Book review: Capitalism 4.0 The Birth of a New Economy in the Aftermath of a Crisis by Anatole Kaletsky. The author is Chief Economist with GaveKal investment company in London.
This is a very intriguing and inspiring book, even though I disagree with some of the author’s points. The author says that in economics sometimes there really are new paradigms. He believes we are in a brave new world where finally, after centuries, people have learned to trust and use fiat (paper) money with out any backing by precious metals, and this new behavior will make the world more efficient and prosperous.
His big point is that we are in the middle of a multi-decade process of globalization and technological revolution which will greatly increase prosperity and, by contrast, the Crash of 2007-2008 was merely a petty distraction. The book is loaded with stunningly optimistic explanations about the solutions to the economies problems.
He cities four megatrends: lots of new 3rd world consumers, globalization, the Great Moderation (where recessions become rarer and interest rates lower), and financial revolution where ordinary consumers can get loans against assets that previously only rich people could get.
Regarding economic worries he says: regarding inflation, relax, the increase in the money supply doesn’t by itself create inflation, in addition labor must gain power and there must be shortages of labor and this won’t happen so there won’t be inflation. Regarding excessive government debt he maintains that as long as it is issued in the nation’s currency and is mostly owned domestically and if interest rates remain low then all will be well. He forecasts interest rates will be low for many years. He believes the dollar won’t collapse. He feels the increased consumer debts are legitimate and affordable because of current and future growth of the economy. He says the increase in house prices before the crash of 2008 were partially justified due to growth in the economy. I disagree with that, my previous career in real estate lending gave me some insights in that area that he may not have. I think the severe lack of income based “full-doc” loan underwriting from 1997-2007 was responsible for the ridiculous once in a century real estate bubble. During 2000 to 2010 incomes were stagnating. Since income is the key determinant of ability to get a housing loan, even more so than interest rates, then I believe that house prices in 2000-2008 should have remained stagnant in parallel with personal incomes. He claims that "mark to market" rules for banks helped create the Crash of 2007-08 but I think it was a cold, hard fact that banks had loans that needed to be permanently marked down and that the markdown was not a temporary panic but a permanent write-down of junk quality loans that were falsely labeled as “A” paper quality. But that is part of the past. What is important now are his observations about things other than and more lofty than the U.S. real estate/mortgage crash. And those observations are wonderfully cheerful and sound. I agree with him that the world economy has a bright future. By, contrast my caution is that I recommend that investors be careful not to overpay for equities, and to use the Shiller PE10 ratio to avoid investing when the market is overpriced.
Kaletsky makes excellent points that the economics profession tries inappropriately be a mathematically based science like physics and that it incorrectly assumes that consumers and investors are rational economic actors. The book is very well written with language that is easy to read yet intellectually stimulating.
The book is an example of high quality independent investment advice, even though the author is an employee of a mutual fund company. He does not try to sell the reader any of his company’s services.
I have previously cited Kaletsky on my website as a reason to be fundamentally bullish at http://tinyurl.com/4c7cusr