And another thing... Bernard Connolly on problems with capitalism

Worth reading just for an adult perspective on significant issues, but also helpful for your macro/paper 3:

The problem with global capitalism

The EU sorted out (or not…), we move on to what’s wrong with global capitalism. Two things, says Connolly (which he has, by the way, been warning about for much longer than almost everyone else). The first is the rise of crony capitalism. The industrial revolution saw a lot of people getting rich. But they at least “made something” and helped to set in train a series of developments that “after thousands of years of nothing much happening… lifted people out of poverty and gave them opportunities and standards of living they would never otherwise have had”. Are the people getting superrich today improving standards in the same way? Some are (Amazon, while far from perfect, has improved the lives of many consumers). But there is also a “huge amount of rent-seeking”: large firms have too much power to crowd out the small, and regulators do too little to stop it.

The second is that much of the new wealth has been created simply by those riding on the coattails of Federal Reserve policy (cheap money) by buying into stock and property markets. That creates nothing for anyone else – and is thus politically unacceptable. But it’s hard to reverse. You can deal with the first problem with good anti-trust regulation. But the concentration of wealth created by the equity bubble? That puts the Fed in a “terrible dilemma” – it can’t really be reversed “without crashing the world economy… we’ve seen the extent over the past three months of how dependent the US stockmarket is, not so much on trade talks with China, not so much on China’s growth or global growth, not so much on what happens to wages in the US, but on what happens to interest rates and what happens to interest-rate expectations”.

Fed chairman Jerome Powell has pulled back from rate rises to stop the market falling, but how much longer can he do that for? US unemployment can’t fall much further and if the Fed continues to try and keep US growth at an annual rate of 2.5% (as it plans to) “there will be an L-shaped Phillips Curve, wages will start to accelerate quickly, there will be inflation…  then there’s real trouble” for the stockmarket and the global economy. The Fed got itself into this spot of course – starting with Alan Greenspan keeping rates too low in the mid-1990s, and most recently with Janet Yellen not putting rates up fast when Donald Trump came in with policies that “did increase the level of potential growth in the US.” Had they done that, they’d have less of a bubble to deal with. While the rate of growth would have been less fantastic than over the last year, “the prospects for growth going forward would be much better” as would the politics of wealth distributions. Now, says Connolly, it is all too late. “There is no easy way out.”

• Listen to the full interview here