Strong bull markets usually end badly for a large number of investors. Volatile markets dissuade them from investing in anything but safe investments. If they believe that there is nowhere left to invest, the consequences will be of 1930s proportions. Stock markets hate uncertainty, goes the time-worn phrase. That is because investors abhor the destruction of their wealth, especially if it is seen as being caused by bad politics.
This article pinpoints one reason for my disgust with economics in general, as well as US politics when it is treated as a subset of economics. The disgust is not directed at practitioners of economics or even its practices as such, but rather at economics as rationale for ethics or as justification for private superstitions about politics.
The overriding concern of this article’s author is the great evil of uncertainty. Evil is here characterized by the diffusion of capital into the hands of smaller investors and ordinary individuals, who tend to waste money on food and shelter; whereas they should be donating it to help rich people.
The most telling phrase is the complaint about “the volatility that has wiped out several trillions of investor wealth.” The author thinks that is a bad thing, but here is another view:
The concentration of wealth is now in so few hands and is so extreme in degree, that the combined liquid financial power of all of those not in this small group is inconsequential to determining the direction of the economy. As a result, we now have the equivalent of centralized planning in global marketplaces. A few thousand extremely wealthy people making decisions on the allocation of our collective wealth. The result was inevitable: gross misallocation across all facets of the private economy. [Central Planning and The Fall of the US Empire]
The pinkos at Citigroup, as reported by the pinkos at the Wall Street Journal, call this a Plutonomy.
1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”
2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.
3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.
There is no difference between someone shilling for increasing “investor wealth” and someone shilling for increasing “government control”. Both are concerned with the evil effects of allowing individuals to make decisions for themselves. The decrease in “investor wealth”, like the decrease in “government control” or “consumer confidence”, is a function of society’s lack of trust in its idols. In fact, the “US consumer” as driver of the economy is a myth:
In October 2005, three Citigroup analysts released a report describing the pattern of growth in the U.S. economy. To really understand the future of the economy and the stock market, they wrote, you first needed to recognize that there was “no such animal as the U.S. consumer,” and that concepts such as “average” consumer debt and “average” consumer spending were highly misleading.In fact, they said, America was composed of two distinct groups: the rich and the rest. And for the purposes of investment decisions, the second group didn’t matter; tracking its spending habits or worrying over its savings rate was a waste of time. All the action in the American economy was at the top: the richest 1 percent of households earned as much each year as the bottom 60 percent put together; they possessed as much wealth as the bottom 90 percent; and with each passing year, a greater share of the nation’s treasure was flowing through their hands and into their pockets. It was this segment of the population, almost exclusively, that held the key to future growth and future returns. [Can the Middle Class Be Saved?]
In a roundabout way, that actually supports the contention in the first linked article: the only thing that matters is what the wealthiest people do, since they are the de facto cream of civilized society–“If they were to decide to stop supporting all the working-class leeches, everything would fall apart, just as Ayn Rand predicted.”
Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.
I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.
Nevertheless, most politicians seem to believe that the most important function of politics is to protect the super-rich from losing their money.
While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.
These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.
But favoring the rich risks alienating those who think they are entitled to become rich.
The worst political mistake is to make someone believe they deserve some kind of guaranteed income or status, and then take it away.
We are increasingly taking easy credit, routine work and government jobs and entitlements away from the middle class — at a time when it takes more skill to get and hold a decent job, at a time when citizens have more access to media to organize, protest and challenge authority and at a time when this same merger of globalization and I.T. is creating huge wages for people with global skills (or for those who learn to game the system and get access to money, monopolies or government contracts by being close to those in power) — thus widening income gaps and fueling resentments even more.
The US myth of the middle class propagated from the 1940s onward has been that every citizen deserves to have a chance to get an above average education, a lifetime career, a pension, a nice-looking husband or wife, a stable marriage, two or three children, two or three cars, a house, several televisions, air conditioning, annual vacations, low-cost health care, low taxes, good roads, good public schools, clean air, clean water, no nuclear fallout, no toxic waste, a low crime rate, a few guns, a credit card, a good return on stock investments, truthful politicians, and low-fat ice cream with sprinkles, whipped cream, and a cherry.