Money & Markets: The economic prospects are not as bad as they seem

With layoffs of engineers and technologists rolling out at a pace in the US, with venture capital investment imploding around the globe, with the cost of living exploding and the British wrapping up in outdoor wear in their homes to save on suddenly incredibly expensive energy prices, it’s easy to imagine the whole system is coming unstuck.

It isn’t, we are all being gaslighted.

Gaslighting used to be an incredible technological breakthrough that brought the boon of widespread illumination to humanity. Now this benign meaning is swamped by the idea that gaslighting is the process whereby people are driven mad by the artificial creation of a false sense of reality.

This new meaning comes care of an old British movie, remade in the US, and the verbing of its title. ‘Gaslight’, a sinister tale of a bigamised heroine’s trials and tribulations, is now synonymous for being driven mad by contrived means.

Most of us are now victims of gaslighting.

If we follow the current narrative, the British economy, its industry and, for that matter, all of us, are on the rocks.

Finance is a perfect example. If you follow the news, the global financial edifice remains on the brink of tipping into the abyss; it doesn’t matter if you are a once-lauded technologist, the pink slips are on the way. It’s not just warehouse workers that are doomed to unemployment, AI is going to make obsolete even the most highly trained engineer, if supply chain disruption doesn’t wreck their employer first.

While markets and economies do often steam towards cliff edges, crashes, recessions and even depressions never live up to the predicted catastrophes. Dire prognostications that actually come to pass are very rare indeed. The dollar, for example, has been predicted to lose its global reserve status and collapse into worthlessness for as long as I can remember. That global financial Armageddon is enough to make anyone horribly anxious about their financial future. Yet the dollar has never been more dominant. Two dollars to the pound is a distant memory; the euro and yen are also in the bargain basement by comparison. Still the dollar collapse meme goes on, all the while its technology companies are the most valuable enterprises on earth.

Like the benefits of illumination, we do not get to hear about the good news of economic or market rescues or successes. Averted disasters are not celebrated in the same way that aftermaths are deconstructed with brilliant hindsight. There may be angels and demons but we do not get to hear about the former.

You can be forgiven for imagining the UK, European and US economies remain on a precipice of collapse. You would be wrong. We are now standing well back from the cliff edge of 2020-2021. It doesn’t mean there is clear sailing ahead or that there aren’t new black swans paddling our way, but the worst economic effects of the Covid crisis are behind us.

Inflation is going to drift down, probably quite quickly at some point. Printing new money injects inflation into the economic pipeline but it is a ‘delta’ and once the process of monetary expansion has slowed or ended, inflation passes through the pipeline over time and dissipates. Inflation will moderate. Now that the world is working hard to get beyond Covid, supply will open up and economies will get to work untangling and straightening out its linkages and, soon enough, the equilibrium of normality will resume.

The last time we were ‘here’ was in the 1970s and the difference today is that the institutions who manage advanced economies do, contrary to the gaslighters’ opinions, have a good grasp of what they are doing. In the ’70s you might be forgiven for believing they didn’t have the foggiest grasp of monetary theory, and it took Milton Friedman, an economics professor from Chicago and Nobel Laureate, to ram home the simple fact that printing too much money makes inflation. Since then monetary policy has been dramatically refined so that unorthodox monetary policy was able to be battle tested in 2008 and onwards, enabling and perhaps encouraging governments and their regulators to step in and save the day when the aforementioned black swans came a-paddling.

Central banks have not been standing idly by since the dotcom crash and all sorts of disasters have been averted, the latest one in the UK, for example, being last autumn’s pension crisis that wasn’t, when the pension funds got caught out with piles of toxic leverage on their government bond portfolios that took a £60bn backstop from the Bank of England to avert. The high price of a dozen eggs is much more newsworthy than the successful bailout of a country’s entire financial system and a near miss is as good as a mile.

In economics and markets, time heals and heals fast, and when you look at the numbers coming out of the US you can see that the Federal Reserve is pulling money from the system in what looks like a careful tweaking aimed at defanging inflation without pulling the economic roof down on top of everyone.

The post-Covid crisis is not over yet but we are past the most fragile phase and advancing towards normality.

It’s not time to crack open the champagne, but in the UK something went right. The FTSE is at an all-time high. This will be great news for all engineers and technologists whether they work for listed companies or not.