The stock market has returned to pre-Brexit levels. So the crisis is over and everything is fine. After all, if you're not losing money, what's the problem? Let's think about what craft beer to try next.
Actually, Brexit is still very much affecting the financial markets. The British pound is moribund. The Euro isn't looking pretty. And the Yen is strong, much to the unhappiness of the Japanese, who want a weak currency that gives them an advantage in exporting. The bond market continues to show a flood of financial refugees into U.S. Treasury securities. The crisis isn't over.
The volatility in stocks was more about short term speculation over the outcome of the Brexit vote, than about Brexit itself. Shortly before the vote, much of the fast money crowd had placed large bets on the UK voting to remain. When the vote went the other way, the speculators had to unwind their now stinky positions muy pronto. But this volatility didn't reflect the impact of Brexit itself. Brexit will take years, and its impact is largely unknowable at this time since we don't yet know the terms of the UK's decampment.
The EU is talking tough about the terms of divorce. That's perhaps an understandable emotional reaction. After all, the EU is afraid that the insurgents in other member nations will engineer more exits. Taking a tough line, it apparently thinks, discourages further desertions.
But the EU is missing the point. What impelled a majority of British voters to choose exfiltration was that globalization and the benefits of the EU were oversold. Britons were promised a glowing future if they cozied up to continental Europeans, who they haven't really trusted since before the Hundred Years War. EU membership may have boosted British GDP, but there was a problem with most of the boost going to a small number of people who were doing pretty well to begin with. And there was a perception that the EU's open borders policy allowed immigration that took jobs away from native-born Britons. All this occurred under a legal regime in which many Britons felt they had no voice. They apparently felt that, contrary to the principles of democracy, they, although voters, were being ruled instead of ruling.
By playing tough with the terms of Britain's exit, the EU fails to address the real, legitimate grievances leading to Britain's vote. The truth is that globalization is an oversold political bubble and the bubble is bursting. Those with grievances aren't confined to the UK; they can be found throughout the other 27 member nations. A punitive approach to the terms of Brexit could leave both the UK and the EU poorer, while the forces of insurgency would continue unabated.
The distribution of wealth isn't merely something for social scientists to study. It really matters--politically and economically. The elites who have led the way toward globalization must find ways to improve the lives and fortunes of all, or face much bigger problems than Brexit.
This is true in America as well as across the pond. Donald Trump hopes to emulate the Leave campaign. Hillary Clinton has gotten a certain amount of mileage from running as not-Donald-Trump. But she is one of the elites who has pushed globalization. She now purports to have changed her mind, but only after severe pressure exerted by Bernie Sanders. It's not hard to wonder if she's really changed her stripes. The widespread perception of her untrustworthiness will hinder her ability to convince the blue collar voters in swing states that she's really on their side. She doesn't inspire or excite hardly anyone. If she doesn't acknowledge the overselling of globalization in a clear and convincing way, and offer real relief for the distressed, Trump may yet strut to the tune of Hail to the Chief.
Showing posts with label distribution of wealth. Show all posts
Showing posts with label distribution of wealth. Show all posts
Thursday, June 30, 2016
Friday, September 25, 2015
Do the Financial Markets Regulate the Fed?
When the Federal Reserve decided last week to hold short term interest rates at zero, the stock market's reaction was to drop. Even though easy money has been a shot of glucose for stocks since the 2007-08 financial crisis, the market seemed to be saying that there can be too much of a good thing.
Yesterday, Fed Chair Janet Yellen stated her view that rates should rise sometime this year. The market reacted positively, even though rising interest rates logically should push stock prices down (since fixed rate investments that compete with stocks would offer higher yields than before).
The implication is that the market is leading the Fed. The market wanted rates to rise, and when they didn't, the market pouted. That may have prompted Chair Yellen to make more noise about rates rising, and then the market cooed with approval.
Why would the market want rates to rise when conventional wisdom holds that stocks should love easy money? Maybe it's because the stock market absorbs information from a variety of inputs, both short and long term. Easy money is positive in the short run, but can be corrosive in the long run. Accommodative policy by the Fed and other central banks has continued for almost 8 years now, and is distorting asset values and relationships to the point where the social contract may be changing. With interest rates so low, the ability of pension funds, insurance companies and other asset managers to provide pension and annuity income is becoming impaired. (For more, see http://blogger.uncleleosden.com/2015/04/is-federal-reserve-wrecking-retirement.html.) When private parties can no longer provide retirement income, greater responsibility falls on the government. Social Security and similar programs become more essential. If these programs suffer from fiscal imbalance, taxpayers become more burdened. We can't toss retired and disabled people into the gutter, but who besides taxpayers can cover their needs?
