I’m afraid I can’t help but be cynical when I hear earnest well-paid fund managers rattle on about ESG. That cynicism takes on a nervous tick when talk turns to how fund managers can help tackle inequality, prompting extensive eye-rolling and a final sigh.
But to be fair to poor benighted fund managers I also reserve the same cynicism – bordering on scorn – for the left-wing social justice mob who incessantly chatter away about combating social inequality but then remain strangely silent on core issues such as housing costs. They would much rather jabber on about the end of capitalism or, if they are more sensible, universal basic income as some kind of catch all salvation – for the record I am quite drawn to a negative income tax but accept that implementation is decades away.
Those of us with a more practical, investor-focused outlook tend to ignore this excited moralizing talk and think about practical steps to help people who need a little bit of help. So, in the spirit of prompting new ideas let me focus on two areas worthy of discussion, both of which have some very real world investment implications.
The first idea is the introduction of a basic bank accounts for people who are currently unbanked – and as a way of getting rid of cash. The second idea is investing in digital skills and addressing the broadband divide.
It strikes me that the reason many of the less fortunate struggle is that they are stuck with an expensive cash economy, and even more expensive credit facilities. Dig around and one discovers an alarming absence of bank accounts amongst many people. The big clearing banks have variously tried to address this gap, but with little success. The fintechs have also worked hard at this but again with limited success. The challenges facing the unbanked are formidable. They are forced to use a cash economy at the margins of society which imposes hideous extra costs. They also end up making use of expensive pay day lending options.
Now I realise there is an extensive lobby who are pushing the government to commit to a cash economy for the foreseeable future but honestly this is a hopeless commitment. Cash is soon to be as dead as the dodo and we need to accelerate the shift whilst also accepting that many have real struggles.
So, one practical idea to accelerating the shift is to let the ordinary people open basic bank accounts with the central banks. This is an idea that has been kicking around in macroeconomic circles for a different reason. It’s seen as a great way of delivering a monetary boost via a form of helicopter money. One could for instance have a time limited e-money process where to stimulate the economy freshly minted cash is flushed into central bank private e money accounts : spend it in the next three months or lose it. But as the US commentator Matt Yglesias points out in an excellent column on his Slow Boring Blog, central bank e-money accounts could also be repurposed as a cheap, basic bank accounts. They could be structured so that they pay no interest and offer very little functionality except the important basics. You can read Matt’s excellent analysis HERE.
As Matt says, referring to local trials in the US to avoid using cash “ what we need to do is give everyone bank accounts. It’s a fairness issue, but it’s also an infrastructure and innovation issue. Creating a uniform, reliable, national currency was a huge step forward in its day. But people want cards and electronic transactions. Making the private sector the sole provider of those services is holding the whole country back, even though most people have them. Meanwhile, Fed accounts could be the basis for further public sector innovation.”
I’m sure the cynics amongst you will roll their eyes and sigh but my suggestion is not blue sky thinking. Many central banks are thinking through how to build digital money solutions built around e-money schemes and currently the Chinese central bank is pioneering a series of trials that look a great deal like my suggestion.
Come the next big economic meltdown, as I have said many times on this blog, the armoury of central banks will be much depleted. We will be collectively looking for new ways to pump prime demand and get us out of a funk. The good news is that fiscal policy and sending cheques to everyone is already being deployed but I think the use of e money is almost guaranteed in the next decade. And if deployed properly, this could also provide everyone with a free, basic bank account with an institution they can trust.
And there are of course Investment implications! The macro point is that we’ll see new monetary tools deployed in the next decade which will help to keep growth bubbling away. That will, arguably, fuel inflation. On a sector basis I think we will see central banks begin to invade high street banks core product territory. This has the potential to undercut banking margins BUT I wouldn’t be quite so bearish. Banks don’t really make money out of their basic accounts and most are busily moving up the value chain. Lloyds for instance is aggressively rebuilding its wealth management proposition.
My second focus is the digital gap and inequality. ETF firm Global X produces some excellent research and one of their latest reports is well worth a read. It’s called The Digital Gap and Inequality and is by Morgane Delledonne and Michelle Cluver, CFA. You can download the report HERE.
The big picture is that if we care about inequality – and I accept that some don’t – then maybe another good place to start is why many poorer members of society struggle to access decent broadband and perhaps more importantly lack the necessary digital skills for a cloud based economy.
Here is a key section from the Global X report:
“In the U.S., most of the population used the internet in 2019, although only 73% had broadband access at home. There are a few key areas in the U.S. where fast, reliable connectivity is lacking; rural regions, lower income and lower education households as well as the elderly. Only two-third of rural Americans had home broadband access in 2019. More than 90% of college graduates have broadband access compared with only 46% of those with less than a high school qualification. Similar patterns are evident when comparing internet and broadband access across income levels. While education and income reflected a sliding scale in access, age is unique with there being a clear distinction between working age and retirement. In 2019, U.S. home broadband access for those older than 65 was only 59% compared with in excess of 77% for all other age groups. While older generations typically adapt slower to new technologies, over the last few years internet access and home broadband has been rising the fastest within the above 65 demographic. The COVID-19 pandemic has driven even greater adoption within older generations due to the social inclusion provided by digital connectivity as well as e-commerce providing a safe way to shop.
There is a strong negative relationship between the skill mismatch and labor productivity growth (Figure 1).[i] OECD countries have been experiencing a secular decline in labor productivity over the past decade which coincides with the rise of skills mismatch.”
Figure 1: High skill mismatch is associated with low labor productivity.
Source: OECD, Global X Research. Note: labor productivity is calculated in real GDP in 2010 constant US dollar per hour worked.
It is also worth noting that the aforementioned skill mismatch “is likely to affect more women than men in the coming years considering a significant gender gap in Science, technology, engineering and mathematics (STEM) education”.
So, when you hear politicians babbling on about leveling up, maybe we might challenge them to start with existing government initiatives. The UK’s digital broadband initiative is nowhere near fit for purpose and is oh-so-piecemeal. Various universal service obligations have been continually watered down as ministers worry about upsetting BT and its Openreach business. I have argued before that we need to be much more ambitious and maybe think about a more interventionist approach. Heck I think I have even suggested nationalizing for a decade OpenReach and then getting the job done properly (before re privatizing it). And by properly, I mean
- Making sure that 100 mbps is universally the minimum target
- Eradicating broadband not-spots in urban areas
- Making surer that every rural home has access to a minimum 50 mbps speed
- Turbocharging 5g roll out
In addition, I think a clearly stated commitment to a lifetime learning, training, and skills programme to re -equip as many 30/40/50 something’s as possible to compete in a digital economy. I’m not for one minute arguing that we should repeat the failed “retrain unemployed late fifty-something coal miners into Hackers” policies of the past. But we can make sure that older unemployed workers are properly equipped with the basic digital skills and then focus on getting as many women into STEM training and jobs as possible.
The investment implications are, I think, obvious. A huge wall of money is needed to fund digital infrastructure rollouts which should benefit the growing number of funds in this space. I would also be very long the most ambitious players in 5G and in addition, I think we should focus on edtech and digital delivery of training solutions (private equity houses such as Oakley are already all over this space). Rize ETFs already has a #n EdTech tracker fund out there worth watching.