Temporary distortions of wealth and ownership in a free democratic economy will always be challenged and redistributed in the competitive process. But the major economies today are not free, they are not competitive, they are not capitalist. They are collectivised, politicised, corporatist and sclerotic under remote supranational control.
Inequality today is not a question of rich individuals versus poor individuals or richer classes versus poorer classes. Today the great inequalities are between individuals and the State, between communities and corporations, between private and quoted companies, between Germany and the mediterranean countries, between peripheral regions and the centre, between easily taxed domestic companies and wily offshore multinationals and between countries with massive trade surpluses and countries with huge deficits.
Jeremy Warner of the Daily Telegraph wrote an excellent article (28th April 2015) on the high percentage of bonds in the Eurozone countries which bear negative interest rates – in other words anyone buying those bonds will actually pay the borrower to borrow his money! Such is the supply of debt in the world that its price has turned negative! Why?
The principal reason why economic stagnation and massive debts dominate the world economy is the concentration of capital and spending power in the hands of the large corporations, the State and the Superstate – while the creative forces – consumers, small companies, entrepreneurs and smaller and open, free trading countries – are starved of cash.
Temporary distortions of wealth and ownership in a free capitalist and democratic economy (where the State does no more than defend the country and emancipate the people) will always be challenged by free people and redistributed in the competitive process. But the major economies today are not free, they are not competitive, they are not capitalist. They are collectivised, politicised, corporatist and sclerotic under remote supranational control. Income and capital is directed by taxation towards the State and the big corporations. Capital is hoarded by big business who have so controlled the State that they have been allocated privileges in law, in taxation and even in tax avoidance (although politicians seem unaware they have done so).
The State itself, as the source of monopoly in law, taxation and subsidies, has taken more and more of the nations’ resources, alienated those funds from individuals, communities, regions and local businesses and put them in the ignorant hands of bureaucrats, politicians and “consultants” none of whom have ever created wealth, invested capital or employed people on their own account.
The 2 trillion Euros worth of bonds which Warner identifies as bearing negative interest are issued by Germany, France and Spain and are doubtless remarkably popular for those fleeing Greece and Italy and for those who feel that investing in productive business is a risk when the consumer has been so impoverished by the State. The European Central Bank has of course not helped by starting (far too late in the day for this long running international crisis) to print money through “quantitative easing”.
70% of all German bonds have such a negative yield and 50% of French bonds. Even long term British Government bonds are approaching nil returns. Needless to say there is no shortage of French and UK debt to sell to the markets and in normal times that would mean high interest rates. But Governments are so afraid of the lack of demand that they suppressing interest rates to boost borrowing and hence consumption. As Warner notes:
to the extent that demand is growing at all in the world economy, it seems again to be almost entirely dependent on rising levels of debt
and he points to the world wide growth in debt since the crisis caused by…… yes! the world wide growth of debt:
The combined public debt of the G7 economies alone has grown by close to 40% to around 120pc of GDP since the start of the crisis, while globally, the total debt of private non-financial sectors has risen by 30pc, far in advance of economic growth
The bond markets are of course riding for a fall because as soon as interest rates rise – as indeed Governments will have to bring about – then those bonds will fall in price. All who hold them will make a capital loss. So it is even more grotesque that Governments legislate to force many critical institutions to hold those bonds. As Warner writes:
Other contributory factors include “financial repression”, where (Government) regulation forces banks and insurers to hold more bonds, whatever the price.
But what is the underlying cause of the massive rise in debt in the world? – and indeed the related massive rise in the volume of interest rate hedging through so called “derivatives” – a form of mutual gambling to “insure” financial institutions against the consequences of getting things wrong! Warner, like Governments in general, seeks the reason for the general malaise and notes that:
Call it “secular stagnation” – the idea popularised by former US Treasury Secretary Larry Summers – if you like, but whatever it is, it’s a particularly unhappy place to be. For all kinds of reasons, advanced economies, and perhaps emerging ones too, seem to have run out of productivity-enhancing growth
But excessive debt is due to inequality and capital concentration
All concentration and monopolisation of capital leads to waste, misallocation of resources and stagnation. As the consumers, communities, entrepreneurs and regional peripheries are starved of spending and capital they must resort to debt – which profits the banks which provide the debt and the State which taxes the spending – leaving the democratic forces in a permanent cycle of debt.
Indeed it was a Bank of England official who not long ago suggested that people with capital should not worry about low or negative interest they should just go out and spend it! From such irresponsibility of debt and spend treadmills for the people the State hoped to tax and pay off its debts.
