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Captain Murphy’s Diary

Updated: May 19, 2022

Murphy’s Law says that what can go wrong, will go wrong. It is thought to be named after Captain Ed Murphy, an aircraft engineer who, frustrated with the work of an incompetent colleague, is alleged to have remarked, “If there is any way to do it wrong, he will.” This section is dedicated to combing the financial markets for risks that are lurking out there, preparing to pounce.

I’ve always enjoyed reading Financial Times columnist Martin Wolf’s articles. His approach to economics often focusses on the balance between savings and investment and how that balance helps explain such things as growth and the level of interest rates. If there are more companies and individuals who want to save than want to invest then it follows that real interest rates must fall to a level that encourages more investment and less saving.

"If everyone on the planet wanted to live within their means the global economy would collapse"

Wolf’s latest piece (Corporate surpluses are contributing to the savings glut, November 17th) is about the excess of savings in corporate sectors around the world – particularly those in developed countries - and how this is impacting interest rates and growth. Wolf points out that the imbalance is as much about a lack of investment as it is about too much saving. Is this imbalance temporary or is it structural and thus perhaps something to be more deeply concerned about?

Oscar Wilde said that “people who live within their means lack imagination.” I doubt that he meant it in relation to economic systems but nevertheless its relevance in this regard is rather neat. The fact is that if everyone on the planet wanted to live within their means the global economy would collapse. Economic growth relies on people or businesses who are prepared to take risks and spend more than they earn. If you want to live within your means – meaning that you want to spend less than you earn – there needs to be someone else doing the opposite. It is a mathematical identity or truism that in aggregate spending must equal income, savings must equal investment. Those who live beyond their means (borrowing to fund ideas and dreams) should be applauded; it is their risk taking that drives growth.

As to why corporate investment is weak, Wolf puts forward three reasons. First, demographics; if societies are aging and population growth falling, there is less need for corporate investment to grow capacity. Second, globalisation has meant relocation of investment from high-income developed countries to lower-income developing countries. And third, technological innovation. As Wolf points out, “much innovation seems to reduce the need for capital: consider the substitution of warehouses for retail stores.”

I wonder if the internet isn’t almost single-handedly to blame. True, computers changed our lives, but for me it is the internet that has transformed them. It has been a hugely deflationary force, with high street shops being replaced with online shops and people now able to organise things themselves rather than having to engage and thus pay an intermediary, travel being a good example.

Will the global economy find ways to employ the excess capital and labour that now exists? Almost certainly. It has for the last several thousand years without too much trouble. It’s just it’s never had to do it this quickly.

Published in Investment Letter, December 2015

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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