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Patrick Watson of Mauldin Economics looks at the possibility of future growth potential being highest in small countries with strong, flexible political institutions like New Zealand and Switzerland

Patrick Watson of Mauldin Economics looks at the possibility of future growth potential being highest in small countries with strong, flexible political institutions like New Zealand and Switzerland

By Patrick Watson*

We all want to know the future. Unfortunately, the future isn’t talking. It’s just coming, like it or not.

We can, however, make educated forecasts. I think John Mauldin is broadly correct: the future is bright, but we’ll go through darkness first.

In fact, many of us are already in pretty dark situations, “left behind” in a supposedly thriving economy. We’re told there is no inflation even as the real cost of living rises ever higher.

Where is it leading us? To answer that, we have to think about how we got here.

America alone

In his recent "Inflationary Angst" letter, John Mauldin shared this inflation chart, broken down into spending categories.

The cost of things average people must buy—healthcare, education, housing—tends to have risen more than wages did over the last two decades.

But aggregate inflation measures, like the Consumer Price Index, don’t show this. Falling prices elsewhere held them down. Those tend to be “luxury” goods… which is why inflation is no problem unless you’re poor.

My friend Bruce Mehlman had a different reaction on Twitter.

He’s right; the fastest-rising spending categories are things you can’t easily import from other countries. If you suddenly need surgery, you’re going to the nearest hospital pronto.

On the other hand, US hospitals and colleges do import certain components and personnel. That’s why we have foreign-born nurses and professors. It doesn’t seem to have reduced their costs, though.

Bruce’s latest slide deck is about global trends re-shaping the world. He distilled his outlook into a two-factor equation: globalization vs. regionalization, US-centric vs China-centric.

I realized long ago that globalization was on its last legs. I also think trade conflict will continue and even intensify. So Pax Americana or Pax Sinica (the top two quadrants) aren’t very likely.

The bottom left scenario—what Mehlman calls a “Free World United”—would be a partial end to trade wars, with the US and its allies uniting against China. That might happen but not without a leadership change in Washington. And maybe not even then.

So the “America Alone” scenario within an otherwise China-centered world seems the most likely. For Americans, this will probably mean even greater economic difficulties than we face now.

How people who are already struggling will deal with it is unclear. But it probably won’t go well.

Small winners

Recently in our Over My Shoulder service, I shared a report by Gavekal Research co-founder Louis-Vincent Gave called “The Knowledge Revolution and Its Consequences".

Louis has a great way of systematically thinking through a situation to see where it leads. He thinks technology and political trends are aligning against mega-powers like the US and China. His key points:

  • Modern Western economies have become knowledge based. This means Marx’s three factors of production (land, labor, capital) now have a fourth.
  • Neither physical strength nor access to capital are sufficient for economic success. Power now resides with those best able to organize knowledge.
  • The internet has eliminated “middlemen” in most industries. In a representative democracy, politicians are basically middlemen.
  • Hence, the knowledge revolution should bring a shift to direct democracy, but those who benefit from the current structure are fighting this transition.
  • This is the source of much angst around the world, including the current wave of popular protests.
  • Smaller political entities should find the evolution toward direct democracy easier to achieve than big, sprawling governments.
  • Today’s great powers have little choice but to spend their way to political stability, which is unsustainable, and/or try to control knowledge, which is difficult.

The conclusion is that future growth potential should be highest in smaller countries with stronger, more flexible political institutions. The US, China, and most of Europe don’t qualify. Places like New Zealand and Switzerland have better odds.

That brought to mind one of my favorite Enlightenment philosophers, who happens to have been Swiss.

A social contract

Eighteenth-century thinker Jean-Jacques Rousseau wrestled with how to preserve individual freedom when we also have to depend on each other for survival.

Rousseau saw politics as a social contract between a sovereign and citizens. What we call “government” is the interface between them.

The sovereigns of Rousseau’s time were mostly kings, but he envisioned a democracy in which the people collectively were sovereign. But then he ran into a math problem.

In a tiny democracy of, say, a thousand citizens, each possesses one-thousandth of the sovereignty… small, but enough to have a meaningful influence.

Each individual’s share of sovereignty, and therefore their freedom, diminishes as the social contract includes more people. So, other things being equal, Rousseau thought smaller countries would be freer and more democratic than larger ones.

How do we reconcile that with democracy in a US composed of 330 million citizens? I’m not sure we can. It worked pretty well for a long time but maybe, as population grows, the math is catching up to us.