Economic growth comes from flexibility, creativity, easy access to capital, entrepreneurship and service of consumers. Large corporations and the State apparatus are totally incapable of providing those attributes and so the concentration of capital in their hands leads to stagnation. These inequalities are RIGID because politics, taxation and geopolitical considerations refuse to allow free challenge by free people to the rigid institutions who control the wealth. Ironically this usually leads to a revolution by those whose philosophy demands even more State control, resulting in even more poverty.
CHIEF SOURCES OF RIGID INEQUALITY
The main sources of massive inequality are between:
INDIVIDUALS AND CORPORATE POWER
The corporate power of collectives of capital and labour combined with the all powerful political State far outweigh the influence of voters in elections and – more important – the choices and economic decisions of consumers in the daily economy. In addition the former lobby the central power for tax advantages, subsidies, State contracts and trade subsidies at both the national and supranational level. Competition between free capital is the consumers biggest source of power and lower prices are the fairest source of “tax” on corporations. The State is lobbied by business to prevent both. Free elections are a threat – so corporate power now intervenes there too! (Two recent examples are the Scottish referendum on independence and the possibility of the UK leaving the EU)
QUOTED AND NON QUOTED COS
The effect of low taxes and high subsidies to large quoted companies compared to the taxes on small companies and individuals is compounded by the effect of inflation on quoted share prices forcing down the cost of capital for large corporations but increasing costs for entrepreneurs and smaller companies.
REGIONS TO CENTRE
The nation states – and even more so the superstates like the EU – tax wealth creators in the peripheral regions and concentrate revenue, patronage and State buying at the centre in capital cities and surrounding areas.
GERMAN SURPLUSES TO MEDITERRANEAN DEFICITS
The Euro has provided artificial subsidies to Germany industry, bankrupted the peripheral countries of the mediterranean, drained them of capital and forced their skilled and young workers to flee to the centre (Germany, Holland, Luxembourg)
STAGNANT BANK BALANCE SHEETS TO NEW BANK BALANCE SHEETS
The collapse of the banks in the recent State induced debt crisis led to massive subsidies by the State for the old established and failed institutions. New banks with unencumbered balance sheets are a competitive threat to the Old Bank/Indebted State establishment so smaller companies have been starved of funds.
ONSHORE COMPANIES TO OFFSHORE MULTI NATIONALS (TAXES)
As capital has been concentrated in the large corporations and their multinational empires, with their tax privileges and huge cash piles the politician has nevertheless agreed to lower their corporate taxes while doing little to stop their tax haven manipulations. Meanwhile small domestic businesses, entrepreneurs, individuals and families have suffered swingeing tax rises (VAT, business rates, energy bills, income taxes and numerous stealth taxes).
CHINA, GERMANY SURPLUSES VERSUS UK, USA DEFICITS
At the inter-nation level the situation is the same – with some countries with massive balance of payments surpluses and earning power from e.g. trade surpluses, oil and gas or commodities refusing to empower their consumers and/or unable or unwilling to re-cycle capital through investment in other countries.
The biggest inequalities in balance of payments are between Germany ($74 billion surplus) and China ($54 billion surplus) on the one hand while the USA ($81 billion deficit ) and the UK ($38 billion deficit) pay the price of their more open trading economies. The Eurozone runs a $90 billion annual surplus while profiting from its biggest surplus with the deficit ridden UK – even as millions of EU unemployed have fled to the UK!
Germany has manipulated its trade position by adopting the Euro which is a far weaker currency than the Deutschmark and dominates with its political votes and patronage the terms of trade within the Eurozone, picking up at knock down prices assets of other Eurozone countries which the Euro has bankrupted.
China as a centrally directed communist political system can direct labour to its pseudo capitalist industry and commerce and starve the vast majority of its citizens of purchasing power. The result is an artificially high trade surplus and gold and foreign currency reserves.
GOLD AND FOREIGN CURRENCY RESERVES
China: $3.7 trillion
Japan: $1.2 trillion
Saudi Arabia: $0.6 trillion
Switzerland: $0.5 trillion
UK: $0.14 trillion
USA: $0.12 trillion
Most of the EU countries have reserves of about half that of the United States. The Saudis have a phenomenal surplus in oil revenues and a small population. Switzerland has been so successful compared to the disastrous EU countries that it has had to sell its own currency and buy gold and foreign exchange to keep its currency from getting too high!
Now that the West has imposed sanctions on Russia for daring to defend itself against Washington London and Berlin’s attack on Ukraine it has had to use its reserves to repay debt – but still has twice the reserves of the UK!
THE SOLUTION TO THESE LOCAL, NATIONAL AND SUPRANATIONAL DISTORTIONS is a return to democratic freedoms, to the free trading nation states acting together only where they need to and to the break up of centralised, collectivised capital in favour of individuals, communities and entrepreneurs and the recognition that the daily social and economic choices of individuals represent a thousand times more democracy than the occasional election.
