“The purchase of shares and bonds by central banks is no more than monetary policy for rich people.” Steve Eisman
The last financial crisis lasted roughly 1.5 years. Since March 2009, markets have started to recover substantially. That was the moment when the so called bull market have been initiated. Apart from the declines of the end of the last year, it has been 10 years of increases in the stock prices.
The bull market, which still lasts (or, as you prefer, lasted until last October) is to a large extend based on the actions of central banks. During the last crisis, they have relieved commercial banks from many toxic assets and after that they lowered interest rates to zero. At the same time the purchase of risky assets have also started, which we define in a simplified manner as a currency printing. It is based on the fact that central banks buy shares and government bonds for the currency created from the air. In this way, they artificially increase their prices, encouraging investors to return to the market.
According to what we have written recently, despite the huge currency printing, the global economy have not experienced a hyperinflation. This is all because the created currency was directed to the financial markets (stocks, bonds, REITS – Real Estate Investment Trusts). The vast majority of these funds have never reached the real economy, therefore significant inflation have never appeared. At the same time, the prices of securities have been inflated which mostly are owned by the wealthiest people. Sometimes, the average bread eaters also own them, but they are never owned by poor people. That is why Steve Eisman is right to say that the policy of printing/buying assets/QE has been designed for the richest part of the society.
Most of the data confirms this opinion. Do not think that it is an attack on capitalism, because the currency printing has nothing to do with it. The facts are that artificially inflating financial assets during the time of average economic conditions led to a situation where 0.1% of the richest people have a gigantic share in the general wealth of the society. Let’s have a look how it is shaped in the US (share of the richest people is denoted as a blue color):
Assuming that over the last 3 years trend has been maintained, we can say that 0.1% of the richest own today such a share as in 1929, just before the Great Depression.
The graphic is several years old. However, one of the researchers, professor Zucman has not stopped researching this issue. From his subsequent publications, we can learn that in 2016, 400 richest Americans have accumulated wealth greater than 60% of the poorest US citizens.
Red line on the chart is the wealth owned by the 400 richest people in the US, blue line describes the bottom 60% mentioned, or 150 million Americans.
In turn, if we take into account the share of the 10% richest in the overall wealth of a given nation, then the United States looks similar to Russia and China.
Of course, the results of France and the United Kingdom does not mean that the situation in these countries looks better. We always have to look at how the system works in a given country. In Europe, the lower share of the richest is not due to the fact that everyone has an equal chance, but because it was recognized that the richest should pay high taxes, which are later spend for a social support and those people who simply do not want to work.
Let’s get back to the main topic. Relax, we are not going to criticize the central banks and the financial elites once again. This time, we will focus on the impact of the mentioned above currency printing on society and what effects it could bring in the coming years.
And they can be disastrous.
You can always borrow
A particular sign of the previous crisis was the fact that many countries and corporations have been rescued from bankruptcy. In other words: many people have not yet been given a lesson, according to which borrowing above the limits combined with:
a) Excessive consumption, (mainly using credit) and low propensity to save,
b) Missed government investments,
c) Risky investments in financial markets,
may end tragically. In some cases, it should even end tragically, i.e. as a bankruptcy. That is how capitalism works. In fact, considering the big picture of the story, the wave of bankruptcies is less evil. However, the option for saving of ineffective companies and extremely indebted countries has been chosen, which in the long run would bring much greater problems.
The effect of the financial rescue for indebted entities and people is to create a false belief in the society that prosperity can last forever, because you can always get more credit. In fact, would people have come to a different conclusion, since the bankrupting European countries have been rescued by the ECB’s currency printing? And since the governments have been saved, the politicians have been able to exploit it, keeping all subsidies in play. Nobody has been given a cold water shower, no one has been hurt, each time a short-term solution has been chosen – no matter if we are talking about the US, Europe or Japan.
Now, consider the people dealing with other things than finance. For most of them it does not matter what have caused that, for example, the euro zone is still functioning, and the loan is still cheap. Such people draw conclusions based on what they see. And what do they see? That the system still works, that the cost of credit is still low, that the country continues to pay all the promised subsidies.
In the meantime, due to the increasing national expenditures as a share of GDP, more and more people are becoming to be dependent on the country. Starting from food cards (tens of millions of people in the US), subsidies to housing, free education, free communication, etc. At the same time, the same people see the effects of the financial elite activities, namely the accumulation of property in the hands of a small group of people. The conclusion is often like that: these capitalistic pigs have special privileges, so this is a time to take away what they have stolen and to distribute it to everyone equally. Long live socialism!
While in Europe it does not shock anyone, the situation in the United States is starting to look similar, If you look at the Gallup study, you will notice that among the supporters of the Democratic Party, socialism is now better perceived than capitalism.
Let the results of the Republicans not deceive you. The next graphic is much more important and shows views about capitalism and socialism among particular age groups.
When we look at individual age groups, a positive attitude towards socialism is visible especially among the youngest ones. Many of them are people brought up in a reality in which, regardless of the circumstances, nothing bad will happen to you, because the country will always look after you. And if it is not enough for the social spending, then we can continue to take loans and spend it on any nonsense that comes to our minds. Not only as individuals, but also as the country. Where to get the money for that? Well… Take away from the richest! And what if they have no enough? Then print!
