–At last. A prediction of the world’s economic future that is as bombastic and grandiose on the positive side as your editor’s is on the negative side. Investment and urbanisation are the twin engines that will drive global GDP from $62 trillion last year to $143 trillion by 2030, according to Gerard Lyons at London’s Standard Chartered.
–This is the superest of “super cycles.” Lyons reckons it will be only the third time in human history you’ve had a chance to invest in the kind of synchronised global growth spurt that lifts all the world’s boats—big and small—on the rising tide of prosperity. He says the first such super-cycle included the four decades before World War One. The second super-cycle included the three decades after World War Two.
–This position is going to get a lot of air time at the upcoming World Economic Forum in Davos, Switzerland. That’s where the smartest, best-dressed, most loquacious people in the world will meet in April of this year to discuss how much better the world is getting. And if you’re one of the underwriters of globalisation or a firm that’s taken advantage of the globalisation of labour, the world HAS been getting better and better.
–But here is a question: how were those two previous super-cycles of global growth different? The answer? One was based on sound money, free trade, and occurred in a world with relatively low personal and corporate taxation (there was no income tax in fact), and governed by the Rule of Law (instead of the corporatist welfare/warfare State we now suffer under).
–The other “super cycle” was what we’d call the “Keynesian super cycle.” It had one attribute in common with the previous cycle, namely the whole world used the same monetary standard. In the 19th century it was the gold standard. In the 20th, it was the U.S. dollar standard.
–But the post-World-War-Two cycle was not really the product of growing, non-coercive global trade. It was the product of shattered economies having to rebuild and reindustrialise (Germany and Japan). The U.S. enjoyed unrivalled supremacy on global markets because its industrial machine was undestroyed and consumer credit released years of pent-up war-time demand.
–If the Davos crowd is right, you can expect to see two massive trends. The first will be a $100 trillion credit boom to finance the Third Super Cycle. “Credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential,” write the people who apparently missed the fact that we just had a disastrous credit boom.
–But let’s assume the trans-national global elites are right on this one. If they are, you should probably buy coal, copper, oil, and energy, or the companies that explore, find, and produce them. So looking on the bright side for Australian investors, all you have to do if the Davos crowd is right is…well nothing. Just sit back and get rich!
–BHP, Rio Tinto, Santos, Woodside…these companies will reap a profit harvest of biblical proportions in the coming Third Super Cycle. If steel prices are set to rise by 66% this year alone, then the Pilbara will be to Aussie investors as Ghawar has been to the House of Saud.
–But what if “credit” isn’t the lifeblood of the economy? What if “credit” is the lifeblood of zombie economies, where real resources are misallocated to uneconomic projects? What if credit accelerates the depletion of scarce resources based on fictitious demand? And what if new credit is just a transparent attempt to recapitalise the global financial system with a new kind of global currency?
–Well, that’s a lot of what ifs. Who knows what the world will be like in 20 days, much less twenty years? But here’s a prediction for the Davos set: your plans to unleash a Third Super Cycle of global growth based on $100 trillion in trans-national credit growth are going to fail spectacularly. Tomorrow, how it will happen.