The idea for this column owes to William Adamopoulos, CEO of Forbes Asia. Since 2001, Will and his superb team have also run the annual Forbes Global CEO conference. I’ve spoken and led discussions at each one, and will again on September 11-12 in Singapore.
This year’s theme is “Sea Change.” The winds are shifting, the waves are high. Since Covid, smooth sailing has been a rare luxury. Storms are everywhere. Business and political leaders must navigate a world that is far different than just four years ago. Back then, the reach of globalization went one way—forward! There was no pandemic. No land war in central Europe.
Let’s be clear. The old pre-2020 economy is not coming back. Watching and waiting for what’s next is not an option. If we want to play big in the exciting new era ahead, we must navigate our way there. On this journey we’ll see life-changing improvements in healthcare, education, transportation, housing, energy—and, if we don’t blow it—wider access to capital and opportunity.
Poor navigation, on the other hand, will take us to places we don’t want to go: Economic stagnation, rising social instability, geopolitical turmoil and war. More energy and climate uncertainty—even more than we have now. And worse, life-sapping barriers to opportunity and hope.
None of us would willingly steer our companies, countries and investments toward danger, stagnation and loss. Yet some of us will do just that. We’ll misread the signals. We’ll pick fights we didn’t need to. We’ll underestimate a new technology or competitor. Our very success will create hubris.
Where I live in Silicon Valley—on the east coast of the Pacific as Will likes to say—one of our best banks, with a sterling 40-year record of serving high-growth industries, bet wrong on interest rates. Silicon Valley Bank crashed, and burned—it was a sudden and shocking death. Right now, countless CEOs around the world are making bad bets, or no bets at all, on artificial intelligence, alternative energy, digital currency, new trade partners and supply chains—you name it. In a period of global sea change, it’s easy to lose our way. A few wrong decisions could wreck us.
Speaking of interest rates and tough choices, the world’s major central banks will play an outsized role in shaping the economy and markets in 2024-25. I don’t like this. Maybe you don’t either. It’s more fun when markets rule and central bankers are quiet, like furniture, and barely thought of at all. Then we can talk about exciting growth levers: new technologies, brash entrepreneurs and booming consumer markets. I prefer China-U.S. relations to be about competing views to create abundance for all. Not fights over scarcity.
But the scary interest-rate death of Silicon Valley Bank can’t be swept away. It forces us to pay attention. When will central banks cease hiking? What is a proper interest rate anyway? Is there, as some argue, a “natural rate of interest” (called R*, or R-Star, by academics) or is that only an academic theory?
Advocates of R* say optimal central bank rates should be core inflation + R* (which is currently 0.6% and has been falling for decades, the result of global trade and technology efficiencies). Skeptics counter that R* at 0.6% is artificially low. They point to a history of stable interest rates closer to core inflation + 2%. Higher rates have well-established benefits. They reduce lending risk and systemic bank volatility. But they also slow the economy and raise unemployment—at least in the short term. In the longer term, it’s likely that modestly higher rates lead to smarter capital allocation.
Core inflation + 2% was the old tradeoff and a good one. It worked decently after the world jettisoned the gold standard in 1971. It required greater patience. That was then. Today, populist pressures and social media are anything but patient. They don’t tolerate high unemployment and lousy stock prices for very long. Populist pressures always favor the short term and lower rates. Whether the populists know it or not, they are R* fanboys.
It’s a populist world for now. Plan accordingly.
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