If so, the options are a non-democratic US or a smaller US. Or maybe no US at all.

This land we now inhabit wasn’t always the United States. Nothing requires it to remain so. At some point, it will develop into something else.

When and how that will happen, we don’t know yet. But we know it will.

*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by with permission.

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Very interesting costs graph above, helps explain real inflation !

Yes, what it says is the essentials in life have been captured by the few; which are now price setters.

The few's system will and is coming to an end, as the parasites (which they are) continue to eat whats leave of the host; which then eats itself to survive.

The fundamental problem appears to be the fixation on growth, where interest on money seems to be the only driver. We need to move back to where money was only a medium of exchange, rather than using interest as a private tax shared unequally.

The only growth that should be encouraged is growth that is shared by everyone. It seems the scandinavians are closest to anyone in delivering this.

Still obsessed with growth. Yawn.

Growth + debt = gigantic pyramid scheme!?

Always good articles from Mauldin. Picking the future in a democracy is fraught with difficulties, none more so than the fact we are dealing with human beings, who being (mostly) educated, will generally vote for their best interests, which will & do change over time. That's what's so interesting about today. 75 years into this current age, things are winding down for the winners & changing by the hour, creating widespread confusion & probably more importantly (and not in a good way) the opportunity for deception to abound.
We see this in our media, in our politics & it is rampant in the education systems of most western democracies. Deception is an evil thing. You are told & indeed you might believe in certain things that may make sense to you, but when push comes to shove (like this weeks UK election) you realise that what you have been told was not what most people were thinking. You have been deceived by a mostly left wing biased media. The reality is (in the UK) that 365 seats for the next 5 years gives Boris the chance to enable & restore to the British people their own sovereignty once again. Sure, it will be complex, but its always better to be responsible for your own mistakes (and victories) than it is being told what to by others. That, IMHO, is the key ingredient & empowerment & reason for knowledge, to be able to do what you can do to make your life better, to live a good & rewarding life as much as you can & to be able to raise a family in times of peace & prosperity (which don't last forever, sadly). These are the privileges of our age. Bringing it back home in comparison, one party got way more votes than the other main party but due to the details of the MMP system, one person was able to deceive the majority for his own ends. To create a situation where he is able to exert more than his fair share of power into what we are now all seeing is a government of incompetence. This says very little about the benefits of the MMP system that we currently employ, which was just another deception in what is turning out to be an (end of) age of them.

The fail I see is a government that governs with the support of a minority of the population.
It continues to push its policies (supported by a minority of the population), its policies face resistance.

Compounded to get polly numbers they included several policies supported only by a smaller minority, & included em as governing policies...

The learning. Governments need govern with policies the majority support.

This one fails because it presents policies supported by a small minority as policies to be enjoyed by the majority.

Falling into this trap points to poor skills and poor awareness. Bad talent. Touching on character issues of those involved.

The cross check being: if the minority parties policies appealed to the majority, the minority would be a majority party, or those policies would be picked by by the major parties.
Remember the Values Party.

Golly! The things you see when you're doing some background reading ( on this topic from this author )

"by Yvil | 4th May 18, 1:36pm
So be brave and let the great depression happen, it's the purge the whole system needed. It's much better than the long slow downward spiral we're on now, which will still lead to a depression"

How times and views change! That poster was right then, and they're just as right today...

How do we reconcile that with democracy in a US composed of 330 million citizens? I’m not sure we can. It worked pretty well for a long time but maybe, as population grows, the math is catching up to us.

I think it has more to do with homogeneous vs heterogeneous, as opposed to simple size of population. In maths, heterogeneous means incommensurable through being of different kinds, degrees, or dimensions. We used to extol the merits of cultural diversity, whereas now we extol the virtues of retaining ones cultural roots (and being empathetic/accepting of all cultures).

Yet I know from experience that had I not decided to leave my American heritage behind (and similarly to deliberately embrace NZ ideals and culture) when I came to live here, I would never have been as happy or as secure in myself as the NZer I have become.

My mother, a Canadian by birth, was a bit the same - she moved to the States and became far more American than Canadian. Even between those two countries there are big differences.

