Everything will be fine - just not quite yet
By
MoneyWeek editor-in-chief
Merryn Somerset Webb Aug 04, 2010
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I'm settling into my summer reading: I've read Matt Ridley's The Rational Optimist and I've now moved on to a note just out from Baillie Gifford called Rational Optimism.
I found myself rather taken by Ridley's book – largely because I think I might be something of an optimist myself. I'm mildly concerned about peak oil, but I also think it pretty likely that any long-term crisis over a shortage of fossil fuels will be thwarted by something along the lines of Ridley's "vast solar power farms" in Algeria, and some "pebble-bed passive safe modular nuclear reactors". As my husband mutters every time an oil doomster comes to dinner, the Stone Age didn't end because they ran out of stones.
I'm also less concerned about food shortages across the world than many. The fact that there are now more obese people in the world than starving people – 1.3bn versus 800,000, according to Prof Barry Popkin of the University of North Carolina – surely tells us that hunger is a matter of politics and logistics. And those are more solvable problems than a worldwide lack of land or faltering productivity.
So, like Ridley, I think that the world will eventually "pull out of the current crisis because of the way that markets in goods, services and ideas allow human beings to exchange and specialise for the betterment of all".
I'm also convinced by many of the points made by James Anderson, manager of the Scottish Mortgage Investment Trust, and chief investment officer of Baillie Gifford. He notes that the "cult of pessimism defies current and historical reality" – which shows that the rate of global growth has increased steadily over the centuries. It was a mere 0.01% a year during the years 1 to 1000 (this is clearly a best guess) but had hit 0.2% by 1500, and 0.3% by 1820. Move to 1914, and 2% was "commonplace". From 1950 to 1973, growth was at 5%. Since then, it has been around a respectable 3%.
Although last year wasn't exactly top of the pops, Anderson has great hopes for the future. As economic growth appears "closer to exponential than linear in the long view", we could soon be thinking that growth of 5% is "modest."
He isn't worried about the eurozone on the basis that "markets regularly panic over deficit peaks that turn out to be mirages" and that, thanks to the wall of worry and subsequent low valuations this panic creates, equities often "gain strongly in real terms in the decade after debt peaks".
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He isn't worried about China being a bubble, either. Instead, the massive rise in infrastructure spending that has the bears so worried is a "vital, justified sustainable and intelligent response to urbanisation".
It is feisty stuff to chuck into a banking-crisis-driven deflationary environment, but Anderson does put up a good case for a rosy global garden. The main drivers of the improved growth rate of the past couple of centuries – imitation and innovation – remain entirely intact. In the same way that northern England was once copied by Belgium, northern Germany and North America, and in the same way that Japan and western Europe copied the US postwar, Asia now copies the West as a whole.
You might say that this kind of "sweat" (mobilising capital, introducing basic education and facilitating technology transfer) is not enough for long-term growth. However, it is certainly enough to be getting on with, says Anderson. The International Monetary Fund puts gross domestic product per capita in India at $1,031 – which means that "there is lots of potential return on sweat still to come."
It isn't just those currently at the bottom of the heap who are on the move. Anderson says "those at the front of the economic queue continue to make progress", too.
Take synthetic biology, where progress is astonishingly fast. Anderson has even heard an expert claim that curing cancer is "low hanging fruit". That "matters a lot more than Greek debt," he argues.
All this unbridled joy seems to have served Anderson well. His fund is up 74% over the last five years. That's an unusually good performance. But there is, I think, a problem with the optimistic case today: it is just too long term. It is very possible things will have worked themselves out for the best in a few years. But – given the traumas that Europe still has to go through, the risks of a double dip, the fragile state of the banking system and the political risks that come with austerity – it is unlikely that things will have been worked out in six months.
Of course, curing cancer is a bigger deal for humanity than how much the Greek government owes Europe's big banks. But, over the shorter term, it is the latter than matters to our pension pots.
So, while I have taken heart from reading Ridley and Anderson, neither has made me want to invest much: not enough people are yet pessimistic enough for equities to trade at the kind of levels from which we can expect to make large returns. We'll get there – and then Anderson and I will be at one. But not yet.
• This article was first published in the Financial Times
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