I recently gave a speech at my bank’s Megatrends conference in Madrid. This is what I said:
1. The US Military
(Who’s the biggest of them all?)
Let me start by asking you:
“What is the largest organization in the world by revenue?”
Most of you will think it is Apple, Walmart or some China entity, but it is actually the US military it has an annual revenue of around $650bn compared to Walmart’s $482bn, China State Grid’s $330bn and Apple’s $234bn.
Why is the largest organization on the planet not well known or analysed by economists and investors? Well, I think the branding of the military certainly helps. It employs over 2000 people in PR. It works closely with Hollywood productions. Movies such as Transformers, Man of Steel, Iron Man, and Top Gun all were made with assistance from the US military. Consequently, it’s ended with an image of being a benign, reactive and benevolent force like the fire service or an electricity utility. Of course there is an element of snobbery where rich countries with our liberal democracies are post-military unlike developing countries where militaries are supposedly more involved in governing society.
(Might is right)
But when we scratch away at the surface, we realise the military is more powerful than we may think. Barack Obama broke tradition by re-appointing his predecessor’s defense secretary Bob Gates. This helped ensure Obama was not viewed as soft on the military.
Now with Donald Trump, we find that US foreign policy is being heavily influenced by former the defense secretary, James Mattis, a former Marine Corps general. More tellingly, the current White House Chief of Staff is John Kelly, another former Marine Corps general, who is thought to have brought more order to the office. His arrival coincided with the departure of the nationalist iconoclast Steven Bannon. In the 1950s, Republican President Eisenhower coined the phrase “military-industrial complex” to describe the influence of the military on politics. It seems as relevant today as it was then.
(Centrally planned innovation)
Given our theme of Megatrends for this conference, I wanted to highlight the role of the US military on innovation. It may not fashionable to think that a huge centrally planned organization can be a source of innovation, but the US military has to be one of the most innovative organisations in the world. It invented:
- the internet,
- virtual reality
- digital photography
- jet engines
- nuclear energy…
- …and canned food.
Moreover, Silicon Valley didn’t come out of a vacuum. Rather it was the child of a post-war marriage between the US military and the hippie movement in Northern California . In essence, you had hard-nosed military types with technology mixing with people who were into spirituality and saw technology as a path to some kind of transcendental utopia.
The mix of these opposites brought about some of the most interesting innovations in the post-war period. Steve Jobs has to be the epitome of this. He spent time in India visiting Ashrams, practiced Zen Buddhism and experimented in psychedelics, like LSD. He along with others saw the possibilities of technologies in transcending our physical constraints.
One of the sources of innovation within in the US military is DARPA, a multi-billion dollar research unit. Over the years, I’ve found that what they do first, others follow years later. They were looking at machine intelligence years and years ago. Their most recent shift in focus has been towards biological technologies. This is the amazing area of hacking biological processes for technological advances. Some of the things they are working on include:
- Living materials that heal
- Nucleic-acid based protections against infectious diseases,
- Tissue integrated bio sensors to monitor health
- Direct neural control of physical systems
- Reducing the sleep cycle of soldiers
- Exoskeletons (like the ones you see in moves like Avatar and Aliens)…
- … and of course, editing human genes, which could soon create super-humans.
So don’t just look at tech start-ups in California, keep an eye on DARPA!
2. Central banks are political
(Politics of printing money)
On to my second unwritten theme: politics. I don’t mean things like Brexit, the election of Trump, and populist movements. We are all over-familiar with these topics by now. Rather,
I mean the political imperatives of central banks. Many like to see central banks as politics-free technocracies, but it would be naïve to think that a state’s “money printing machine” would stand outside of the political process.
For evidence, I would highlight the failure of key central banks to achieve their inflation targets. Taking the US as our example – it formally adopted a 2% inflation target in 2012 and has undershot it every year since. Today it is a measly 1.4%. The same can be said for the ECB and BoJ. All have 2% inflation targets, yet since 2008, inflation has averaged 1.3% in the US, 1.2% in the Euro-area and 0.2% in Japan.
(Shouldn’t they be cutting rates?!)
This begs the question of why is the Fed (and soon the ECB) raising rates? Put another way, if interest rates were currently at 5% and we had several years of below-inflation target outcomes, would the Fed be raising or cutting rates today? I’m sure they would be cutting! This tells us that something other than reaching its inflation target is driving the Fed (and other central banks). I would argue a big factor is politics.