When we lived in USA we had a couple of trips up to Canada. And yes different indeed, we immediately recognised we were back in a Commonwealth country. Street signage, style of post offices, those sort of things. We felt very much at home in the States and were adapting very positively. Where we were was even paced, reasonably safe. We found society much more polite, tolerant, patient and mature than here in NZ. Great sense of fun. Would have stayed had we been younger and without family responsibilities at home. It is an individual personality thing though. One English friend has come here and embraced the space, privacy, clean air and nature, beaches, mountains, lakes, rivers all close,and wonderful. Another English friend lasted only six months, too quiet, needed a big city of people and activity constantly around.

Ditto myself (ex-UK) and my wife (ex-PNG). It seems to be our immigrants who see what is special about NZ and we also regret the madcap desire by young Kiwis to be just like their image rest of the world: modern, crowded, multi-cultural.

I don't know if young Kiwis want that at the expense of things like home ownership, being able to go to the beach, being able to get to and from work. Funnily enough, that's never a trade off that's part of the question, but it's part of the reality - and that's not exactly something that young Kiwis have foisted upon themselves, is it?

Worth more than a thumbs up. You are right. Given the opportunity most young Kiwis (eg my four kids; their partners and now grandchildren) would contentedly live a 'kiwi lifestyle' rather than dream of working overseas. It would be different but a clear evolution of the NZ dream. How do we achieve it? Clearly a dramatic reduction in house prices and especially the price of land for housing; once that was a strong probability then foreign investors would leave the market and that on its own would start prices dropping. How about a universal land tax plus capital gains tax charged when property is sold and a stamp tax. We also need deliberate govt investment in rural NZ. Probably the drift from country to town is inevitable but our goverments is encouraging it. Cutting the immigration rate (people like me!) to a rational level that just replaced those Kiwis who leave would make sense - much easier for planning infrastructure expenditure and all investors if you know what the future population will be.

Dream of working overseas? In essence that is both a very good point and question. Despite all the rhetoric, punching above its weight etc, NZ remains remote and a small nation. Still hasn’t jumped out of its own shadow, that being the vestiges of once was “British.” NZ needs NZrs to venture forth and learn internationally and bring that experience and education home. Too much of NZ & NZrs view the world as if looking through a pair of binoculars, but held backwards. But then why not the other side of the argument. Is there not merit as well in bringing up a family dedicated to enjoying to their advantage, the remoteness and insulation from the drama and danger prevalent in the much wider world? Perhaps the answer is that some will do one and some will do the other, and others will do something in the middle? At the end of the day it is undeniable that living in a free country in the free world, provides a great head start on life.

Still hasn’t jumped out of its own shadow, that being the vestiges of once was “British.”

Interesting. But the thing is that is our heritage. We still, in large part, play the sports that originated there; we still enjoy/appreciate British humour; we still adhere to many of the principles in law and democracy that come from there; Hillary conquered Everest on a British expedition; and so on. As a country, we can no more forget our British, than our Maori heritage.

He iwi kotahi tatou / Now we [British and Maori] are one.

It might sound soppy, but I feel that saying is deeply New Zealand - it's very heritage.

And because I am neither British nor Maori, I still to this day, feel like a lucky adopted child here.

Tks Kate. The “jumping out of your shadow” was expressed to me by a German in the 1980’s, a fine man, and it was born out of a frustration of what he saw as a nation that was not exactly certain of its place or purpose in the world, in short its identity. He loved NZ as a country and had the utmost respect for NZrs but felt there was at play, something of an inferiority complex. And it is the same point as Lapun makes above. That is you are what you are, just appreciate it and go and do it on your own. If you are good, even great, you don’t need to tell everybody about it, as if a small boy in the corner, because if it is that good, it will speak for itself. The greatest example of how exactly we can do this? Our Olympic champions,the Halbergs & Snells, the Carringtons and Ever Swindells for instance, just do the job and let the result do the talking.

It's an interesting conversation, as you say, "what he saw as a nation that was not exactly certain of its place or purpose in the world, in short its identity"... perhaps that is because there has been a resistance by many NZers to embrace our identity - that being, that we are one people, British and Maori.

What I see as quite unique about NZ (particularly from an American lens) is that through the period of early colonisation, our people and our governments largely attempted integration, not separatism. We fought one another but never legalised either apartheid or slavery. We never sought to establish 'native reservations', as per Canada, the US and Australia. Much land was confiscated but attempts were also made to purchase and to create titles to Maori for land as well (even if some of it was still confiscated thereafter).

