Invaluable selfless actions matter but they are not measured and therefore are NOT VALUED

February 13, 2020

This morning, I was preparing to write on a different topic but got distracted by an interview on Radio NZ with Professor Sir Partha Dasgupta about ‘Putting a dollar value on biodiversity.’ So, I put aside what I was writing and started this post.

Among the many points made by Partha Dasgupta, a few struck me.

Societies, encouraged by governments and businesses, convert virgin land into other uses – agricultural, housing, industrial and infrastructural. This human activity has imposed a cost on the environment. As the population increases, so does that cost. We measure that activity, mainly through GDP, but we don’t measure the cost on humanity and the environment, nor do we measure or assess the initial value of the environment.

A fundamental tenet of Economics is that the individual behaves in that person’s best interests or, according to Dasgupta, each of us is an egoist. However, Dasgupta acknowledged that many of us make selfless decisions based on what he called “socially embedded preferences” that result in us taking a cut in our standard of living because that cut will be shared by others in our community or will create a legacy. The outcome of such selfless decisions is a drop in GDP and the measured collective wealth. Dasgupta talked about shared communal behaviour but he missed what, in my opinion, are two more significant selfless but related actions.

Yes, we all want to be better off but we feel a need to make a net positive impact on the world – on those around us, those to come and the environment. Some of that can be achieved through measurable outcomes, such as earning an income and accumulating savings to house, feed, clothe, educate and support ourselves and our whanau, and developing and applying technological solutions to environmental challenges. But an awful lot is achieved by actions and outcomes that cannot be measured.

How can you put an economic value on spending time with family, taking time to teach valuable life lessons to our rangatahi, our tamariki (e.g. how to ride a bike, how to cook, how to play safely in our rivers and the ocean and along the way learning vital skills of problem solving and critical thinking), and doing voluntary work whether in the community or within our own whanau?

Our government is attempting to measure these selfless actions with its Well Being Budget, which received considerable international attention and acclaim when released last year, enthusiasm that was unfortunately not shared domestically.

The younger generation are showing more care and urgency about nurturing the environment in the face of increasing evidence of the damage already done to the environment and climate change. Yet, leaders of the main industrialised nations refuse to resist pressures from industrialists and businesses or, in some prominent cases, publicly deny any damage or change.

None of this matters to financial markets because it cannot be defined or empirically valued or traded. Yet, these are intrinsic elements in defining the quality of life today, what we leave behind and what we have to fall back on in times of strife.

Most people will say that not everything important in life can have a financial value placed on it but, without some attempt to measure its financial value, we will continue to make decisions that ultimately make us all poorer.

To find out more, email me at ital@cavanaugh.co.nz

Have we really escaped the GFC?

February 12, 2020

The slowdown in global economic growth over the more than 10 years since the Global Financial Crisis (GFC) seems to have bottomed out. Sharemarkets (by definition, an indicator of future company cash flows and profits) have had a stellar 2019 and started 2020 in the same vein, much to the delight of investors. Given that most of us are (or should be) KiwiSaver investors, that is good news.

Yet, other key forward indicators are proclaiming the opposite. Prices for industrialised commodities (e.g. oil, iron ore, aluminium and copper), global bond yields and official (central bank) interest rates not only are below 2019’s peaks but also are well below their respective peaks since the GFC.

Many (including the writer) attribute rising sharemarkets to historically low funding costs as a result of low benchmark interest rates and credit spreads.

Low benchmark interest rates are the legacy of central banks’ vigorous monetary easing since the GFC, to avoid a repeat of the economic and geopolitical devastation after the 1929 sharemarkets’ crash, and the interest rate markets’ response to still sluggish economic growth and inflation.

Low credit spreads are the result of investors chasing yield in a low interest rate environment but, in doing so, they are lowering their risk tolerance. That, in itself, is another worrying sign that the financial community has leveraged its investments. Leverage is a useful business tool but too much leverage reeks of greed. And, unlike a Gordon Gekko, I believe that greed is anything but good.

I really hope that the messages from sharemarkets and credit spreads presage the future. But I am not hopeful, although I want to be for the sake of my family, especially future generations.

Over-enthusiastic sharemarkets and credit spreads were signs of greed that preceded the GFC and the crashes of 1987 and 1929, among others. Furthermore, bond yields have been a more consistent forward indicator than sharemarkets and, historically, the longer that bond yields and sharemarkets have proclaimed divergent outcomes, the more reliable has been the message from bond yields.

I do not know the future. No-one does! A prudent risk manager assesses all the risks in the context of risk preferences, objectives and the intimate relationship between risk and reward.

To find out more, email me at
cavanaugh@theeconomicbutterflyeffect.com or
ital@cavanaugh.co.nz