There is an extraordinary article in the FT today. It's extraordinary because of what it says and who says is.
Let me deal with the second point first. The author is Dominic Rossi is global chief investment officer for equities at Fidelity Worldwide Investment. This is no left winger, I suspect, and I am, sure he does not intend the analysis to support a left wing viewpoint. Rather, he clearly thinks the status quo will last forver, and that he is offering a way to profit from it. And yet his analysis reveals precisely why that status quo cannot be maintained.
He begins by saying:
We are working through a curious period in financial history during which neither capital nor labour has pricing power. Neither can generate much income. Average earnings in nominal and real terms have barely grown, while capital sits idly in cash deposits or in government bonds yielding next to nothing. Whether you are working or investing, income is hard to come by.
He admits in a paragraph that the economy is blown apart, before adding:
We know the reasons why. The power of labour to command a greater share of the economic pie has been undone around the world by policy initiatives focused on labour mobility. In most developed countries, labour's share of GDP has been falling. Even in the US economy, which added a record 3m jobs last year, labour's share sits at 50-year lows. Employment growth has been offset by weak wage growth. Productivity gains have passed to the owners of capital, allowing operating margins to rise.
So supply side market reforms have, in other words, destroyed prosperity for the vast majority of people. The blame is clear, as is the consequence. But that consequence has also meant that the removal of the social safety net has meant that:
Concurrently, the propensity of developed nations to accumulate savings faster than income growth compresses yields everywhere. Wealthy nations with excess savings and little growth, such as Japan, Germany and Italy, can only export capital, lowering yields. Central banks' quantitative easing programmes exaggerate the yield compression. Their bond-buying further crowds these countries out of their own domestic sovereign and credit markets compounding the effects abroad.
There is no crowding out, by the way: there is just an excess of savings as people are too frightened to invest. QE is the money creation programme that has to fill the void left by the banks.
Rossi's argument is that in this case only dividends from stock markets have any chance of growing and so people should invest in the shares he has to sell. He goes so far as to say of dividend growth:
Is this set to continue? We think so. We can find no other asset class that offers this level of income growth in dollar terms.
It's hard to see how someone can set out the case that markets have totally failed and yet believe they can still deliver, but he does.
And he is wrong. His description of what is wrong is fair. His suggestion that this can continue is absurd. This is a system on the brink of falling over. If he can't see that I strongly suggest you do not follow his advice. I do suggest that you think about what will happen when he has to realise how mistaken he is, because the scenario of falling labour returns and capital sitting idle doing nothing cannot persist. Change has to happen.
And right now only the state can break the log jam.
But that's the possibility people like Rossi cannot even imagine.
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I think that this article sums up exactly what the problem is as stated by Adam Curtis in one of his films – that after the 2008 crash no-one really knows what to do anymore about how to create a fully functional econonmy/society.
Those in charge are still haunted by the so-called crises of the mid to late seventies (not long agon and still fresh in people’s minds) and the arrival of Thatcher etc., which was meant to give us the answer in the form of market led stability (yeah, right).
The problem as I see it is that too much of the apparatus of change has been captured by neo-lib insurgents (the ECB, Wall Street, City of London) and they will continue to call the tune as long as over-compliant politicians rule the roost.
When the awful events in Paris took place, politicians walked down the Champs Elysee’s saying ‘I am Charlie’.
Those politicians must now do the same thing but this time the slogan should be ‘I am Greek’ because believe you me, we are. And that message should go to the ECB.
“It’s hard to see how someone can set out the case that markets have totally failed and yet believe they can still deliver, but he does.”
I think you’re comparing apples and pears, here – only where both the apples and the pears are called ‘markets’.
He is talking about the stock market ‘delivering’, not ‘markets’ in general. So he thinks that the best (or, probably, ‘least worst’) place to put money is in equities – which one buys via the stock market.
If ‘markets have failed’ (a rather imprecise statement, but let’s run with it) then you are, surely, looking at a much broader range of issues than whatever might be wrong with the stock market. Labour mobility, marketisation of public services, labour competition (in lieu of collective labour power) are all, I would assume, parts of the ‘market failure’ you deride, but are nothing to do with the stock market except insofar as that is where shares in some of the participants of that failure are traded (but they would be traded there even absent failure, and much of the failure doesn’t involve listed companies).
There’s no contradiction in the person writing that article saying that there’s a lot wrong and that buying shares isn’t still the best way to preserve wealth.
You can talk about ‘markets’ as a philosphy (for want of a better word), but you can’t then say that they are the same thing as a particular market.. whether it’s the LSE, eBay, or the Wednesday farmers’ market down the road.
My whole point was that a) he did not realise real markets have failed and b) this means his stock market prediction is impossible
I do think it entirely possible to explicitly link the two on this case
‘We know the reasons why. The power of labour to command a greater share of the economic pie has been undone around the world by policy initiatives focused on labour mobility.’
I don’t think there is any ambiguity in what he identifies as a core cause, much more specifically than you in your response.
You appear to agree with his argument if not his solutions.
But you then fail to make any reference to what he identifies as the core reason for this current situation.
Well do you or do you not agree???
If you do, surely then you should be calling for government to address this – presumably by changing the structures that deliberately allow for the labour mobility that is undermining any possibility of labour achieving ‘a greater share of the economic pie.’
A bit of logic please – and guts?
I have addressed this issue time and again
At least it adds some balance to be called gutless from the left
Can you point me to where you have addressed this?
Linda
You took part in discussion on a blog where I did a while ago
Richard