Well, we seem to have scraped through the oft-predicted economic crises of 2015.
The financial markets spent the past year worried about the US Fed raising its policy interest rate, which happened in December with imperceptible adverse effect. Some still worry that we just haven't seen the damage yet, while others try to work up a concern about future rate increases. But 'Wolf!' has been called too often to stir widespread concern.
The China worry-warts have convinced just about everyone that China is on the brink of depression, whereas in fact it is growing twice as fast as the advanced economies, and the necessary transition from the unsustainable pre-2008 growth to a viable pace at around the present rate seems on track. Michael Pettis' 2012 wager of 3% annual average growth for this decade becomes longer odds with each passing year. Tyler Cowen, the new drama-queen on China, is still waiting for a financial collapse. At some stage China will have a growth glitch, and these pundits will claim victory, but predictions have to be time-bound to be of any practical use. In the meantime, China plugs along, still adding more (in dollar terms) to world growth than it did in the 2000s, when it was growing faster but from a lower base.
Perhaps the main 2015 lesson is an old one: economic predictions aren't very reliable. It's not just that the predicted risks rarely eventuate: it's the unforeseen risks that do the damage, because we haven't prepared for them.
That said, let's welcome in the new year by trying to find fresh things to worry about. With commodity prices down (especially oil), resource investment worldwide is likely to fall over the next few years. As well, the steam has gone out of property investment. One forecaster predicts the only prospect of strong positive investment growth over the next few years will be in the high-tech sector. [fold]
This prediction doesn't comprise just Silicon Valley, but that's where the most dynamic action is. Things have changed since the 'tech wreck' of 2000, but it is still a sector built on dreams, with only a minute proportion of start-ups likely to join the ranks of FANG (Facebook, Amazon, Netscape and Google). Sure, there are still plenty of ideas around — driverless cars, virtual reality, big data, artificial intelligence and many variations on concepts for errand-running — and there will be things that no-one (not even Steve Jobs' successors) have yet realised we all want.
But disruptive technologies will, to a large degree, replace things already being done. Domino's mastered the art of speedy home delivery three decades ago, and the pizzas won't taste any better if delivered by drone. The existing banks have a huge advantage in developing payments systems which rely on absolute trust, so they are likely to retain their dominance. Driverless cars would replace existing investment opportunities rather than add to them.
The start-up industry itself is still, for a major part, as insubstantial as dreams. The herds of 'unicorns' (Silicon Valley has nearly 100 start-ups which each have a purported value of more the $1 billion) are vying for the limited pasture. They all want to dominate an area (say, food delivery) so that they can reap the network externalities which go with becoming the dominant player. But by definition, they can't all dominate, and there is no place in this kind of world for the multiplicity of viable competing producers which are typical of traditional industries.
The world has changed since the 2000 tech wreck in that there are now some established successes, but the many failures of the earlier collapse are still relevant. Pets.com raised $US110 million to deliver kitty litter and pet food, but went out of business in under a year. Kozmo.com (speedy snack-food delivery), Webvan.com (grocery delivery) and Flooz.com (e-market payments) all raised substantial sums before permanently logging off.
The inventor of the term 'unicorns' has now coined another: 'unicorpses'. Many of these companies are raising funds, not to make physical investment but to cope with 'cash burn' as they try to establish a dominant market position. Even Uber (valued at more than $US 50 billion) is reported to be losing US$470 million a year.
How far should these concerns be translated into adverse effects on the wider economy? There is a fundamental difference between the tech-wreck and the 2008 financial crisis. In 2000-03, NASDAQ shareholders lost hugely, as did venture capitalists who had invested directly in these failing start-ups. But in most cases they lost their own money; they weren't geared up with borrowing. Thus the financial sector was largely unaffected by the collapse. For the main part, people who had suddenly been made rich by the tech boom found themselves back where they started, and life resumed as before. There was a blip in US GDP growth, but it was short-lived.
If this kind of ephemeral investment comes to a halt, it would not presage an economy-wide contagious crisis like 2008. But it would still take away the one element of investment strength in these forecasts. It's time to think about possible policy responses.
It looks like monetary policy has been pushed to the limit (and perhaps beyond). Fiscal expansion is still constrained by a fixation with debt and deficits. But it's not as if there are no valuable investment projects to be done. So perhaps we should be thinking more about the near-universal infrastructure deficiencies and how these can be funded and made profitable. If the market for infrastructure worked as well as the market for smart-phones, people might prefer to have airports with adequate capacity, better metro-rail networks and fewer potholes in the roads rather than the latest software upgrade. If Silicon Valley could invent an app to offer consumers that choice — between better infrastructure and a new set of emoticons to play with — that really would be an advance.
