Howard Marks in his recent memo referred to Morgan Housel’s newsletter as ‘always brilliant’. We agree. This one is indeed a brilliant long read with Housel doing what he does best – connects the dots underpinned by his unique story telling approach. The premise is that a few events have an outsized impact on the outcomes in the world, such as – a lot that happened in the 20th century can be explained by the two world wars and the great depression. So, what are the few events or developments currently that will likely have an outsized impact on the world in the coming decades. Housel suggests the three most important forces shaping the world are demographics, inequality and information access.
- A demographic shift that reconfigures modern economies.
Housel refers to the ageing populations of the western economies and how it will affect the global economy. Housel refers to a chart showing estimated change in working age populations for major western economies plus China and Korea over the last and next thirty years – America whilst slowing down compared to the last thirty years still continues to grow whilst all the others see massive declines.
“When people talk about what nation will own the next century they point to leadership in AI and Machine Learning, where China looks so competitive. But it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. China could invent something as big as the next internet, but when mixed with its demographics have an economy that muddles along. Europe, Japan, and South Korea are the same or worse.
Demographics will slow America’s economy, but they’re a five-alarm fire for other countries. So even assuming equal levels of productivity growth, the U.S. is head and shoulders better off than other developed nations, just given its demographics alone. America could drop the ball on technology while China/Europe/Japan make all the right moves, and America could still remain a much larger and more powerful economy.
…Another thing affected by demographics: Fewer births means more reliance on immigration for population growth.
…“By 2035, immigration will add twice as many people as natural births and deaths to the population,” writes Derek Thompson of The Atlantic.
…America was built by immigrants, who have shown to be more entrepreneurial and better educated – immigrants are 13% of the population but 27.5% of entrepreneurs. The political dynamics aren’t as clear. Derek Thompson writes:
Today the rich and mostly white upper- and upper-middle class pay the majority of federal income taxes, which often support programs to help lower-income minorities. This contributes to a “makers” vs “takers” narrative that often skirts dangerously close to dividing the country on racial lines. But within a generation or two, this picture will change. As America’s offices diversify faster than its retirement communities, the minority-white labor force will be supporting the majority-white retirees.”
- Wealth inequality that’s grown for four decades hits an inevitable breaking point.
Housel gives us a simplified explanation for how inequality built up in a capitalistic world:
“To grossly simplify, here’s the historical path of how the balance of economic power toggles between social poles:
- Person creates a great business, gets rich.
- People say, “That’s great! They created a great business. They deserve to be rich.” Genuine admiration.
- Wealth begets more wealth as the business compounds.
- More wealth enables power, including regulatory influence, corporate governance deficiencies, and wage negotiating leverage.
- Those powers create super wealth, and lower-income workers begin to say, “Hey, the reason you’re super rich is because you got all these powers from being merely rich, and some of that super wealth looks like rent-seeking rather than creating value.”
- People say, “This isn’t right. You can’t do this.”
- Super wealthy person says, “Too bad, this is the way things work.”
- The process keeps compounding.
- People feel demoralized, undignified, and like the whole system is stacked in favor of a few.
- They eventually have enough, and coalesce as a group to become powerful enough to force change, typically with taxes, minimum wages, and labor unions.
- Super wealthy person says, “This isn’t right. You can’t do this.”
- The people say, “Too bad, this is the way things work.”
…The most important thing about this topic is that people don’t judge their wellbeing in a vacuum. They measure their worth relative to the people they see around them. If your income stays the same while people around you see their income rise 10%, you will likely feel worse off. This is usually subtle, as the material possessions of those with more money inflate your aspirations, often taunting you to close the gap between you and them by taking on debt.
The point is that we can’t just look at how rich the top has become, or at how stagnant the bottom is. It’s the gap between the two that causes one group to push back against the other.
And that gap is the highest it’s been in almost a century, if not ever.
What happens when the bottom starts pushing back against the top?”
Housel reckons massive changes to the political system (eg, Trump/Brexit), educational system and economic system (taxes, tariffs).
- Access to information closes gaps that used to create a social shield of ignorance.
Finally the ease of information availability can have its effects on the socio-political economy.
“The greatest innovation of the last generation has been the destruction of information barriers that used to keep strangers isolated from one another.
What’s happened over the last 20 years – and especially the last 10 – has no historical precedent. The telephone eliminated the information gap between you and a distant relative, but the internet has closed the gap between you and literally every stranger in the world.
It’s a Big Thing. Perhaps the biggest thing since World War II.
TechCrunch founder Michael Arrington recently wrote: “I thought Twitter was driving us apart, but I’m slowly starting to think half of you always hated the other half but never knew it until Twitter.” This is a good point that highlights something easy to overlook: 1) everyone belongs to a tribe, 2) those tribes sometimes fundamentally disagree with one another, 3) that’s fine if those tribes keep their distance, 4) the internet increasingly assures that they don’t. Opening your mind to different perspectives is good and necessary. But when fundamental, unshakable views that used to be contained within tribes expose themselves to different tribes, people become shocked to learn that what’s sacred to them isn’t always a universal truth. The range of political opinions has always been extreme, but what we’ve seen over the last decade is what happens when the warm blanket of ideological ignorance is removed.”
In addition, he reckons the breakdown of entry barriers for talent, the rise of fake news, etc as other effects of this as well as on dating, education, elections and geo-politics”
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