May 13, 2013
The top 1 per cent of Americans now own a staggering 40 per cent of the country’s $54 trillion of wealth. This is an extraordinary figure. When taken together with the fact that wages as a proportion of national income have been falling in the US since the 1980s, we see a vision of a society where the average person’s income is faltering, yet the wealth of the super-rich has never been more extreme. As a result of the fall in the share of output represented by wages, the share represented by profits has gone up sharply, and corporate America is now sitting on more cash than ever before.
This can’t continue. The pendulum will move back in favour of the average worker. The only questions are how . . . and when? Will it be gradual or sudden? Remember, the last time we saw such disparities between the hyper-rich and the average guy was at the beginning of the Great Depression.
The following three decades saw policies introduced by Washington to narrow this gap, ushering in a period of the American Renaissance during which levels of education and opportunity for all increased dramatically. This was truly the era of the American Dream.
The American Dream is now broken, but the aspiration is not extinguished. It is this aspiration that will be the driving force behind the move to narrow the gap between the super-rich and the average.
The re-emergence of the ordinary Joe is not just a political question; it is a question of economic survival, too. After all, where does corporate America think consumer demand comes from? It comes from the income of the average guy – and wages are his income.
At the moment, high-end goods are selling well in the US. Look at the chart for Porsche sales above. They are booming. Who is buying these Boxsters and Cayennes? It’s certainly not the average dude. Yet it is the average dude that Ben Bernanke is hoping to help by his policy of printing money. Bernanke is on record as saying he wants to drive up stock prices, to create a wealth effect for Americans, making them feel wealthy, coaxing them to spend and, in so doing, kick-starting the economy.
It is against the background of income disparities that I would like to look at the present policy of the world’s central banks.
The policy of printing money and pumping up the stock market has two very serious dangers for the rich all over the western world, but in America in particular.
First, the policy is making the rich very much richer because they own the assets that are rising in value and more and more money is pumped into the financial markets. This obviously exacerbates the gap between rich and poor. It also greatly increases the risk of a market crash because, if the only thing keeping stockmarkets at historically high levels is cheap money, then how do the central banks turn off the taps without precipitating a crash?
The second dilemma for the rich is that, as the gap widens between them and the rest of humanity, the natural human craving for fairness and having a slice of the pie will mean that, if the system crashes, the appetite for political forgiveness could be finite.
The first dilemma is something that is perplexing many investors.
We know that printing money by the trillions of dollars raises the prices of stocks and bonds. This forces down the rate of interest, which slashes the cost of servicing government debt. So all looks OK. But it’s hard to imagine the slowing or stopping of quantitative easing (QE) without major adverse effects on the prices of stocks and bonds and the performance of the economy.
But what if only the super-rich benefit and the average Joe is terrorised by rapacious management at home and globalisation abroad, both forcing down his wage?
In such circumstances, the economy doesn’t recover because the income of the regular dude remains suppressed. Then, as the famous investor Paul Singer said last week, “the exit from QE is somewhere on the continuum between problematic and impossible”.
The central banks of the world are then caught in a classic catch-22 situation. They can’t stop printing money because this would cause the whole deck of cards to come crashing down; they can’t keep printing money because this only creates the conditions of an even bigger stock and assets price crash.
The problem is that, at current growth rates, the world economy is far too weak to support current asset prices without more central bank credit easing. Unless that changes, an attempted exit would cause a massive correction in risk assets.
Such a crash would mean a return to depression-like economic conditions. The alternative is, of course, to keep printing irrespective of inflationary consequence, maybe leading to stagflation – a situation where inflation rises and output falls.
The problem now for the global markets is a bit like the problem in the Irish housing market when we were getting close to the top. Most analysis suggests that the credit explosion is driving the rise in prices, but what if it’s the other way around?
What if the rise in stock prices is driving the lending? At the top of the boom in Ireland, the rise in houses prices prompted further lending, because the rise in prices validated the next bout of reckless lending.
The balance sheet began playing tricks on both lender and borrower. As asset prices rose, imprudence began to look like prudence, recklessness like sanity. As house prices rose, more and more ‘equity’ was released, pushing prices yet higher.
Given these risks, you would imagine that the central bankers might sound a bit worried about everything. But every time I listen to Draghi et al, all I hear is swaggering masters of the monetary universe. Maybe they know where all this is leading, but calamity in a few years becomes a secondary consideration when compared with the desire to avoid immediate pain and, most of all, blame.
All the while, for the super-rich, the chance of a gradual, gentle pendulum swing back to the average guy diminishes – and something much more violent becomes possible.