May 7, 2021


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Financial bubbles also lead to the golden age of productive growth

3 min read

Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s, asking if Eurotunnel shares were worth anything, sparked a blowout from the boss of the company. Appeals have been launched, voices have been raised, resignations demanded.

Fortunately, I kept my job. Eurotunnel’s equity was also quickly crushed under a mountain of debt. However, the company was refinanced and the project completed. I raised a glass to Morton’s fierce determination on a Eurostar train in Paris a decade later.

In hindsight, Eurotunnel was a classic example of a miniature productive bubble. Amidst great euphoria over the wonders of Channel travel, capital was sucked into financing a large business of unknown value.

Unfortunately, Eurotunnel’s first backers were not among its financial beneficiaries. But the infrastructure has been built and, aside from pandemics, it is providing a tremendous service and making a comeback. It was a lesson in how markets usually guess the right direction to go, even if they misjudge the speed and scale of value creation.

This is worth thinking about as we wonder if our over-inflated markets are about to explode. Will something productive emerge from this bubble? Or is it just a matter of spreading the losses? “All productive bubbles generate a lot of waste. The question is, what are they leaving behind, ”says Bill Janeway, the seasoned investor.

Fueled by cheap money and feverish imaginations, funds are pouring in exotic investments typical of an advanced bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $ 347 billion was invested in ESG investment funds last year and a record $ 490 billion in ESG bonds was issued.

Last month, Nicolai Tangen, director of Norway’s $ 1.3 billion sovereign wealth fund, said investors were right to support tech companies in the late 1990s – even though valuations were too high – as were they were right to support ESG stocks today. “What is happening in the green shift is extremely important and real”, Tangen said. “But how well stock prices reflect this is another question.”

If the past is any guide to the future, we can hope that it is a productive bubble, regardless of the short-term financial carnage.

In his book Technological revolutions and financial capital, economist Carlota Perez argues that financial excesses and explosions of productivity are “interdependent and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused – even as “brilliant successes and innovations” shared the stage with “big fads and outrageous scams”.

According to Perez, this cycle has occurred five times in the past 250 years: during the Industrial Revolution that began in the 1770s, the Steam and Railroad Revolution in the 1820s, the Electric Revolution in the 1870s, the petroleum, automotive and mass production revolution in the 1900s and the information technology revolution in the 1970s.

Each of these revolutions was accompanied by bursts of savage financial speculation and followed by a golden age of increased productivity: the Victorian boom in Britain, the Roaring Twenties in the United States, The Thirty Glorious in post-war France, for example.

When I spoke with Perez, she guessed that we were halfway through our latest technological revolution, moving from a phase of tight installation of new technologies such as artificial intelligence, electric vehicles, printing. 3D and vertical farms in a phase of mass deployment.

Whether we enter a golden age of productivity in the future, however, will depend on the creation of new institutions to manage this technological transformation and the green transition, and the pursuit of the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues that the top priority should be to transform our tax system, reduce the burden on labor and long-term return on investment, and move it around. more towards materials, transport and dirt. energy.

“We need economic growth, but we need to change the nature of economic growth,” she said. “We need to radically change the relative cost structures to make it more expensive to do the wrong thing and less expensive to do the right thing.”

Despite excessive enthusiasm, financial markets bet on a greener future and began funding the technologies needed to bring it to life. But, just like in previous technological revolutions, politicians must now play their part in shaping a productive outcome.

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