Trends, Themes and Fault Lines: Where Could All This Inequality End Up - in Darkness or the Light?
by The Little Deal Clincher on April 30, 2014
Since July 2013 the FTSE100, the leading UK share index, has ranged between 6400 and 6800 points. While the larger US S&P 500 index has moved from 1600 points up to record highs, closing above the 1850 level on several occasions, notably since January the S&P 500 has traded in a more sideways fashion. Perhaps this indicates a top in the market or a pause for good reason- reported earnings weaknesses or Fed tapering - however it's still an impressive increase from the market lows during the 2007-2009 financial crisis. The bulls and bears react to positive or negative news and information which forms investor sentiment to drive the markets on their trajectories and so forth.
However, are there other longer term developments, trends or geo-political fault lines which will weigh on investors' appetite for risk and the world economy at large?
In the January 2014 blog I mention the reduction of monthly quantitative easing by the US Federal Reserve as an important issue for markets to gauge. While in August 2012 (LDC, 2012) I discuss some territorial disputes in the East and South China Seas which still rumble on today. Then, there's the Ukraine joining them and not forgetting the brutal civil war in Syria and unrest in Libya, Egypt and Venezuela too. There's some hope of negotiations bearing fruit in Iran with talks on nuclear energy production and lifting of trade sanctions with wide regional implications due soon involving the US at a senior level-more on this fascinating story later.
However, since the 2007-2009 financial crisis some issues keep re-appearing on the political and economic agenda which have long term social implications. The media has increasingly reported on such topics since the aftermath of the financial crisis. The issues are wealth inequality and inherent moral hazard with the rescue of financial institutions deemed "too big to fail". Reforming a discredited culture within the financial industry, especially those deemed systemically important enterprises, and political scandals combined with impotence of governments and state institutions to evoke clear and effective reform remains elusive and unresolved. Over 5 years since the worst of the crisis the new FCA in the UK, the gargantuan Dodds-Frank Act in the US or the efforts by the BIS on Basle 3 capital requirements or the EBA or indeed EU on the sovereign debt concerns all are struggling to be effectively implement or capable of regulating across borders or markets.
Meanwhile, the reporting of stagnating incomes for the "squeezed middle" in contrast to the perceived politico-financial elites gathers pace. In the UK there's been the Leveson inquiry in to 'phone hacking with politicians, the press and police conduct all investigated (BBC,2012). The US has had a NSA centred-spying scandal along with political deadlock over budgets on Capitol Hill. China has had corruption trials too, with Bo Xilai, and concerns in property markets remain. China's 1 child policy is now being relaxed but the implications of this decades old policy are still to be fully realised. One wonders if raising territorial disputes with neighbouring countries over the Paracel or Diaoyu Islands is to avert public attention away from the pressing internal issues China faces- China will get old before it gets rich reputedly said by Wu Cangping, an academic.
However, whether workers' pay and conditions in China, India or Bangladesh or stagnant salaries and poorer prospects in the US and EU, the news flow and political potency of wealth inequality between the majority and the favoured political-industrial-financial elites, where inheritance is in the form of assets both monetary or political is ascendant, stokes a long-term threat to both democracy and economic prosperity. Technological progress should help resolve these issues over the years although politicians of varying hues will resort to ever inventive methods of taxation-some sensible some not. Prosperity isn't a zero-sum game and there's plenty to go-around so the quicker reforms are effectively made - in financial regulation or infrastructure built where it's needed when interest rates in developed economies are low, to finance pension systems and healthcare requirements from long term cash flow from such projects whether in the UK,US or India- the better everywhere.
In the week-end FT magazine both Simon Kuper at the front and Gillian Tett at the back both refer to wealth inequality. Kuper declares "inequality is the new apartheid" (Kuper, FT, 2014) and compares the ruling classes sending their children to expensive private schools to apartheid Johannesburg. While Tett highlights a feature from Thomas Piketty's new book (Piketty, 2014) that Americans "need to confront a growing sense of cognitive dissonance" with regard to the American dream and growing inequality in the US, especially in the case of increasing inherited wealth.
To confront wealth inequality from damaging economic prosperity and avoiding inevitable social unrest or worse governments and public/private institutions need to act effectively and in conjunction with others yet with moderation to allow innovation and enterprise to flourish with regulating to allow for a disbursement of wealth and prosperity through individual countries and between trading nations.
It's not an easy task but a necessary one- let's hope the right discussions get made and the sooner the better. The wrong kind of "noblesse oblige" from the ruling elites takes civilisation to a darker place indeed. Let there be light.
References and further reading-
BBC News, (2012), "Press 'need to act' after Leveson", BBC website, 2014. Accessed: Mon.28th April 2014- http://www.bbc.co.uk/news/uk-20543133
Little Deal Clincher, (2012), "2012: We didn't start the fire. It was always burning while the world was turning…* Part 2, Little Deal Clincher website 2014. Accessed Mon.28th April 2014: http://www.littledealclincher.com/2012-we-didnt-start-the-fire-it-was-always-burning-while-the-world-was-turning-part-2/
Kuper, S. (2014),"Apartheid, just less black and white", FT Weekend Magazine 26/27th April 2014, Financial Times Ltd, London, UK. p.7. Website accessed Sat. 26th April 2014: http://www.ft.com/cms/s/2/be6cf4d4-ca7e-11e3-8a31-00144feabdc0.html#axzz30BntA9Ww
Tett, G. (2014),"Lessons from a rock-star economist", FT Weekend Magazine 26/27th April 2014, Financial Times Ltd, London, UK. p.54. Website accessed Sat. 26th April 2014: http://www.ft.com/cms/s/2/0421d04e-cb42-11e3-ba95-00144feabdc0.html#axzz30BntA9Ww
Piketty,T. (2014),"Capital in the 21st Century", Harvard University Press, Harvard University, Mass, USA.