09:28 Tue 02 Feb 2010
Investment Line: Did the BoE deliberately hurt the middle classes?
Few wealth managers will look back on the past decade as a period when wealthier clients enjoyed the support of a benevolent government.
New tax rates, a concerted attack on trusts and most recently the threat of taxes on bonuses have created the impression that this is a bad place to be rich.
But Albert Edwards from Societe Generale - one of Investment Line's favourite economists, if only because he is one of the most controversial - argues that the Bank of England and the US Federal Reserve have formed monetary policy in recent years around a goal of helping the super-rich.
How so, you ask not unreasonably? Over to Albert: 'Some recent reading has got me thinking as to whether the US and the UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich indeed, it has been amazing how little political backlash there has been against the stagnation in ordinary people's earnings in the US and the UK.
'Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction?'
A ha, there you have it. No longer is religion the opium of the masses, now it is property. Marx would have been proud of the neat circular logic of this argument.
Edwards is someone who points the blame for this financial crisis firmly in the hands of central banks. He describes his feelings listening to Bernanke's latest speech: 'I feel like Peter Fince in the film Network, sticking my head out of the window and shouting "I'm as mad as hell and I'm not going to take it anymore!"'
Underpinning Edwards' musing that the central banks may have actually deliberately been trying to boost the super-rich is data on wage growth. He demonstrates that the share of national income earned by the top 0.1% of earners has risen sharply. In Britain it is now more than 4% of total income and in the US it is more than 8%. In contrast, there has been much lower growth in middle and lower incomes. This is of course little suprise to those of us who have watched the news at any time over the past two years.
Whether we believe the conspiracy theory or not, we can at least agree that in recent years the wealthy have seen significantly more wage growth than the moderate earners. This of course is underpinning much public rage towards bankers. The argument goes that as the property bubble bursts we all suddenly realise we have not shared in this economic boom as much as we thought and we rebel.
The fact that we are blaming the commercial banks for the crisis and not the central banks of course plays right into the hands of central bankers engaged in Edwards' Orwellian plot.
Edwards' concludes: 'Now you might argue central banks had no alternative in the face of under-consumption. Or you might conclude there was a deliberate, unspoken collusion among policymakers to 'rob' the middle classes of their rightful share of income growth by throwing them illusionary spending power based on asset price inflation. We will never know.
'But it is clear in my mind that ordinary working people would not have tolerated these extreme redistributive policies had not the UK and US central banks played their supporting role.
'Going forward, in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis. For as Bill Gross pointed out back in Pimco's investment outlook 'Enough is Enough' of August 1997 '"When the fruits of society's labour become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down."'
While Edwards does optimistically point out that the low levels of social cohesion in Britain should prevent a Marxian revolution (phew), he does nonetheless see this scenario as a recipe for wage growth and squeezed profits.
For this, among many other bearish reasons, he is recommending a 35% equity weighting compared to an index neutral weighting of 60%.
In reality, wage growth has been very modest throughout this financial crisis. The analysts in the United States have been celebrating that fact with great enthusiasm, boasting that it will lead to earnings upgrades. But is it masking a major wage shock in the longer-term? Well, the deteriorating industrial relations we have seen so far this year in the UK could suggest that Edwards is at least a bit right.
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