Another change in the social contract is that easy money favors the wealthy. Low interest rates have pushed up the value of risk assets--stocks, real estate, commodities and so on. The distribution of income and wealth have become more skewed in favor of those who need the money the least. Such growing inequality makes it more difficult to attain social and political compromises and consensus. A resentful and angry society may lack the optimism and initiative for investment and risk-taking that would foster strong economic growth. (Note that jaded, cynical Europe is hardly a hotbed of innovation.)
The voices that are heard at the Fed tend to be those of elites--Wall Street executives, influential academics, power players like IMF Managing Director Christine Lagarde. A lot of these voices have advocated keeping interest rates at zero. But the accumulated knowledge of many thousands of participants in the real financial world seems to signal that continued distortion of asset values is doing more harm than good. Maybe the market is regulating the Fed. And maybe, at least this time, that's a good thing.
Yesterday, Fed Chair Janet Yellen stated her view that rates should rise sometime this year. The market reacted positively, even though rising interest rates logically should push stock prices down (since fixed rate investments that compete with stocks would offer higher yields than before).
The implication is that the market is leading the Fed. The market wanted rates to rise, and when they didn't, the market pouted. That may have prompted Chair Yellen to make more noise about rates rising, and then the market cooed with approval.
Why would the market want rates to rise when conventional wisdom holds that stocks should love easy money? Maybe it's because the stock market absorbs information from a variety of inputs, both short and long term. Easy money is positive in the short run, but can be corrosive in the long run. Accommodative policy by the Fed and other central banks has continued for almost 8 years now, and is distorting asset values and relationships to the point where the social contract may be changing. With interest rates so low, the ability of pension funds, insurance companies and other asset managers to provide pension and annuity income is becoming impaired. (For more, see http://blogger.uncleleosden.com/2015/04/is-federal-reserve-wrecking-retirement.html.) When private parties can no longer provide retirement income, greater responsibility falls on the government. Social Security and similar programs become more essential. If these programs suffer from fiscal imbalance, taxpayers become more burdened. We can't toss retired and disabled people into the gutter, but who besides taxpayers can cover their needs?
Another change in the social contract is that easy money favors the wealthy. Low interest rates have pushed up the value of risk assets--stocks, real estate, commodities and so on. The distribution of income and wealth have become more skewed in favor of those who need the money the least. Such growing inequality makes it more difficult to attain social and political compromises and consensus. A resentful and angry society may lack the optimism and initiative for investment and risk-taking that would foster strong economic growth. (Note that jaded, cynical Europe is hardly a hotbed of innovation.)
The voices that are heard at the Fed tend to be those of elites--Wall Street executives, influential academics, power players like IMF Managing Director Christine Lagarde. A lot of these voices have advocated keeping interest rates at zero. But the accumulated knowledge of many thousands of participants in the real financial world seems to signal that continued distortion of asset values is doing more harm than good. Maybe the market is regulating the Fed. And maybe, at least this time, that's a good thing.
Wednesday, October 22, 2014
The Turmoil of Economic Inequality
Of all the potential dangers of economic inequality--slow growth, reduced upward mobility, and so on--social destabilization is the most worrisome. This is when people say, "Enough. We're not waiting for things to happen. We're making them happen. Our way."
The pro-democracy demonstrations in Hong Kong were nominally over Chinese attempts to limit the freedom of Hong Kong's elections by vetting candidates. Only pro-Beijing candidates need apply. But growing economic inequality in Hong Kong fueled the anger of the demonstrators. Wealthy Chinese are buying up prime real estate in Hong Kong, pushing prices beyond the reach of the local middle class. The wealthiest Hong Kong residents are, like the 1% elsewhere, growing disproportionately richer. Job and other opportunities for many others are looking bleaker. Middle class Hong Kong residents began to see less and less for themselves in the status quo. They didn't take things quietly.
