|There is talk of revolution in the air
By Ambrose Evans-Pritchard
Russell Brand is more right than wrong. Pre-revolutionary grievances are simmering in half the world, openly in France and Italy, less openly in Russia and China.
The Gini Coefficient measuring income inequality has been rising for 25 years almost everywhere, thanks to the deformed structure of globalisation.
Companies can hold down wages in the West by threatening to decamp to the East. “Labour arbitrage” boosts the profit share of GDP and eats into the share of workers.
That is how Volkswagen extracted pay cuts at German plants in 2005. The German reforms now being exported to Club Med are why Germany’s Gini index has soared and why German life expectancy is falling for the poor.
It is also why the Social Democrats are taking such a hard line in coalition talks with Chancellor Angela Merkel. Even Switzerland is stirring. Voters will decide this Sunday whether to cap top pay at 12 times the lowest rung.
The US Congressional Research Service says the income share of the richest 1pc of Americans reached a record 19.6pc last year.
It never rose above 10pc for the whole post-War era until the mid-1980s. The 1pc Club has bagged 95pc of all gains since the Lehman crisis.
Such extremes must ultimately threaten political consent for market capitalism. Yet quantitative easing as conducted in the rich countries risks making matters worse. The money is leaking into asset booms, without much economic trickle down.
The Bank for International Settlements says the credit markets are becoming unstable again. A hunt for yield is creating a stampede into high-risk assets, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.
The 10-year Shiller price-to-earnings ratio for Wall Street’s S&P 500 is 50.3pc above its historic average, and higher than before the 1987 crash. Yes, it can go even higher. But should the US Federal Reserve try to push it there by purchasing the $85bn of bonds each month?
Even as stocks soar, world trade is becalmed, and the West is still stuck in a contained depression.
Manufacturing output is still down 3pc from its pre-Lehman peak in the US, 6pc in Germany and the UK, 7pc in Japan and France, and 12pc in Italy. Compare that to the 60pc surge in US factory output over the same time lapse in the 1990s. It is another world.
The US workforce shrank by 755,000 in October. The labour participation rate for men dropped to 69.2pc, the lowest since data began in 1948. Discouraged workers are dropping off the rolls.
Former US Treasury Secretary Larry Summers says the US is trapped in “secular stagnation”, a bad equilibrium where the interest rate needed to keep growth alive may be as low as minus 3pc.
It takes fresh bubbles to keep the show on the road, and it threatens to become “chronic and systemic”. This is our brave new world. If Mr Summers is right, we need to go to the next stage of QE. Rather than relying on more bond purchases, the stimulus could be injected into the veins of the economy, or into the “income stream” in the words of the late Milton Friedman.
“We can spend it on roads, railways, smart electricity grids, or anything we want,” said Lord Turner, ex-chief of the Financial Services Authority. “Or we can cut taxes, targeting employers’ national insurance so that it creates jobs here and does not leak out.”
Professor Richard Werner, from Southampton University, suggests “Green QE”, a £50bn blitz of spending on wind turbines and solar panels with funds created out of thin air by the Bank of England.
Exactly the same could be done by the Fed and the Bank of Japan. “There is a whole spectrum of things you can do,” he said.
Or we might want to erect 300,000 homes on brownfield sites (not in my village, of course). This would help drive down ratio of house prices to incomes, rather than trying to drive it up. The point is that QE is versatile once you break free of central banks shibboleths.
The constraint is that money should be used for “one-off” projects, aimed at raising the long-term dynamism of the economy. “Central banks are terrified of going into this space. They are afraid that it will be used to excess,” said Lord Turner.
The authorities can mop up excess liquidity to avoid inflation when the time comes by restoring reserve requirements on lenders, in abeyance since the 1980s. You could go further. You could reverse QE bond purchases — deliberately forcing down asset prices — while offsetting this with a switch to fiscal spending covered by printed money.
You might even raise interest rates, exactly the opposite of what the Fed is trying to do.
As for the debt created by this quasi-fiscal putsch, it is an accounting fiction. The government can issue zero-interest consols. Past deficits can be monetised by shuffling the QE furniture. Britain can slash its debt from 95pc of GDP to nearer 70pc by legerdemain. If France, Italy, and Germany want to do it the hard way, they guarantee a lost decade.
There is such a thing as a free lunch. It is called QE in a deflationary world. Lord Turner says it may even be necessary to wipe out this debt openly — rather than in the underhand way happening now — in order to convince people that stimulus is for ever.
To those who say this violates the Weimar taboo, the answer is that near anarchy in Germany under reparations in 1923 tells us nothing about our current predicament.
We live in a deflationary age more akin to the 1930s. The apostles of orthodox economics at that time — Irving Fisher, and Chicago’s Henry Simons — floated just such plans for “overt monetary financing” in slumps.
Japan’s Takahashi Korekiyo carried out a live experiment from 1931-1936. The fiscal and monetary double shock achieved “escape velocity” within two years. Japan was the first major country to recover from the Depression.
If you are worried about central bank independence, the bank could have the same powers to calibrate fiscal stimulus as it enjoys over monetary stimulus. It could leave it to parliaments decide how to spend the money. None of this is beyond the wit of man.
To Russell Brand I would say, you are too harsh on British leaders. Tories and Liberal Democrats have responded to the national crisis with grace and impressive discipline, as Labour would undoubtedly have done too. British institutions have worked. And please, stop talking down the vote. Democracy is our sword.