Of course, the majority/colonisers haven't listened to Maori on many fronts, and in particular on immigration - which goes to the heart of NZ identity and culture. The late Ranganui Walker had this to say on that back in the 90s (a must read for all NZers);

The original charter for immigration into New Zealand is in the preamble of the Treaty of Waitangi. There, it states that Her Majesty Queen Victoria of the United Kingdom:

" has deemed it necessary, in consequence of the great number of Her Majesty's subjects who have already settled in New Zealand, and the rapid extension of Emigration from both Europe and Australia which is still in progress, to constitute and appoint a functionary properly authorized to treat with the Aborigines of New Zealand for the recognition of her Majesty's sovereign authority over the whole or any part of those islands. "

The present generation of Maori leaders abide by the agreement of their ancestors to allow immigration into New Zealand from the countries nominated in the preamble of the treaty, namely Europe, Australia and the United Kingdom. But, for any variation of that agreement to be validated, they expect the Government to consult them as the descendants of the Crown's treaty partner. The Human Rights Commission endorsed that position with its recommendation to government that the Treaty of Waitangi should be considered in any decisions on immigration policy. The Commission's advice was not properly heeded.

and still today, Maori perspectives on immigration are largely ignored;

When I read Johnson’s History of The American People I was struck at how similar the early colonial days of the USA & NZ actually were. In particular, good and bad, the vital role, the vital thread if you like of the church. An unusual feature, easily overlooked, of the American revolution was that after its victory, there was no immediate falling out of the leaders, no bloodshed except perhaps, poor old Hamilton & Burr. Eventually though, there was of course the civil war and after that the westward expansion, land seizures of Native American territory (under Rutherford particularly) really got underway.After NZ’s The Maori Wars, government too was stable but that did not stop the cruel and illegal treatment of much of The Maori, their rights, traditions and their land. In the search for wealth the USA with the cotton gins needed slaves. Thus they imported the root of the civil war and the crisis of civil rights today. Of course the native Americans had no say about that either. So Kate, at this hour of the morning, a bit of a long bow, but there are some interesting parallels in there.

How about a universal land tax plus capital gains tax charged when property is sold and a stamp tax.

Jeez that's a lot of taxes! Would like to write more but I have to obey the rules here and remain civil.

Well I hate the admin cost of taxes but if the first is just handled via existing rates then the other two are a subset on registering ownership with LINZ. So all three cheap to collect. All three could be set to very modest amounts but their very existence would stop all buyers of property doing so as an investment (fear a future govt might tweak them up). Buyers would be buying only because that is where they want to live. Result would be realistic prices say halving Auckland prices for a typical stand alone house. Adjust the taxes to get the result they want.

Existing rates. Therein lies a problem. In Christchurch two neighbouring houses. Each the same sized section and structure.One pays annual rates $3,900.00. The other $8,100.00. Same street, same services same everything except the latter is a EQ rebuild. Bared down, this equates to a wealth tax, simple as that. For a retired couple it is a heavy financial burden. They will have to sell up. If the levying of rates is so skewed as this already, would not like to think about the complications and implications of feeding in another calculation.

"Same street, same services same everything except the latter is a EQ rebuild."
What are some specific examples 3900 rates vs 8100 seems extreme

obviously I m not going to reveal private details but suggest you go onto & scroll around Christchurch, for example Sumner, Clifton & Scarborough hills street by street. But I can vouch for the “extreme” well and truly. You see it involves my family.

You say above "same everything".. is council valuation the same, one cv/rv is probably double the other or substantially more. Sure I can check values on but not rate bills which I think is your original point.

Search, that will give you both valuations and rates for any one address.

My Auckland rates are based on an estimate of the value of my home ($250k) and my land ($800k). I would add a tax proportional to the value of the land not the building on it. So I would lose out and my neighbour in a new house on a small section would do well.
The aim of my trio of taxes (and willing to think of more) is to get the land value to a 'true' figure. So considering its pre-building use was growing strawberries and based on that and its convenient location it might have a true worth of say $100k (the market decides). So once the land is revalued without its investment element it would reduce my land taxes to being rather similar to my neighbour in his posh abode.
The need to get land values back to sanity is obvious. Maybe more obvious if you are a young hard-working Aucklander. My proposal might be bad but surely it can be achieved if only our govt had the will. Happy to read alternative solutions.