This is the moment that more than ever opens the field for extremely populist politicians who are able to promise everything just to win the election. We are observing this process at the moment. It is the result of:
1. Breaking the gold window in 1971, as a result of which governments could start to significantly increase their debt.
2. Introduction of asset purchases on a massive scale after 2007, which has resulted, among others, in that the heavily indebted countries have not gone bankrupt (interest on debt has been lowered by creating artificial demand for bonds).
According to what wrote above, in the present reality each subsequent election will be like an endless marathon of promises. When during the election rally in front you have people who think that prosperity can be printed, then you can tell them everything. And this is happening now.
You can start with the events in Italy, where the recession appeared again. The economy of the country is shrinking, but the ruling populists are not in the lost position. They know that the European Central Bank needs to buy Italian debt to keep the eurozone on the surface. This means that even by announcing the fulfillment of further extremely socialist postulates (e.g. unconditional guaranteed income), they can be sure that interest on Italy’s debt will not suddenly double. Even if the market moves slightly away from Italian bonds, they will be bought by the ECB anyway. And even when the central bank officially is not buying assets which we showed in the article “Have central banks lost credibility”. Therefore, we can be sure that in the case of the next elections in Italy, we will have even more absurd postulates, because they can ensure victory and re-election.
Populist slogans also brings effects in the US. If the monetary policy has not been created for the richest, perhaps it would be different. And so, the person like Alexandria Ocasio – Cortez, which 1.5 years ago has been working at the kitchen sink, today with her socialist slogans not only sits in the parliament, but also is one of the most famous characters! As a result, her reform proposals must unfortunately be taken seriously. Below you can see a few of them:
– free higher education
– housing subsidies,
-rebuilding every building in the US to function based on modern systems with adequate energy efficiency,
– achieving zero GHG emissions within 10 years,
– prohibiting nuclear energy in 10 years if possible (moving away from fossil fuels),
– high-speed railways all over the US, abandoning air travelling,
– new trade unions for all jobs,
– carbon tax.
This is only some part of her ideas. According to various estimates, the so-called Green New Deal would cost between 51 and 93 trillion dollars. It is up to 30 times more than the federal government collects in one tax year
On the other hand: we can always print the money, right?
Since you already know what kind of person is Ocasio – Cortez, we will only add that she has secured a seat in the House Financial Services Committee, which controls Wall Street.
However, this is not all about the US. In 1.5 years we will have the presidential election, and on the side of the Democrats, there is no shortage of candidates who are sure to get along with Ocasio – Cortez. The first one is Bernie Sanders, who proposes to introduce a very high property tax for real estates worth more than 3.5 million dollars. Anyone who owns a property worth over $ 1 billion will pay a tax of 77%! Sanders explains that due to the threshold, the tax will affect only 0.2% of the richest.
He is backed by another presidential candidate, Elizabeth Warren. She also wants to impose taxes on the richest, but her plan looks a bit different. Warren offers a special tax of 2% on assets paid by all households with assets over $ 50 million.
How will it end?
Of course, we can not determine at the moment who will win the US elections, however in our opinion the general tendency towards implementing socialist postulates will be maintained. In this aspect, Donald Trump appears to be a last hope rather than a threat to normal voters. Unless the Democratic Party will surprise us with a sensible candidate.
The same will happen in Europe. Even those who are against the EU have to promise a lot to win the elections.
The final effect is always the same. There is a change in the structure from a three-level society (rich, middle class, poor) to a two-level (rich and poor). All new taxes and inflation always hit the middle class the most, which can not be defended against them. The richest will always manage, even if they had to rely on the army of specialists in finance and law.
Unfortunately, in such conditions, ordinary people will become more and more dependent on the country. Such a clumsy society is easier to intimidate. Thus, if at some point the financial system will face the wall then citiziens can hear from the government: do not be afraid, we will take care of you. You will receive 1000 dollars of unconditional income. The robots will replace you, so the prices of many goods will fall. You will get money on your account, so you will not need a cash. Cash is only needed for people who work illegaly. As long as the situation within the system is not controlled, however, we must introduce negative interest rates. Earlier, we will be forced to take 50% of your deposits, but no worries – this only applies to people with assets over 100 000 dollars.
Of course, this is just one of the possible scenarios. The alternative is unfortunately a repetition of the past, when the populists have persuaded people who their enemy is and as a result they have gone to the war.
Socialism always ends tragically and makes people desperate. Meanwhile, the desperate crowd is unpredictable, which, in fact, somewhat conflicts with the priorities of the elites. That is why we consider a more reliable scenario the one with unconditional income, which instead of desperation, induces human indifference.
Finally, we want to emphasize that we realize that there are many people among the current American millionaires who have worked hard to reach their current status. However, we would like to point out that we have new rules of the game since 10 years. A millionaire can be a person who enters the stock exchange with small funds and selects the most popular companies. Such an “investor” does not know that he participates in a game similar to a musical chair game, i.e. the number of chairs is smaller than the number of participants, and when the music stops playing, the participants try to sit down. In turn, the DJ is the central bank, and only he knows when the music will be turned off.
Allowing the central banks to rescue markets 10 years ago, their role has been tremendously strengthened. The bankers have used this to create incredible disproportions in wealth among people. Now the key question is how the fight against inequalities will take place. If socialist reforms are to be defended, then nothing good can come out of this.
Independent Trader Team