Blog | Personal Finance

Happy New Year

Rather than writing something gloomy about the outlook for the stock market in 2015 as I had intended to do when I sat down to write this first blog of the new year, I have decided to write about the aspects of the economy that I believe we can all be happy about. While there are many reasons to worry when it comes to the economy, I thought it would be nice to begin the year by looking on the bright sides of things. Before you jump to the conclusion that someone must have kidnapped me and hijacked my blog, let me assure you that I will write something gloomy about the stock market next time or, at least, some time soon. So, OK, here goes.

First of all, while we came very close to collapsing into a new great depression in 2008, we didn’t. That is certainly something to be happy about. What’s more, the chances of the economy spiraling into a depression in 2015 are very slim. Although the economic fundaments are still quite shaky, the fiscal and monetary firepower of the US government is truly immense and almost certainly more than adequate to stave off a collapse any time during the next 365 days.

The government’s budget deficit has fallen from 10% of GDP in 2009 to 2.8% last year. This year it is forecast to be just 2.6%. Furthermore, the cost at which the government can borrow is very low, just 2.2% a year for 10 years. Therefore, if necessary, the government could again prevent an economic breakdown by aggressive deficit spending, just as it did in 2009. Meanwhile, with globalization continuing to put downward pressure on prices, the Fed could also jolt the economy with a massive new round of monetary stimulus (QE 4) without causing high rates of inflation. So, while it is possible that the economy could be very hard hit from a number of directions this year, a real economic collapse could only occur if the government failed to respond to the crisis with the ample tools and resources available to it.

Next, it is good to keep in mind that the world is growing richer each year. There are many ways to measure wealth, but today I would like to focus on the stock of accumulated Capital, i.e. the stock of fixed assets like plant and equipment, intellectual property, and residential and non-residential structures. I’ll use US data to illustrate this point (since I don’t have global data and because I believe the trend for the US and the global economy would be similar).

The Capital Stock of the United States reached $51 trillion in 2013. And, as you can see in the chart below, since 1952, it has grown at an average rate of 2.8% a year in real terms.

Moreover, the Capital Stock per capita has also increased sharply, from $42,000 per person in 1950 to more than $130,000 per person now. That means, on average, Americans have more tools per person to work with. Capital creates Income; and the part of Income that is not consumed is invested and becomes more Capital. Our economic system grows - and this is the process through which it creates growth. OK, it is true that not everyone has benefited equally from the growth in the Capital Stock in recent decades. Nevertheless, as a society, Americans are richer because the US Capital Stock is so much larger now than in the past. The same is true for humanity more generally. There is no evidence that this process of wealth creation through Capital accumulation is going to end any time soon. So the world is likely to continue growing richer. That’s another thing to be happy about.

Related to the growth in Capital is the next good thing going on in the economy all around us: very rapid technological progress. For instance, new processes for extracting oil have caused the price of oil to fall by half since June. That means most people will have more money to spend on other things this year. Or consider this, even though I am in the countryside of Northern Thailand today, I will be able to see my family and friends and wish them Happy New Year with a Skype video-call, for free. Twenty years ago, even a short international voice call cost $100.

I could go on (seriously), but I’m out of space. The bottom line is this: even when it comes to the economy, there are a lot of things to be happy about as we enter 2015. So, with that, let me end by wishing you a healthy, fun-filled and very Happy New Year!