Tks & straightaway I admit I have not put in your same effort of thought. But yes there must be a more equitable system than the present for rate levying and, as that basically is a tax, a comprehensive rethink of how this area of revenue sits and acts not just at local government level, but within the broad tax system of NZ. However the suspicion, out of decades of precedent, remains that politicians and government agencies will fiddle, cherry pick any good & fair system for greater revenue, and it will soon sure enough, be compromised.

The cost of things average people must buy—healthcare, education, housing—tends to have risen more than wages did over the last two decades.

But aggregate inflation measures, like the Consumer Price Index, don’t show this. Falling prices elsewhere held them down. Those tend to be “luxury” goods… which is why inflation is no problem unless you’re poor.

Wealth effect or wealth illusion? The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.

There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?

There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.

Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.

The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.

When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.

But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.

But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax.

Median incomes have been stagnant. And most Americans will, in fact, rely on Social Security for their retirements, which is a financial asset that will have appreciated in value as a consequence of a lower rate of discount. You may also think it unlikely that many households without savings will spend much time calculating the net-present value of their future consumption expenditures. But they can and do assess exactly the reciprocal, namely, they recognize that the (present value) cost of their hoped-for standard of living has been rising even as their incomes have been stagnant.

Haven’t you wondered how it is that, after ten years of the lowest consumer price inflation in several generations, so many Americans feel that they are “falling behind”? Falling behind what? The standard of living that they hoped for but which the Fed re-priced.

The Fed’s engineering of a wealth illusion is by no means the only cause of angst among Americans. But the next time you hear that the net-wealth of American households is at an all-time high, do spend a minute thinking about the present value of the unrecorded future consumption expenditures, particularly of households with no savings. Link

Full analysis of the UK election:

World is moving towards Trumpism.

Ploitical class statas quo will change.

Yes, getting more stupid by the day

. .. more stupid ... or , more pissed off with the ruling elites ?

The latter I suspect. It's why Trump's 'Drain the Swamp' resonated with so many.


But just who are these 'ruling elites'? Are you referring to the Democrats under Obama, is it the powerbrokers in the financial system or the multi billionaires of the tech companies? Trump promised to 'drain the swamp'. Has he done so? Of course not and few believed that he would. So I ask again, just who are they?

But what is "Trumpism". To me all I see is a mess. Basically the US is split , roughly equally between Trump and anti-Trump

I would now call the USA -the Divided States of America.

Stuff is running an article about the seeds of distrust,

These two world-leading democracies have been severely stress-tested. They are enduring intense political divisions, volatility and distrust.New Zealand is due for a general election next year, and trust in politicians is not high here either. Before the 2017 election, in the Stuff/Massey online survey, 51% of respondents agreed with the statement 'New Zealand's political leaders are out of touch with the people'; while 47% disagreed with the statement 'Our political leaders care about the things that people like me really value'.

In the end I think trust in politicians has been severely eroded and I don't believe it will restored for some time yet - if ever.

I hate it when people cherry pick bits of Rousseau and make out like he just made reasonable, sane suggestions about culture, when he also suggested that culture and society were a pollutant and his educational model was that children should be isolated so as not to be influenced and his life and theories were a mass of contradictions and fallacies.

And science has shown his social contract theory to be a bunch of nonsense too. You can't choose, your brain is wired to follow the tribe, whilst also being able to develop individual skills and an identity. However, make no mistake, ostracism from the tribe is actually neurologically harmful. We did NOT evolve as individuals happily frolicking by ourselves as innocent, pure individualists in nature, until the corruptive influence of society came along!! We evolved as a social species and to tear ourselves away from the culture that we build together would have been both dangerous and counter-productive to our evolutionary adaptations. I mean, sure, no doubt, he's an important thinker, who posed important questions but can we not for the love of god, use a bit more science to consider human behaviour because we have a LOT more to go on now, than Rousseau did back in the 1700's.

Quite like the article, but not his choice of Enlightenment philosopher. Rousseau was a dreadful human being. his vanity might even have exceeded Trump's. But his philosophy was just as suspect. His idea that humans had initially lived in a state of peaceful quality for which they fell, was based on absolutely no evidence and indeed Rousseau expressed a contempt for facts. "Let us begin by laying facts aside" he once said and was equally dismissive of books; "I hate books" he declared. He regarded science and technology as ignoble, putting power in human hands. One last quote gives the flavour of the man; "whosoever refuses to obey the general will shall be constrained to do so by the whole body which means nothing else than that he shall be forced to be free".
Of all the great figures of the Enlightenment, to choose Rousseau is bizarre.