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Entering the New Age of Inflation
“Bringing Leviathan under control will be the heart of global politics because of a confluence of three forces: failure, competition and opportunity” ― John Micklethwait and Adrian Wooldridge, The Fourth Revolution: The Global Race to Reinvent the State
It doesn't matter whether or not Trump wins on 8 November because the populism genie is out of the bottle. Just at the moment when Western governments (particularly in Europe) are reaching the limits of what they can do for their people, the people want more.
The world now appears fractured into three main groups: the global business elite; the global political elite and the people. The interests of these groups seem to be rapidly diverging¹.
The global business elite previously led by banks, but now by Silicon Valley, is libertarian in nature. They don't recognise borders or barriers, and monopolies are their preferred state.
The global political elite used to be aligned with them (perhaps because the business elite provided lucrative post-retirement employment), but that is no longer the case.
Blazing the trail is the EU Competition Commissioner, Margrethe Vestager, who, perhaps with an eye on a Prime Ministerial campaign back home in Denmark, has taken it upon herself to be the scourge of corporate fiscal optimisation generally and America’s tech giants in particular.
Viewed from a distance, it appears as if the US has used regulation to beat European banks into submission and Europe is now responding via their fiscal authorities. In any event, the cosy shared interests of both elites seem to have broken down. Why?
Because the people want what politicians can't give and any tactic will do to turn voters’ attention away from the facts. The people want jobs, cradle-to-grave welfare and pensions; funded, if possible, not by themselves, but by ‘the rich’² and ‘corporations’.
Whilst the Internet and social media has made knowledge fairly universally accessible, it has also made inequalities in-your-face blatant. The Gini coefficient, which measures income disparity³, can be seen as an advance indicator of social unrest.
Data from the US’ Central Intelligence Agency, gives the US the highest Gini coefficient in the G7 at 45, followed by Japan at 37 and the UK and Canada at 32.4 and 32.1, respectively.
The now universal perception is that globalisation works for the few but not for the many. From 1999 to 2014, the suicide rate rose by 24%4, according to the latest Centres for Disease Control and Prevention tally of the causes of death. These rising suicide numbers and falling longevity amongst the American middle classes bear testimony to this.
Western governments seem powerless to grant the needs of modern democracies. ‘Winter is coming’. The mathematics of aging populations and shrinking state resources just don't add up.
Angela Merkel summarised the problem neatly, albeit with slightly off kilter statistics: “Europe today accounts for just over 7% of the world's population, produces around 25% of global GDP and has to finance 50 % of global social spending”. Mrs. Merkel has already seen one system of government collapse in her lifetime. Her warning is stark.
In John Micklethwait and Adrian Wooldridge’s book, The Fourth Revolution: The Global Race to Reinvent the State, they argue that government has to be ‘done better’. Their poster child is Singapore. But would such a model work on a larger scale? And is the inherent quasi-totalitarian framework and long intervals between elections palatable to peoples whose democratic rights have been hard won, centuries ago, through revolution and war?
In The Welfare State in Europe: Visions for Reform, the authors Iain Begg, Fabian Mushövel and Robin Niblett ask a similar question to Micklethwait and Wooldridge: “what is the extent of the state’s responsibility to its citizens and specifically whether governments can or should maintain comprehensive welfare systems in the future?”
Unless there is a dramatic shift in longevity (and the politics of healthcare for the aged and infirm), something has to give. In the meantime, popular focus will remain on immigration and jobs, which, often irrationally, are linked in the minds of voters.
Britain has a fabulously low rate of unemployment (currently the lowest since October 2005), yet the perception remains that immigrants are ‘taking’ jobs; a palpable nonsense. In fact new report Immigration: Encourage or Deter? demonstrates that migration could boost the economy by £625 billion (or 11.4% bigger) by 2064-65.
Governments feel that there is little that they can do to roll back the welfare ‘Leviathan’ and to quote the current President of the European Commission, Jean-Claude Juncker, “We all know what to do, we just don’t know how to get re-elected after we’ve done it,” when talking about economic reforms back in 2007.
So, if governments are to respond to the increasingly strident demands of their people, immigration and repatriation of jobs are the only arguments that are left as variables over which they have some control.
One side effect of this will be to increase the pricing power of labour (no longer competing on a global stage). This will be another step towards structural inflation; the only way out5, longer term, for the vastly indebted governments of the Western world.
Maybe governments can do less, better and make ‘tough choices’. Mr. Corbyn, leading Britain’s Labour Party, has proposed cutting back his country’s nuclear deterrent and re-nationalising railroads.
Put more palatably: “we are boosting spending on our conventional forces and embarking on a national infrastructure upgrade programme. This will be partly paid for by reducing our nuclear commitments”.
Winston Churchill once said that "The best argument against democracy is a five-minute conversation with the average voter,” but the vox populis cannot be ignored, indefinitely.
And the rising presence of various populist politicians and parties not just in Europe but around the world, which metropolitan elites view with amused disdain6, are on the path to power. That doesn’t have to be all bad. But it will usher in a new age of inflation.
Photo: © Niki Natarajan 2016
¹ The economic losers are in revolt against the elites (26.1.216), The Financial Times
² Singapore to Raise tax on rich to fund welfare (23.2.2016), The Financial Times
³ For Richer, For Poorer (11.10.2012), The Economist
4 The Saddest Trend (28.4.2016), The Economist
5 Political power follows economic power (3.2.2016), The Economist
6 Global elites must heed the warning of the populist rage (19.7.2016), The Financial Times
The views and opinions expressed in this article are those of the authors. CdR Capital Ltd is authorised and regulated by the Financial Conduct Authority. This article is for professional clients and eligible counterparties as defined by the FCA only.