by Andrew White | July 21, 2017 | Comments Off on The Good, The Bad, and the Get on with It (Interesting Economist Articles This Week)
I read this week’s Economist in two parts: the first half in my way from Atlanta to Seattle and the second half on my way from Seattle to Vancouver. I got excited the further away from home I flew. Much of what I read made sense and seems self-evident, and has been written about and analyses before, but totally ignored or misunderstood by our collective political and mostly economic leaders.
There were two interesting articles in “The World If” special report. One explored what might happen in the US should an EMP explosion knock out the electricity grid. The second looks at universal constants and what changes (e.g. everything) if they are ignored.
A third article in the special report I found hilarious and hugely entertaining. It looked at what might happen in France if President Macron was actually able to enact the reforms to business, tax and labor laws that he promoted during the election. There is next to no chance these ideas will ever get accepted. France’s economy has, in the past, been in far worse shape when such changes were required; in it’s current state it is more likely that he will get stiff resistance. The amount and kind of changes needed to make France competitive (and fair) just don’t sit well with the way the population has supported its politicians in the past. It should be entertaining to watch the EU squirm as reality sinks in.
The early excitement from reading my Economist was reinforced with the leader of the Business section. It was called, “Artificial Intelligence- The algorithmic kingdom“. First the good and obvious news. AI, though hyped beyond belief in the market today, is actually not as important as the data it uses.
Correctly the article reports that deep learning and other AI approaches excel when they have access to data. Not any data but large or even as much data as possible. Thus advantage will not be secured by access to the algorithm but it will be secured by ownership and access to data. I blogged this point last year. This is knew to those that understand the market but glossed over by those peddling and stoking the current AI hype. But don’t take my word for it. Check out which vendors are smartly buying up data…. Did you notice that Microsoft just joined IBM and Oracle by securing access to some important data (in this case, D&B) to power its solutions. I blogged on IBM’s data strategy back in April.
Now the depressing and insightful part of the article. China has the largest most populated soon-to-be-homogeneous internet-enabled market. It is amassing and represents the largest set of market data anywhere. In fact it is frightening to read what is happening in China and with Chinese firms thinking about and collecting or defining their data strategies. The US may not be able to assume a victory position in this most important of markets.
In “Schumpeter- The United States of Debt” we read of the fatal flaw in central bank policy associated with low, zero or even negative interest rates. If central bankers ever spoke with CEOs and CIOs they would know that interest rates only affect the source of investment; they don’t trigger the need for an investment itself. Business strategy is what drives the need; once that need is established the CFO and or treasurer then has to fund it.
For some reasons central bankers believed that lowering interest rates would lead to increased capital investment by firms that would in tern lead to increased demand and improved productivity. This has not happened. Why didn’t our economic leaders not know how firms actually behave?
We have now set ourselves up for increased risk:
- Central banks have little powder left to cope with any new pressures from an economic downturn turn, should one appear
- Central bank balance sheets have crowded out traditional market dynamics (and prices) for bonds such that debt funding and debt policy is totally lopsided. We won’t see rational investment decisions for years, until the Fed and other central banks get out of owning corporate and even public sector debt of this scale.
Finally in “Buttonwood- How to Kill a corporate zombie” we explore the plane and simple fact that zombie firms are the enemy of creative destruction. In effect capitalism has been put on hold (some years ago) and in fact our leaders are doing their very best to prevent the mechanisms that would lead to growth from operating. The entire process of resource allocation is now being managed by polices set by people far removed from the knowledge needed to make rational decisions. We just saw in Italy two banks bailed out by the state with public funding to help a buy-out to prevent their liquidation and efficient reallocation of resources. Zombie firms are growing in number; and business productivity remains in the doll drums; some economists suggests that micro level misallocation of funds shows up in macro numbers demonstrating lack of productivity growth.
Zombie firms prevent effective allocation of labor and capital. Some past and new research, mostly from the OECD, show how the number of zombie firms are on the increase and that such firms lock up under-performing assets. The very same assets that, if re-purposed, would lead to improved productivity and growth.
This is so annoying. We have moved beyond ‘too Big to fail’ and we now seem mired in an inability to let even the basics of creative destruction from operating. Maybe Adam Smith would be appalled. I hope that next week’s Economist is a little more uplifting.
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