Democracy is a mechanism by which the 99% push back against the growing wealth and power of the 1%. Without democracy, oligarchs and plutocrats flourish. China has an authoritarian government, whose powerful members and their families are intertwined with China's economic elite. The ordinary citizens of Hong Kong have no voice in the northern capital. Public protest is only way for them to be heard.
Modern day mandarins in Beijing no doubt shivered when protest banners unfurled in Hong Kong. Since the days of dynastic China, rebellions against the central government have usually ignited in southern China. Far from the seat of power, the discontented more readily questioned claims to the Mandate of Heaven. Indeed, both of the rebellions that unseated the last emperor, and then the Chinese Nationalist government (now a vestige on Taiwan), began south of the Yangtze River. In recent weeks, Communist cadres have no doubt been taking more business trips to warmer climes.
Turmoil from economic inequality is not limited to Hong Kong. In the city by the bay, middle and lower income San Franciscans have bristled at the invasion of the geeks from the Silicon Valley. Young technocrats have driven up real estate prices and Yuppified neighborhoods that heretofore took pride in their eccentricity. Charter buses used for commuting by the options-compensated have been attacked by the not-so-well compensated. The so-called trickle-down theory isn't entirely benign. Capitalism has losers, and the losers will push back.
America is a democratic nation, although increasingly dominated by Big Money as a result of U.S. Supreme Court decisions striking down various limits on campaign contributions. Democratic Party get-out-the-vote efforts in 2008 and 2012 have held the forces of wealth at bay for now. But countries tend to work best when they have a government of the people, by the people and for the people. Economic inequality cannot continue to increase indefinitely; and consequently, it won't. The only question will be how it ends. Let's hope it doesn't end badly.
The pro-democracy demonstrations in Hong Kong were nominally over Chinese attempts to limit the freedom of Hong Kong's elections by vetting candidates. Only pro-Beijing candidates need apply. But growing economic inequality in Hong Kong fueled the anger of the demonstrators. Wealthy Chinese are buying up prime real estate in Hong Kong, pushing prices beyond the reach of the local middle class. The wealthiest Hong Kong residents are, like the 1% elsewhere, growing disproportionately richer. Job and other opportunities for many others are looking bleaker. Middle class Hong Kong residents began to see less and less for themselves in the status quo. They didn't take things quietly.
Democracy is a mechanism by which the 99% push back against the growing wealth and power of the 1%. Without democracy, oligarchs and plutocrats flourish. China has an authoritarian government, whose powerful members and their families are intertwined with China's economic elite. The ordinary citizens of Hong Kong have no voice in the northern capital. Public protest is only way for them to be heard.
Modern day mandarins in Beijing no doubt shivered when protest banners unfurled in Hong Kong. Since the days of dynastic China, rebellions against the central government have usually ignited in southern China. Far from the seat of power, the discontented more readily questioned claims to the Mandate of Heaven. Indeed, both of the rebellions that unseated the last emperor, and then the Chinese Nationalist government (now a vestige on Taiwan), began south of the Yangtze River. In recent weeks, Communist cadres have no doubt been taking more business trips to warmer climes.
Turmoil from economic inequality is not limited to Hong Kong. In the city by the bay, middle and lower income San Franciscans have bristled at the invasion of the geeks from the Silicon Valley. Young technocrats have driven up real estate prices and Yuppified neighborhoods that heretofore took pride in their eccentricity. Charter buses used for commuting by the options-compensated have been attacked by the not-so-well compensated. The so-called trickle-down theory isn't entirely benign. Capitalism has losers, and the losers will push back.
America is a democratic nation, although increasingly dominated by Big Money as a result of U.S. Supreme Court decisions striking down various limits on campaign contributions. Democratic Party get-out-the-vote efforts in 2008 and 2012 have held the forces of wealth at bay for now. But countries tend to work best when they have a government of the people, by the people and for the people. Economic inequality cannot continue to increase indefinitely; and consequently, it won't. The only question will be how it ends. Let's hope it doesn't end badly.
Saturday, August 24, 2013
The Hidden Inflation
The Federal Reserve assures us that inflation is modest, and can point to measures of inflation it prefers (the PCE price index) or doesn't prefer (the CPI), both of which tend to be modest--in the 2% range or less. But if you ask a lot of people out in the real world, they'll tell you inflation is worse than that. And they are right, once you take account of what inflation really means.
The ultimate problem created by inflation comes up when price increases exceed income increases. If your real income is falling, your standard of living will drop. That's cause for concern. When incomes rise faster than price increases, people complain but then dig into their steaks and lobster.
