Rick Rieder
BlackRock Chief Investment Officer of Global Fixed Income
Russell Brownback
Head of Global Macro positioning for Fixed Income
Published
Rick Rieder, Russ Brownback and Navin Saigal
contend that if a negative monetary policy endgame is to be avoided,
particularly in the face of recent economic declines, it will likely be
technological advances of a profound kind that get us there.
Last year, at the beginning of September, we wrote a blog post entitled The Monetary Policy Endgame that laid out one possible future for the path of monetary policy, should economic growth falter, productivity not materialize and populist politics continue to thrive. Some parts of that analysis seem worryingly prescient nine months hence, so we wanted to revisit the analysis from a different vantage point today. Part of the global policy response to the exogenous shock of Covid-19 and the subsequent economic lockdowns has been some combination of new and expanded quantitative easing (QE) programs, interest rates pushed to zero, or even more negative levels, and currency depreciation. These policies should go a long way toward helping us weather the economic storm of Covid-19 and jumpstart the economy once the storm passes, but they do not on their own create a long term trajectory for sustainable growth, which was something already sorely needed in parts of the world before the crisis hit. In this post, we imagine what it might take to reinvigorate such growth and avoid an acceleration toward the negative monetary policy endgame we previously described.
....MUCH MOREExamining the engine of growth Coal mines are not often thought of as bastions of technological innovation. Yet, one of the sparks that ignited the Industrial Revolution was a humble invention from just such a mine – the steam engine. Originally intended to solve the problem of flooding by helping miners pump water out of mines, the new technology was quickly applied to transportation, and the construction of new ships and trains eventually led to soaring productivity in Western Europe in the 18th and 19th centuries.
If the world ever needed another “steam engine moment,” it would be now. A growth spurt on the scale of the Industrial Revolution would be a sure-fire economic lifesaver from the Covid-19 storm. But what is today’s flooded coal mine and where would today’s steam engine equivalent come from? Asked another way, if we happened to be looking back in the year 2030, and the world had just completed a decade of above-trend growth, throwing water on the prophetic fires of today’s economic doomsayers, how might the world have done it?
Before speculating on how above-trend growth might be achieved, we must first understand the component parts that drive economic growth. The Cobb-Douglas production function suggests that real output is a function of labor and capital resources, and a third factor, productivity, which is the ability to extract more output from fixed labor and capital pools. Since the size of the labor resource is largely a function of slow-moving demographic cycles (50 years long or more), the burden of raising output on shorter time horizons falls more heavily on capital and productivity. Capital and productivity themselves are intricately intertwined – only through sufficient investment can productivity-enhancing technologies be invented.
Today, investment is more than just capital expenditures – in our modern economy, total investment includes research and development (R&D) too. To understand the importance of R&D, one need look no further than the epitome of modern-day capex – the energy industry in 2006-2015. Since 1995, energy capex averaged 20% of the S&P 500 total, and from 2006-2015, it never dipped below that 20% mark. From 2008-2014 it averaged 31% of S&P 500 capex, peaking at 33% in 2013. The results of all that investment, the oil price trend over the last six years, needs no further explanation. Nobody can blame the energy industry for not investing, but investment oriented around growing volumes needs to be accompanied by some defense against price declines, especially in a disinflationary world. Perhaps investments must include some form of pricing power preservation, or economic moat. R&D, while not a perfect measure, is a vital component of any comprehensive framework for investing while protecting against industry rivalry (think Porter’s Five Forces) when the global economic pie is not growing as fast as it has historically.
How much investment is enough?