(Gold bugs bug )
In the US, especially from QE2 onwards there has been huge backlash from many politicians on that policy. Indeed, soon after QE2, Republican senator Ron Paul, an ardent critic of the existence of the Federal Reserve, became chair of the House Subcommittee on Monetary Policy. This committee scrutinises the Fed and has been relentlessly pressuring the Fed to scale back its unconventional programmes. This year for example, the current Chair, Andy Barr, wrote that the Fed has “employed unconventional tools” but “failed to deliver the robust economic growth predicted by Fed central planners” and he hoped that the Fed would “shrink the Federal Reserve’s balance sheet and limit its holdings to U.S. Treasuries”.
The same can be said about the ECB with Germany acting as the persistent critic of QE. The German Axel Weber stood down, rather than succeed Trichet as ECB President. The spectre of the German constitutional court had constrained the scope of ECB QE. The German finance minister, Wolfgang Schäuble, has argued against low rates saying they cause “extraordinary problems” for German banks, pensioners and risked fuelling the rise of Eurosceptics in Germany.
(People want lower prices)
Even the Bank of Japan is being questioned about exiting its easy monetary policy, despite inflation barely able to stay above 0%. In the case of Japan, the public’s opposition’s to inflation may play part of a role. Indeed, a few weeks ago, BoJ governor, Kuroda, cited a BoJ survey which showed that 80% of the public view price rises as unfavourable . In fact, Bernanke in his diagnosis of Japan’s failure to achieve inflation since the 1980s cited “ political constraints, rather than a lack of policy instruments” as the key factor for low inflation in Japan .
(Thinner balance sheets matter more than inflation)
So it’s not just the business cycle that matters for central bank policy, but the political pressures on central banks. Currently, the Fed has three out of seven positions on the Board vacant and we will soon hear who President Trump will select to replace Yellen as Fed Chair next February. Later this year, the next BoJ governor will be nominated. For the ECB, we have to watch new German dynamics to see what influence they will exert on the ECB policy. All-in-all, the politics suggests that central banks will subordinate their inflation targets to shrink their balance sheets. A consequence of this could be that inflation may end up continuing to undershoot the 2% target.
3. Technology stop work
My third and final area to cast a light on is technology itself. We all know about robots, artificial intelligence and machine learning. We will hear much about these during the conference, but there is another side to technology which is not so helpful for economies. One is video games! Yes, video games, you may not know this, but they are huge amongst boys and young men. Let me elaborate:
- The media product to reach $1bn in sales at the fastest pace was not a move like Avatar or Star Wars, but the video game Grand Theft Auto 5. It made $1bn in three days in 2013!
- The video game League of Legends has 100million players a month.
- The most expensive game ever is Call of Duty: Modern Warfare 2, which cost around $280mn, which is more than most summer actions movies.
You may be wondering why I’m focusing on video games? Well, one puzzle in recent years has been the decline in male participation in the US labour market, especially young men. It turns out that much of this can be explained by young men playing video games rather than looking for jobs . Older segments of the population appear to be returning faster to the work force, so it seems that parents are going out to work to fund their adult children’s gaming habits!
(Let me check Facebook, first)
For something closer to home, I think smartphones and social media could be the big unexplained cause for low productivity. I say this from experience. I recently tracked how often I use my smartphone, check emails and social media. At work, I found I did it every 10 minutes! That means I was interrupting my work to do this, which meant losing my momentum and ability to finish tasks. Too often an initial click on a social media post would end up taking me down a pointless rabbit hole of clicks usually ending on pictures of child stars from the 1980s compared to how they look today. That means wasted time, and less work.
Since discovering this addiction, I’ve reduced my checking to three times a day, and I’ve found that my productivity has shot up. I get into the zone and I complete work. There’s a huge body of work that shows that single-tasking is much more effective than multi-tasking . I would argue that today’s dilemma of low productivity could be partly due to modern technology distracting us from work!
So there is a dark side to technology that takes us away from work whether it’s checking social media feeds or playing video games. Until this gets resolved, perhaps we will never recover from the low productivity slump!
Hopefully, I don’t get into trouble for this speech, but remember to keep an eye on the US military, the political pressure on central backs and the distractions of technology.
 “What the Dormouse Said: How the Sixties Counterculture Shaped the Personal Computer Industry” (2006), Professor John Markoff
 “Japan’s Economy and Monetary Policy”, Speech at a Meeting with Business Leaders in Osaka, September 25, 2017. Haruhiko Kuroda
 “Deflation: Making Sure ‘It’ Doesn’t Happen Here” November 21, 2002. Governor Ben Bernanke
 “Leisure Luxuries and the Labor Supply of Young Men”, February 2017, Aguiar, Bils, Charles and Hurst.
 “How Single-Tasking Boosts Your Productivity”, November 2014, Fast Company