. Even the Chinese can't stop using it.

jesuscript 4y ago

Perhaps I’m taking too much of an American centric understanding of his opinion, but the political economy was in full swing during the Pandemic with vaccine subsidies, stimulus, followed by Democrats pushing through a social security increase, student loan forgiveness, and I think we extended unemployment for quite some time, along with rent assistance and eviction moratoriums, and that whole infrastructure deal. They want to do a bunch of other stuff too. “A third possibility would be voters telling their governments to stop these policies by voting them out of office.” In America we are about to go through a midterm where the Republicans will take back parts of Congress, effectively shutting down Democrats ability to continue that political economy. Our rhetoric and political climate is also setting up the foundation for another Trump presidency, and he won’t push for jack shit in terms of government programs (if anything, more tax cuts). It’s a bipolar situation, we are either going to hit the breaks entirely on the political economy with the Republicans, or go full swing with it with Democrats, which I think will leave us in a stagnant place as we shift between both parties over the next 20+ years. Not sure if this is good or bad.

jillesvangurp 4y ago
You are describing the past 20 years in terms of politics. Basically, we've had a sequence of relatively powerless presidents of both parties held hostage by a hopelessly divided senate and house failing to agree on much at all except printing more money to keep things going. Both parties have fueled their respective agendas with debt. That is indeed looking like it will extend into the near future.
- matthewdgreen 4y ago
  I know it’s a lot to remember way back to the 90s, but the Clinton presidency was based on an aggressive program of deficit and debt reduction. It worked extremely well and without major inflation, to the point that the Federal Reserve chairman actually began to publicly fret about government debt levels becoming too low. But then in the 2000s it was completely reversed by a Republican President and away we went. Both Democratic and Republican administrations have accumulated debt since. But the lesson I took from this was (1) the US can reduce deficits if it wants to (and without inflation), and (2) don’t believe political rhetoric about spending or fiscal responsibility unless you see action. Also makes me wish the Iraq war spending had been put into climate change prevention. Can only imagine how much better off we’d all be today.

imtringued 4y ago

The operation "paying off debt" doesn't exist. This is because positive interest rates imply demand for debt outstripping savings. For debt to be paid off, the interest rate would have to reflect savings outstripping debt and forcing a reduction of savings as there cannot be monetary savings without debt, it would be just an empty piece of paper otherwise. In such a scenario, you would need a negative interest rate but since that isn't politically feasible. The only path you can take is through inflation and positive interest. This is what Keynes meant by gold digging, if private business and political interests prevent the obvious and rational solutions, then even the dumbest solution will be better than nothing. So, rather than implement a mechanic that allows a nominal reduction in debt, we need a central bank that constantly keeps inflation high enough to not let ourselves drown in debt, which is why the target is 2% and not 0%.

pkrumins 4y ago

Inb4 global hypermegainflation