Incomes today are, in real terms, falling for a lot of people. Workers on average earn less, net of price inflation: see http://www.bls.gov/news.release/realer.nr0.htm and http://money.cnn.com/2013/08/15/news/economy/cpi-inflation-wages/index.html. Median household incomes have fallen since the beginning of the Great Recession: http://www.cnbc.com/id/100980411. While the fall in household income may in part be due to higher unemployment, it would also reflect the drop in worker earnings.
Once you look at earnings and household incomes, you can see that inflation in the broader sense isn't so modest. Since the Great Recession began in 2009, government statistics show that real average weekly pay for full-time workers has fallen 3.5% from 2009 to the second quarter of 2013. (See http://data.bls.gov/cgi-bin/surveymost.) The social discord and turmoil that can come from inflation is rooted in falling real incomes, not nominal price increases. Despite all the statistical soothing the Fed may offer, many Americans today are hurting from this hidden inflation.
There is little the Fed can do about falling real incomes. Its monetary tools and bond purchases have little connection to wage and salary levels. They may boost household income to the extent they promote greater employment. However, because they significantly reduce interest income for savers, they may also exacerbate the problem of falling incomes.
As for Congress and the Administration, they're on August recess right now. And they won't do much about this problem when they get back. Fights over a budget for the next federal fiscal year (beginning Oct. 1, 2013) and the looming debt ceiling will provide photo ops and Sunday morning talk show invites for the high and the mighty. The dreariness of ordinary life is likely to get lost in the shuffle. Talk at the state level about raising the minimum wage may have some impact. But falling incomes is as much a problem of the middle class as of lower income persons. Minimum wage laws won't help the middle class very much.
The overall structure of American society, with its exceedingly generous corporate compensation practices to tax laws favoring the 1% to the decreasing degree of upward social mobility to the astonishing growth in the cost of college educations and more, is thinning out and pushing down the middle class. No nation has gone on to its greatest days with increased social stratification and top-heavy distribution of wealth. But nothing is happening right now to change the trend. This story won't end well.
The ultimate problem created by inflation comes up when price increases exceed income increases. If your real income is falling, your standard of living will drop. That's cause for concern. When incomes rise faster than price increases, people complain but then dig into their steaks and lobster.
Incomes today are, in real terms, falling for a lot of people. Workers on average earn less, net of price inflation: see http://www.bls.gov/news.release/realer.nr0.htm and http://money.cnn.com/2013/08/15/news/economy/cpi-inflation-wages/index.html. Median household incomes have fallen since the beginning of the Great Recession: http://www.cnbc.com/id/100980411. While the fall in household income may in part be due to higher unemployment, it would also reflect the drop in worker earnings.
Once you look at earnings and household incomes, you can see that inflation in the broader sense isn't so modest. Since the Great Recession began in 2009, government statistics show that real average weekly pay for full-time workers has fallen 3.5% from 2009 to the second quarter of 2013. (See http://data.bls.gov/cgi-bin/surveymost.) The social discord and turmoil that can come from inflation is rooted in falling real incomes, not nominal price increases. Despite all the statistical soothing the Fed may offer, many Americans today are hurting from this hidden inflation.
There is little the Fed can do about falling real incomes. Its monetary tools and bond purchases have little connection to wage and salary levels. They may boost household income to the extent they promote greater employment. However, because they significantly reduce interest income for savers, they may also exacerbate the problem of falling incomes.
As for Congress and the Administration, they're on August recess right now. And they won't do much about this problem when they get back. Fights over a budget for the next federal fiscal year (beginning Oct. 1, 2013) and the looming debt ceiling will provide photo ops and Sunday morning talk show invites for the high and the mighty. The dreariness of ordinary life is likely to get lost in the shuffle. Talk at the state level about raising the minimum wage may have some impact. But falling incomes is as much a problem of the middle class as of lower income persons. Minimum wage laws won't help the middle class very much.
The overall structure of American society, with its exceedingly generous corporate compensation practices to tax laws favoring the 1% to the decreasing degree of upward social mobility to the astonishing growth in the cost of college educations and more, is thinning out and pushing down the middle class. No nation has gone on to its greatest days with increased social stratification and top-heavy distribution of wealth. But nothing is happening right now to change the trend. This story won't end well.
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