Page 16 - ISQ UK July 2020

INVESTMENT STRATEGY QUARTERLY

Connections with others to create value Alignment of your talent and assets

How you make money Signature or superior methods
for doing your work

CONFIGURATION
the
Innovation
Distinctive interactions PROFIT MODEL NETWORK
STRUCTURE PROCESS PRODUCT PERFORMANCE Distinguishing features
EXPERIENCE OFFERING
you foster CUSTOMER ENGAGEMENT BRAND CHANNEL SERVICE PRODUCT SYSTEM and functionality
wheel

Representation of your Complementary products
offerings and business and services

How your offerings are delivered Support and enhancements that
to customers and users surround your offering
Source: Doblin's Innovation Wheel; Visual Capitalist
The first and best response to public debt is to grow and innovate. And finally, we have the middle ground option to a backdrop of
This is what happened after the Second World War, when debt debt which is inflation. A fixed principal investment such as a
levels in the U.K. were notably higher than even today’s 100 per bond, even with high interest coupon payments attached, is
cent of GDP. Simply put, growing GDP proportionately faster than clearly susceptible to inflation and governments throughout
the at-the-margin interest burden proportional increase will time have attempted to counter debt burdens this way. Certainly
contract debt over time. And whilst much analysis in economic a world of extensive central bank balance sheet expansion holds
history has been focused on the factors of production (land, a future inflationary threat... if the velocity of money ever tips
labour, capital and entrepreneurial nous), the reality in today’s back up again.
complex and competitive world is that it centres on innovation.
Boost innovative capabilities and hence economic growth to There are very few panaceas in economic and political life.
reduce your debt burden. This is after all one reason why China Extended fiscal deficits are an appropriate pandemic policy
has such a large focus on supply-side change and evolution. A response, but if uncontrolled they are likely to overwhelm even a
degree of fiscal prudence is required too as the Benjamin Franklin currently becalmed fixed income market. Almost no economies
quote attests but - as the old business saying goes - you cannot in the world today could cope with materially higher bond yields
cut your way to success. Slower growth countries in southern and hence policy choices should be focused on restoring
Europe such as Italy and Greece may be enjoying the lower yields economy-wide growth and innovation efforts. As the world
on their material debt burdens today thanks to material found out in the generation or three after 1945, it can make an
European Central Bank quantitative easing support, but it is no awful lot of sense.
ultimate solution.
KEY TAKEAWAYS:
Greece provides a nice segue into another policy option: default.
In today’s world this typically evolves into a bond ‘haircut’ (a • Partially due to government fiscal responses to the
reduction or maturity extension of anticipated coupon or COVID-19 pandemic challenge, global debt levels are
principal repayments) and certainly a wide range of Greek bond growing.
holders faced such a reality a few years ago at the height of the • Global quantitative easing has contributed to very
country’s debt struggles. Unsurprisingly, it is a policy to only use low bond yields in most major economies.
in extreme circumstances as even with central bank support, • The first and best response to public debt is to grow
lenders can have long memories. The growth contractions and innovate, as seen in the post World War Two
associated with the COVID-19 pandemic are already materially years. This should be a key global government focus
impacting parts of both the corporate and sovereign bond over coming years.
markets in areas (respectively) such as the energy sector and
frontier emerging markets. A little bit of credit analytical work • Defaults and inflation are unsurprisingly more
can go a long way in today’s world. troublesome policy options.

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