11 Sep 2014
Slow money for a digital age
I firmly believe that money needs to be our servant again instead of our master.
We need to change the tide and here’s my view on how. I firmly believe that money needs to be our servant again instead of our master. We need to change the tide and here’s my view on how.
From rocks to bits
97% of the money in the world is digital – that leaves only 3% made up from the traditional notes and coins you might find in your wallet.
Literally anything can be money... in the Pacific Island of Yap, limestone discs up to four metres in diameter are used: the biggest can’t be moved by less than 20 men. At the other extreme, Bitcoins don’t really exist at all, but are “mined” or created through transactions which are recorded in a central ledger called the “block chain”.
Most money has historically been coin or paper, often backed by gold. The “Gold Standard” more or less lasted until the 1970s, and finally expired about the same time email was invented.
Now, after four hundred years of paper, we are in year six of the post-crisis digital money age. From the Masai to Macclesfield, your mobile phone is your bank branch – probably even in Yap.
There are inevitably causes and effects for policy.
Money too fast to mention
Central bankers got through the credit crisis by creating more fast digital money – Quantitative Easing (QE). So far, $3 trillion in the US, £375 billion in the UK, and the European Central Bank is likely to start doing the same before long.
This might have kept our economies alive – but it also left us addicted to cheap, fast money: “monetary methadone”. Fast money is highly mobile, it pushes up asset prices (stocks, bonds, even property) and so it widens inequality between those who live off assets, who did well, and those who live off wages, who have seen pay stagnate. QE has been a policy by the rich, for the rich.
Fast money, like fast driving, can be risky. If money creation becomes the only economic tool we have, we rely too much on the pronouncements of central bankers – whose record of prediction is actually no better than anybody else’s.
And like fast food, it can clog the arteries so the financial circulatory system becomes subject to shocks as tides of investment move rapidly from place to place: witness the impacts on emerging markets of the US even contemplating slowing the rate of QE a few months ago.
Your money is slow – but your bank’s may be fast
Fast money and slow money exist along a spectrum: from flash trading where stocks are bought and sold in milliseconds, to investments in infrastructure with a 50 year time horizon.
Household budgets are slow money, so are the corporate investments which create jobs, products and services. Repaying mortgages and saving for a pension are very slow money activities, as are investments to build roads, hospitals and houses.
Unfortunately, speculative fast money outweighs slow money in many markets. It’s the preserve of investment banks and hedge funds, but as Adair Turner identified, the slow money is more economically and socially useful.
There is a particular danger where clever financiers take slow money and make it faster and faster. The roots of the credit crisis included exactly this: mortgages were repackaged into tradeable instruments, then repackaged again and turbo-charged with leverage and speculative derivatives. When it happens outside the regulatory system, this is known as Shadow Banking.
Slow money drives growth
The challenges of demographic change and insufficient investment in the “real” economy require more slow money. It is intergenerationally fair to invest older peoples’ slowly accumulated savings and pensions – profitably for them of course - in assets that help build a society for younger people, right across the UK.
Matching slow savings to slow assets like infrastructure, housing, education and health is the most obvious way to fund and deliver a restored social contract for the next generation: an education that leads to a job, an income that grows with the economy, underpinned by fair welfare and health.
It just can’t be paid for by more government borrowing or by ever-expanding personal credit. Institutional investors like us are already doing it – we have over £4 billion of slow money directly invested in assets like student accommodation, hospitals and social housing, sometimes for as long as 50 years.
I’d like to see that £4 billion rise to £15 billion. And I’d like the UK’s slow money to get to work alongside that of wealthy overseas investors, be they from China, wider Asia or the Gulf.
Where slow money can make the biggest difference
How the slow money is invested matters. Projects need to deliver real growth, in the right places and on the right timescales.
That means reviving our Northern cities – the economic gap between London and the North is far too big: we need to enable Liverpool, Manchester, Sheffield, Hull and Newcastle to benefit from urbanisation and the growth that comes from being a modern, well-connected city.
And it means avoiding political “marquee” projects like HS2 and airports in the estuary – uncertain outcomes, long timeframes – in favour of achievable projects like better East-West rail in the North, and upgrades to our existing airports, with better transport links, at Heathrow, Gatwick, Luton and Stansted, as well as in the regions.
Here’s how it could happen
Here are three ideas for a start:
- A National Infrastructure Commission producing a roadmap for infrastructure investment that includes a much bigger role for Slow Money investors. It would also ensure that foreign investors work alongside UK slow money to get money invested in our cities and regions.
- Private Finance Initiative (PFI) projects with an explicit preference for financing across the long-term – ideally the life of the asset – rather than relying on re-financing short-term money.
- A rigorous regulatory approach to shadow banking that properly distinguishes dangerous maturity transformation by non-banks from straightforward Slow Money deals that match long-dated funds to long-dated assets.
Money – a digital servant
Digital money is convenient, and this is where we are going. But digital money can be fast or slow, and the slow needs more emphasis as it works harder for the economy.