A Longer View

September 2021

Phil Ruthven AM, Founder and CEO

There is an old saying: that when you are up to your knees in alligators, it is hard to remember that the original plan was to drain the swamp.   In 2021, the swamp is the COVID 19 pandemic.

In the Western world, short term thinking has dominated politics and policy from the turn of this millennium and in the years leading up to it.

As Climate change predictions become manifest and the Asian economies dominate it is time for the west to engage in long term planning.

So, let’s look at the how short-term planning is slowing economic resolve and growth and take our country, Australia, as a case in point. Why have our economic and financial visionaries lost their foresight? Here are some of the reasons:

  • Relative peace in the Europe and anglophone countries since World War II has led to minimum need for rebuilding infrastructure and economies.
  • OECD countries have become complacent and are less hungry for growth than developing nations.
  • Developed countries’ productivity in their Post-industrial Age of services and ICT is not matching the productivity growth of the previous Industrial Age of goods and electricity and telephony.
  • Recent political appeals to emotionalism (gut feel) rather than rational planning is seeing the former winning.
  • This has led to dictatorships, sabre-rattling, fascism, corruption, incompetence and short-term, (hip pocket) gains trumping the stability of long-term strategizing.
  • The consequences of Global Warming are demanding fundamental economic and societal changes that may take decades to settle economically, and have therefore, been placed in the “too hard basket”.

In Australia, our economic growth has been as good as anywhere over the last 150 years.

Thankfully, post WWII years’ economic growth has been less lumpy, with fewer recessions and no depressions at all.  This is mainly due to Agriculture shrinking from 20% of our GDP to 2%, making our economy less vulnerable to natural phenomena and changes in international trade rules.  Modern fiscal and monetary management helped avoid depressions, and some recessions.

But our economic growth has slowed from 5% pa in the 1950s to 2% pa in the 2020s.

The Gold Standard, the system that fixed the value of currency to a known quantity of gold, meant that inflation was virtually non-existent until WWI. Since then, there have been four, roughly, 25-year cycles of inflation as the chart below illustrates.  We can expect the current cycle to peak late in the 2020s or early next decade.

In turn, inflationary cycles create interest rate cycles, at least in real terms as we see in the next chart.

As the Governor of our Reserve Bank regularly informs us, neither nominal nor real interest rates will be rising anytime soon. However, the news that interest rates are at all time lows is not entirely accurate. There have been 20 years in which the rates have been far lower than they are currently. And, interestingly, the average real Bond Rate has averages 2.4% pa for 160 years, compared with an average 5.5% pa in nominal terms over the same period.

Then there is the share market as measured by the All-Ordinaries Index over a century and a half as we see below.

You can see that the eighty years from the Great Depression to the Global Financial Crisis of 2008-09 have been extremely volitile during which deviations of  ± 30 to 60% were experienced.  There is no saying it won’t happen again when price to earnings ratios in some stockmarkets abroad are over 40:1.  Australia hasn’t gone that far into the stratosphere so maybe we may experience less volatility when the next (inevitable) corrections come.  There is a prima face average cycle of 30 years at play, but of unequal lengths, so the extreme fluctuations – if we get them at all – are due around 2030.

Of course each of the nation’s 19 industry divisions have long cycles, two of which are illustrated below.  These two industries that have dominated our exports for the past 233 years since British Settlement (or invasion): mining (our first export ever, being coal as backloading) and agriculture.

In 2021, as mentioned earlier, the Agriculture Industry has shrunk to just 2% of our GDP, ten percent of its highest point and, after dominating our total exports for most of the first 200 years it now sits  around 5% of our total exports.  Mining now accounts for over 50% our exports; although likely to halve that within 15 years or so.

These exhibits remind us that our industries run in cycles too – when measured by their contribution to the nation’s GDP –  perhaps even a little more predictably.  At the same time they are very different in their lifecycle lengths and peak shares of GDP.

But so too are the other 17 industry divisions that make up our $2 trillion GDP these days.

Taking a long view can create vital perspective, particularly in our own industry, just as we need longer term perspective of other variables; only a few of which have been briefly explored in this article.

We need longer term vision of the sort we once had, and the sort that is now in evidence in very fast-growing emerging markets, most which are in our own region – the mega region of Asia including the Indian sub-continent.   Perhaps getting rich has made us soporific.

Time to wake-up.

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