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“Austerity” – a scary word for some that know it all too well and those for which it is a long-ago memory alike. Nevertheless, in the economic environment following the one we have currently created for ourselves – well, also based on a virus that caused a global lockdown – it may be the overarching reality within many nations that austerity will be a part of our future. Maybe sooner than we think.

Last week we discussed the current state-of-affairs for the economy and took a deep dive into what’s really going on, this week’s edition of the Sigma Blog will focus on the next steps and the challenges we will need to face as a global effort over the next decade aims to remedy the dire straits we find ourselves in.

Settling into the COVID19 pandemic’s new normal has given much of the world time to shift its focus towards the ongoing and distressing issue of mounting debt and an impending period of inflation uncertainty, both are crucial in determining the health of the economy and facilitating the healthy flow of capital. In numbers, the US debt-to-GDP ratio was roughly 80% pre-COVID and it is now estimated that debt will be greater than the size of the economy when the dust settles, what are the implications of this?

A long road ahead.

While austerity measures are no new concept and have old roots from early in the 20th century, in the context of the modern-day, they seem to be a better plan on paper than in action. Take Greece for example, when they enacted debt repayment austerity based policy in the 1990s, it was estimated that after 20 years of maintaining a 2% federal surplus, they would be debt-free. What ended up happening? Greece did OK for a while and was actually able to maintain their surplus for a few consecutive years, but overall after l 20 years, Greece’s hole is deeper than it was before. Moreover, in the context of many nations within the western world and the way periods of austerity will affect them, the bottom line is that low growth will be a common occurrence, especially when coupled with the negative real interest rate environment currently being faced. On the flip side, this environment may serve to limit volatility within financial markets as capital will be scarce within this narrative and not as easily free-flowing. Potentially, less activity means less opportunity which is what investors require. Unfortunately, this ongoing pursuit of opportunity is also what entrepreneurs and small businesses need. Whether the world of decreased economic activity means the opportunities to be innovative and speculative will greatly diminish over an extended period of time is yet to be determined. However, this is a concern that results in the discussions of today revolving around revised growth estimates and portfolio returns: of course, downwards. This all sounds so dire. Not so. The world knows that it needs to be revitalized. It needs an inoculation to combat the disease. And as of today, the world believes that this is technology. There may be attempts to suggest Softbank helped push tech stocks upwards during this pandemic but the reality is investors realize that tech is now and the future. A shift to “work from home”? A search for a vaccine? A flurry of fires in the western US, higher frequency hurricanes in the Gulf region, and melting arctic ice are more than enough evidence that we need to find innovative solutions to global warming. 

Technology to level the playing field for those who have been economically and socially disadvantaged through any form of systematic bias. These all require a social mindset but can be pushed further, more quickly, and at a reasonable cost with the smart use of technology. The tech economy to solve very observable problems is where most entrepreneurs, large conglomerates, governments, and policymakers, and even the occasional billionaire have focused their attention to simply make things happen. Can it happen fast enough to offset the immediate burdens resulting from the multiple hits in this crazy 2020? Funny enough, the pace of tech growth is hyperfast. So long as capital feeds easily to where scarce resources are causing problems and real problems are identified allowing smart people to find practical solutions, we’ll have an economy that pushes all forward. It’s not only the usual centers of innovation like Bengaluru, Shenzhen, Tel Aviv, and Silicon Valley. It will be everywhere only because everyone now realizes that this tech bubble we’re in is a necessity. We can’t rely on the energy complex, industrial manufacturing, financial services, or any other traditional sector to win this battle for us. Tech applied to any and all industries and at any and all locations is the economy of now and the future.

For kids not working on their Python coding skills or too afraid to choose algebra or calculus in high school, good luck with the economy of now and the future. At Sigma, we understand this and that going forward investors need to be proactive instead of reactive in discovering these trends and managing risk as being left behind and missing the boat on cutting end tools is almost as bad as taking steps backwards.