George and the giant investment problem August 23, 2011 at 7:12 pm
One of the things that I like about finance is that ideas matter to the investment community. If you might possibly be able to make them some money then be you Tea Partier, Obama loyalist or Communist, they will listen to you. Often they’ll discard what you have to say, of course, but many will hear you out first just in case it gives them some kind of an edge.
This is perhaps the spirit in which George Magnus quotes Karl Marx (HT Zero Hedge). He uses the famous paragraph from the introduction to A Contribution to the Critique of Political Economy:
At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within this framework of which they have operated hitherto.
The rest of Magnus’ paper is fine, but nothing like as radical as that opening quote. I pretty much agree with what he says; tax more, invest in infrastructure, try and create some inflation: and with his analysis of why this is hard; deficit attention disorder (lovely phrase), German reluctance to admit they will have to pay now or later, the Eurozone existential crisis. But what might an open minded financier learn from the Marx quote*?
Well, no one can say for sure what will happen next. Indeed, I think the range of possible outcomes for the global economy in the next few years is much wider now that it has been at any time in the last twenty years. We might, just conceivably, return to robust growth. We might soldier on with anaemic growth and high unemployment in the US and the EU but without a major crisis. But what if (big if) the Marxist moment of conflict has arrived?
I certainly don’t want this to happen. I don’t think it is likely, either. But the combination of the growing illegitimacy of politico-economic relations (see also here for a European angle) and worstening income, employment and security prospects for most make a paradigm shift more probable than hitherto.
I started trying to sketch out what this might look – but then realised that this is an even more foolish exercise than usual. The whole point about paradigm shifts is that they are well nigh impossible to predict before hand. Perhaps Europe breaks up into core plus periphery. Perhaps the US is taken over by the small-government Right: in that case, it could slide towards default pretty fast. Perhaps China blows up in a spectacular way and ushers in an emerging market crisis. In any of these cases many assets – most equities and an awful lot of bonds for instance – look pretty risky. Even so called cash funds (as was the case during the Lehman crisis) can end up losing you money. Bank deposits are only guaranteed up to a certain amount and even then only by (presumed risky) governments. A garage full of gold in Zurich starts to look pretty attractive at this point, unless you think that that challenge to property relations could extend to Switzerland. Investment in a real crisis isn’t easy.
*I do think, BTW, that there is a profitable niche for some Marx scholar willing to explain what the great man actually said in language the average asset manager can understand.