Markets fall across the world – great news for everyone

Sep 4, 2015 | Tony Byrne's View

This is not the headline that you saw last month and for understandable reasons. The billions that were wiped off the stock markets meant that investors lost thousands, if not millions.

Of course, you can argue that now is a good time to invest. If you invest when the market reaches the bottom, you will benefit from the coming bounce and rise. But that rarely helps those people who have existing investments and behavioural economics teaches us that virtually no one (except Warren Buffet) does this.

That said, now is an excellent time to invest and if you have been putting off that investment decision, make it now before it is too late. However, this is not why the fall in the world’s stock markets is good news.  It is good news because there is now a small chance that the world will change in a very positive way. For the last 50 years the economies of the world have focused on growth.

Growth in an economy creates wealth; wealth is what people believe makes them happy; happy people vote for politicians, which keeps them in power and keeps them happy. Growth reduces a country’s debt (as a proportion of its size) and therefore allows the country to provide more services to its people, which makes them happy. Happy people vote for politicians, which makes them happy.

But there is a problem with this virtuous circle. The world cannot physically sustain the present levels of growth. We all knew that China could not maintain growth of 10%, 8%, or even 7%, each year. And so growth had to slow. But even growth of 3%, which is what most developed economies dream of, cannot be sustained. If you hadn’t noticed, there is only so much ‘stuff’ in the world; the world is only so big and can only sustain so much. This means that, inevitably, growth must slow. It means that we must learn to live in a world where 2% growth is high and where 1% growth results in a sustainable future. In a world with 1% growth, interest rates will never exceed 3% or so. In a world with 1% growth, inflation will rarely exceed 2%, or even 3%. And in a world of 1% growth, investment returns of 5% will be the superstar. We have been approaching the point where the world must move towards lower growth (this is already evident in developed countries) and perhaps the events in China, and the ripples they caused across the world, will mark the start of the move to a more sensible world.

This will not please politicians, but I think we could all live with that. It is hard to think of the greater good when your pension loses 10% of its value. It is hard to think of the long term when your ISA returns fall below what you invested. But, if we can understand how this might make all our lives better, then perhaps we can be a little happier and sleep easier.

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