“The question we have to ask ourselves is — are we moving in the right direction, is there a better way, could we at least try and make sure that we don’t impose costs on each other as we try and come out of our own difficulties?” — Raghuram Rajan, Ex-Governor, Reserve Bank of India
Most modern issues have economic underpinnings. Therefore, understanding macro economics has never been more vital. This article provides readers with frameworks to analyze the changes sweeping the globe and ultimately affecting us all. For instance, a slowing global economy has wider ramifications than just a slowdown in consumption. It also creates an environment where wealth inequality often widens resulting in social turmoil and where disruptive technologies become necessary. While social turmoil is a symptom, the deeper malaise is unequal distribution of economic profits which in turn is a direct result of our economic choices.
This article recommends looking at most changes through the lens of macroeconomics. Technologies such as Artificial Intelligence in it’s current form (i.e. Robotic Process Automation and Machine Learning), Distributed Ledger Technology and Cryptocurrencies occupy a greater share of our consciousness in an era of secular stagnation. Because, we are collectively seeking a better life for us and our children. Its as much a story of human solutions to human problems as it is a technological one.
While there are pockets of growth within the world economy such as India, the overall estimate for the global economy in 2018 is either maintaining a status quo or slow growth which has direct implications on our lives.
1. What is Economics?
While there are many technical definitions of Economics, I want to shy away from complexity. In simple terms, economics is the study of scarcity and choice because resources are limited and choices are not.
You can choose to have an ice cream for $3 or buy a book. If you choose to have an ice cream, you forego buying the book. It’s a choice you make that results in an opportunity cost. The opportunity cost is the cost of giving up the next best alternative i.e. buying the book.
Thus, everyone from countries, governments, firms and individuals make a choice about how to utilize the limited resources at their disposal. When larger institutions such as nation states, governments and giant multinationals make choices, these choices end up changing the economic structure at a macro level. Choices made by individual firms, small businesses and consumers affect change at a micro level. These choices become additive when we study changes at an industry or consumer group level.
Choices made by multinationals to look for cheap labor overseas resulted in outsourcing and loss of local jobs. The choice helped some countries to the detriment of others just as attempts to free up time or save costs by creating learning algorithms that mimic human intelligence will do.
2. Why Should I Bother About Economics?
Ask yourself this: what is the one language the entire world understands? The answer is not in your mind but in your wallet. The most universal language is money. Why, then, is there a reluctance to understand how that language travels across the world?
A decade ago, people in emerging economies could get by without bothering about what the Federal Reserve does halfway across the world in the United States. Even then, prior to 2008, many people would still live in a local cocoon not worrying about the monetary policies adopted by countries seemingly not connected to each other financially. The financial crisis created a lasting imprint on the minds of those people and changed all that.
Today, ‘financial interconnectedness’ i.e. the linkages between the financial systems of different countries is taken for granted just as a byproduct of globalization. However, there is a reluctance to look at macroeconomics because we feel that the choices that nations make have no impact on our lives.
Let’s take an example of a bank in Iceland that invested in bonds called Mortgage Backed Securities which were backed by 100 mortgages given to borrowers in the US. As these borrowers default, the investments that the bank in Iceland made turn worthless. As a result, the bank may not have enough cash for its clients to withdraw from the ATM resulting in what is known as a ‘run on the bank’. So, if you were a client of that bank, you would not be able to recover your hard earned savings.
In your mind, macroeconomics should move from being an academic interest to a subject of practical importance in your daily lives. The price of crude oil affects the cost of gasoline at the gas station. The interest rates that central banks set affects the price of stocks half way across the ocean. The rise of blockchains increases the demand for Graphics Processors (GPU’s) manufactured by companies such as AMD.
McKinsey Global Inst publishes a Global interconnectedness index which shows a ranking of countries based on greatest to least connectedness with the world. DHL also performs a similar study.
There are countless examples but the only thing I would leave you with is this: anything that affects your money or financial health is worth learning about.
3. The Financial Crisis And The Rise of FinTech
Certain economic choices made by the financial system collectively resulted in the financial crisis. In a way, the financial crisis led to a structural change in the global economy. Post 2008, the banking and financial services industry looked a lot different than in 2007. A retreat of banks from advanced economies closer to their home base was coupled with a global expansion of banks from developing nations. In addition, more regulatory capital needed to strengthen the financial institutions and prevent future financial crises led to less availability of capital for certain segments of borrowers. A vacuum that was gladly filled by FinTech players through the uses of innovative and proprietary algorithms. Thus, even the rise of Financial Technology has economic roots.
4. Robotics and Artificial Intelligence
The image above tells a story about broad demographic change i.e. an ageing population that prompts the demand for robots and Artificial Intelligence to fuel the gap in the work force. Observed from the vantage point of macroeconomics, the need for higher growth and productivity, these changes seem almost inevitable.
Countries with rapidly ageing populations such as Japan will adopt automation much faster than say countries like India. Again, how it affects your life depends on where you live but understanding correlations between seemingly unrelated factors such as population and robotics can prove to be invaluable in predicting change.
5. Social Turmoil
Since every economic decision is a choice, there are people who feel that the choice has adversely affected their lives which results in social turmoil. Isn’t it understandable to feel sad, angry and frustrated if someone told you that your skills need to be upgraded right at the point in your life when you felt stability was within reach? On the other side of the spectrum are people living below the poverty line without two square meals a day.
As per UN: “Globally, more than 800 million people are still living on less than US$1.25 a day, many lacking access to adequate food, clean drinking water and sanitation. Rapid economic growth in countries like China and India has lifted millions out of poverty, but progress has been uneven. Women are more likely to live in poverty than men due to unequal access to paid work, education and property”
There are other economic choices such as retraining our workforce through globally coordinated efforts, access to basic amenities, basic income, financial inclusion that could help the 800 million people mentioned above. Again, a knowledge of those choices is the first step in trying to resolve most modern issues.
6. Final Thoughts
While money has been a controversial issue and many feel that the current economic system needs to change, a practical and more viable system is yet to be invented. Until that happens, the advantage of understanding macroeconomics is the ability to see changes coming down the pike that others cannot. This vision can then be translated into a personal and collective advantage.
Think of it like the soldier who sits on the watchtower warning the army hidden inside the castle about the enemy’s every moment. Towards that end:
- Try to balance your time between entertainment and health food for the mind. Make health food for your mind i.e. reading voraciously your entertainment.
- There are tons of resources including not for profits such as Khan Academy, Massive Online Open Courses (MOOC’s), podcasts, old school books which can be bought on amazon that can teach you about macro-economics and about how the impact of choices made by other countries can be felt on our lives. One such simple but not simplistic resource is Ray Dalio’s (Ray is the fund manager of the largest hedge fund in the world) Youtube video on how the economic machine works:
3. Look at all major changes and events through the lens of economic choice and you will have a better understanding of how broad, global megatrends such as the rise of FinTech, cryptocurrencies, blockchains and AI are greatly influenced by macroeconomic changes, how these technologies will affect your life and what you should do to re-skill.
My unwavering endeavor has been to help people in any way, shape or form I can. What I wish for all is true happiness. With that said, I leave you with these words by Nathaniel Branden:
The first step toward change is awareness. The second step is acceptance