Mega Trends For The Tens...

In my Money Week column this week, I've been writing about the mega-trends for the coming decade. Here's a taster...

Shortly before the 1929 stock market crash that ushered in the Great Depression of the 1930s, the American economist Irving Fisher made a celebrated prediction. “Stock prices have reached what looks like a permanently high plateau,” he observed.
Fisher was far from a fool. He was one of the founders of mathematical economics, and his equations on the relationship between the quantity of money and the inflation rate laid the basis for monetarism. Still, even the smartest brains flounder when it comes to predicting the future – a point that should be born in mind by anyone attempting to map out what might happen over the next few weeks, never mind the next decade.
Still, as the old decade ends, and a new one begins, it is worth thinking about the themes that will dominate the financial markets over the next ten years. Here are five mega-trends – bearing in mind that any forecasts made here are about as about as reliable as Tiger Wood’s marriage vows.
One: The Currency Markets Take Charge:
In any decade, one sector of the financial markets emerges as dominant. In the 1980s, it was the mergers and acquisitions bankers, in the 1990s, it was the dot com entrepreneurs, and in the 2000’s it was the quants, the mathematical ‘geniuses’ that gave us the structured products that allowed millions of dud mortgages to be wrapped up into clever-looking bonds and sold to people who didn’t understand them.
In the 2010s, it will be the currency traders who will move to the fore. The equity markets are supine, and the bond markets are now effectively controlled by the central banks. The only way that well-run economies can be rewarded and badly-run ones punished is via the currency markets. Expect to see a decade of massive currency movements as the markets attempt to re-balance the world economy through exchange rates. And expect to see the currency traders – and the banks and hedge funds that employ them – emerge as the most influential players in finance.
Two: The Scramble For Africa:
It doesn’t make much sense that a whole continent is virtually excluded from the global economic system – particularly when it is rich in the agricultural land and natural resources that the world is desperately short of. The process of globalisation that has seen Russia, Eastern Europe, India, and China gradually join the developed capitalist world has managed to largely by-pass Africa.
In the 2010s, that will surely change. Entrepreneurs from both inside and outside Africa will find ways of plugging the continent back into the global economy. And the ones that make the most money will be those that get in on the ground floor.
Three: The BRIC Companies Move West:
We tend to think of the BRIC economies – comprising Brazil, Russia, India and China – as providing raw materials and cheap manufacturer goods for the developed economies of Europe, the U.S. and Japan. Big multi-national conglomerates are the preserve of the existing major economies.
In the 2010s, that will start to change. Big new companies will come roaring out of the BRIC countries, providing intense competition for the existing Western giants. The reason is simple. The next decade will see incomes under severe pressure in the old economies: there are debts, both public and private to be paid for, and aging populations to cope with. Only low-cost producers will prosper – and BRIC companies have the most experience of making things very cheaply. Expect a double boost for the BRIC stock-markets, as both their domestic economies grow and their local companies start conquering the rest of the world.
Four: The Dollar Tax Gets Repealed:
The demise of the dollar as the global reserve currency has been predicted for years. Somehow it never quite happens. This decade, however, the dollar should finally be eclipsed. That is usually presented as a bad thing, and in one way it is. The transition from one monetary anchor for the global economy to another will be destabilising – and the world has quite enough instability to be getting on with right now.
In another way, however, it is a good thing. The dollar’s special status acted as a kind of tax on the rest of the world, in that it allowed the US to run a far larger trade deficit than would otherwise be possible. In effect, everyone else had to subsidise the over-consumption of the Americans. As that comes to an end – as it will if countries don’t need to hold dollars anymore – it will act as a kind of tax cut. And like any tax cut, it will be good for the economy. Americans will have to tighten their belts, but the rest of the world – and in particular countries such as Germany that have been running big trade surpluses – will be able to loosen theirs. That will allow them to grow faster.
Five: The Demise of Independent Central Banks:
Independent central banks were meant to be the guardians of economic stability. By managing interest rates and the money supply, they would keep a lid on inflation, and let economies grow at a reasonable pace. And because they were free of political interference, they would make neutral, wise decisions, aimed at securing long-term prosperity.
That was the theory, anyway. As the dust finally settles on the credit crunch, however, and as we start to figure out what really caused financial meltdown, it will become clear the reality isn’t living up to the promise. In truth, the central banks have presided over an era of wildly inflationary asset bubbles that have made the global economy less not more stable. The Federal Reserve, as even Ala Greenspan now admits, ran too loose a monetary policy, creating the credit boom. The Bank of England doesn’t emerge with much credit either. It did nothing to control the housing and debt bubble, and, in the wake of the crash, printed money to finance the government’s debt. The ECB, probably because it is the heir to the stern Bundesbank, has done slightly better, but still has to sort out the mess in Spain and Greece.
As the decade progresses, it will become obvious that the model of independent central banks is flawed – and we’ll need some better way of managing monetary policy. If we’ve found it by 2020, the global economy will be looking in much better shape.