25 janeiro 2013

From Numbers to People and Back to Numbers

Manuela Silva in her blog of yesterday argues, as she has tirelessly done for a long time, of the importance of looking at the people behind economic numbers.  And Manuel Brandão Alves in his blog of today poses questions relating to recent financial market euphoria.  Even the President of the European Central Bank, Mario Draghi, has commented that the success currently being experienced in financial markets has yet to filter down to the people in the economy.

Our economic model is based primarily on debt and consumption.  It needs to evolve into one built on investment, production and jobs, on real wealth creation.  In the face of dire economic growth figures, Chancellor George Osborne of the UK has acknowledged that the government perhaps made a mistake in cutting investment too drastically in the wake of the financial crisis and that infrastructure spending has to resume.

This was Keynes’ contribution following the Great Depression.  He believed that government had to keep the economy going through capital investment, thus benefitting the economy through the multiplier effect.  When the economic crisis occurred in 2008, some were hopeful that the investment paradigm would shift to a more sustainable model, with focus on capital investment and long-term returns and not financial market activity.  George Soros and James Wolfensohn, both seasoned investors, called for investment in the green economy, in order to help resolve both the economic and the environmental challenges. Unfortunately, this did not happen, even as liquidity flooded the markets.  Now the UK government is recognizing the missed opportunity for capital investment.

As long as our current economic model maintains, the debt problem will not be resolved, nor will wealth disparity.  While consumption might make people feel better off - and this revived psychology has been noted in the US with the improved housing market - their balance sheet will not improve, and the environment suffers.  Until the following debt crisis, banking profits resume and monetary gains will accrue to corporate profits, thus benefitting portfolio investments.  Portfolio returns can be illusory until the next financial collapse, but real investment returns secure a better future.  This is the original premise of investment, which we have forgotten as financialization of the economy gained ground.  Numbers are important, but so are the people behind them.


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