There is a delusion that macroeconomics is both viable and useful - a delusion encouraged by its extensive use of mathematics, which must always impress politicians lacking any mathematical education, and which is really the nearest thing to the practice of magic that occurs among professional economists.”

F.A. Hayek

Closing the loop on last month’s Absolute Return Letter

“Will you marry me?” The young man, not yet past the pimple stage, could hardly contain his excitement. “Yes, if you make me two promises”, the girl said. “Don’t ever ride a motorbike and promise me never to go into politics.” “I promise”, he said, and the rest is history.

The conversation took place in 1984, but I remember it as if it was yesterday. The young man was obviously me, and the girl was my wife-to-be. I bring it up now, because the recent US elections taught me (and my wife) an important lesson. Not only should I have promised never to enter politics. I should also have undertaken never to engage in politics of any kind – not even write about it.

The amount of offended US readers last month, when I made fun of Trump, made me realise that while I obviously cannot avoid commenting on politics altogether, as it has always had, and always will have, a major impact on financial markets, I can certainly stay away from commenting on individuals. Lesson learned.

The stagnation conundrum

Now to something more productive – a different way to look at how we get the economy going again. I apologise if this month’s Absolute Return Letter is a tad theoretical in places, but there is no way around it, and I hope you can follow my thinking. Our long-standing economic consultant Woody Brock visited us only a few days after the U.S. elections, and he inspired me to write this month’s Absolute Return Letter.

Charts 1a-d below tell a story of stagnation along several dimensions in some of the world’s leading – and most open - economies (the US, Germany and the UK). The picture is not 100% consistent. Germany, for example, went through a period of dismal productivity growth in the 1970s and 1980s, followed by a period of exceptionally high productivity growth in the 1990s post-reunification, but the trend line is consistent enough that it warrants further work and commentary.