As markets fall, IMF urges more economic risk-taking: Don Pittis

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Sorry, savers. The world is finally waking up to the idea that protecting your nest egg from risk will only result in a long, slow collapse of the entire world economy.

This may not be good for stocks in the short term, and that will make people like Carl Icahn, and probably some of you, very unhappy. (More on that in a moment.) It may also be positively bad for bonds.

But for those who actually invest their savings or profits in new products and inventions, like small business people, and big business people such as Elon Musk with this week’s Tesla announcement, it is a time to shine.

As we celebrate Canadian Thanksgiving, this new economic movement is not something to be gloomy about. Instead, we should be thankful that Canada — with its educated, internationalized, politically active population and an underused resource of youthful energy — has the potential to lead a new wave to drag the global economy out of its current slump.

Just look at Friday’s report, which shows that Canadian unemployment is at its lowest level in six years.

Despite a growing number of allies including International Monetary Fund’s José Viñal and economic author and columnist Martin Wolf, the idea of moving back towards risk-taking investment has some powerful establishment enemies.

Take more risks: IMF

Cue Carl Icahn. “We believe Apple is dramatically undervalued in today’s market, and the more shares repurchased now, the more each remaining shareholder will benefit from that earnings growth.”

That quote comes from a letter released this past Thursday, in which Icahn demands that Apple take its profits and rather than invest them in new products or technology, use the cash to bid up the price of its own shares.

From the point of view of a short-term shareholder, that sounds like a great idea. But according to Viñal, head of monetary and capital markets at the IMF, that attitude has created a problem: “Not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.” 

Effectively, said Viñal in a blog post this week, low interest rates have been sending the wrong signal. Intended to stimulate the economy by way of new investment, the glut of money is merely bidding up assets. And when you bid up assets too high, like a child piling blocks, there is an inevitable result.

Perhaps more important, such investments are sterile. As Bank of Canada Governor Stephen Poloz has complained in the past, bidding up the value of existing assets — whether Apple stock or Canadian houses — produces nothing.

Sterile investments

There is an increasing realization that growing an economy requires more than passive investors sitting watching their nest egg fatten. True economic growth cannot be just a financial construct where governments create money and inject it into the economy. 

As Martin Wolf described this week on The Exchange with Amanda Lang central banks dumped enormous amounts of money into the global economy to prevent the 2008 bank failure from turning into a new Great Depression. 

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But when that seemed to work, everybody tried it. 

Governments around the world, including China, Europe, Japan and the United States, took turns creating cash and pouring it into the economy.

But as the world’s assets became worth more and more, they produced less and less.

True growth takes the assets we have, the workers and the money, and harnesses them to create whole new ways of doing things. It is a time for scientists and engineers. But it is also a time for thinkers and artists. It is a time of ferment and imagination.

While we know from experience that such times lead to new bursts of general wealth, they do not feel like times of perfect safety. As the IMF’s Viñal said this week, such times require an investment in economic risk, taking a flyer, rolling the dice. 

Investing in youth

Periods of real growth are times of creativity, invention and hard work. They are times when young people have a chance to develop original ideas, to think of things the world has never tried before and create something new and real.

Instead, the young people of North America and Europe have been underused for nearly seven years. The money our governments are creating has been wasted as well. Instead of adding to creative growth, they’ve been going to rent seekers such as Carl Icahn, making them unimaginably rich.

Martin Wolf worries that we are in a new period of excessive borrowing, where once again we will have a “flow of savings to people who are not using it well.”

In fact, a recent study by Bloomberg and S&P Indexes shows that companies are expected to spend 95 per cent of their earnings on share buybacks this year. 

This week’s IMF report has joined those of us who think it is time to redirect the world’s cash into the real economy.

“The best way to safeguard financial stability and improve the balance between economic and financial risk taking is to put in place policies that enhance the transmission of monetary policy to the real economy—thus promoting economic risk taking—and address financial excesses,” says the IMF.

The report says governments must use “macroprudential” rules to prevent money from flowing into assets (like Canadian houses) and instead going to businesses willing to take long-term risks.

Of course, there is still much to be done. 

Economic thinkers and commentators may lead the way, but we must now begin the hard work of redirecting and restructuring the world’s leading economies to favour the Musks and discourage the Icahns. 

We must move on from the goal of preserving old wealth to that of creating the new and put our young people back to work.

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