The western economic model is under attack from all fronts.
Legendary hedge-fund manager Ray Dalio says that inequality will end up being one of the defining investment themes over the next 20 years.
His idea is that capitalism – or whatever (waving vaguely at everything) this is – is not a system that naturally distributes wealth equally or fairly.
In fact, given current settings, it seems entirely designed to funnel wealth towards the top of the pyramid.
(It’s probably not an accident.)
But how long can that go on? How long can you keep pushing the middle classes down into poverty?
It’s not infinite right?
So the question is when does the ‘awakening’ come? When do enough people realise that they’re pawns in a game they can never win, and decide turn their sights from ‘winning’ to ‘destroying’ instead?
Dalio has been saying this for a while, but then Covid comes, and now Dalio has another example he can point to. The crisis response has, in the developed world, made a decent fist of keeping the middle classes afloat (although they’ll have to pay back those mortgage deferrals at some point).
However it has also funnelled money into the pockets of billionaires at an staggering rate.
And you have to wonder, since this is exactly what happened during the GFC – is that maybe this unfair crisis response is actually part of the game-design, and that actually, maybe, the crises themselves are part of the game design too.
This is no longer a fringe argument anymore – not something confined to the Universities and their tweed-coat professors.
There’s Dalio. And there’s characters like Neel Kashkari. He’s President of the Minneapolis Fed, which, given the size of America, puts him on par with our own RBA Governor Phil Lowe.
What’s he reckon?
“How can the financial system possibly be this fragile?”
“The funding markets that almost collapsed in March raise important and complex policy questions… It is not as simple as addressing the risks of too-big-to-fail banks, where the clear and straightforward solution is to force them to fund themselves with more equity.”
…“You might not realize it, but the banks got a lot of help.”
There’s a couple of nuanced points he’s making there. But they’re important.
First, when banks are part of everything we do, when we bail out the everything, we bail out the banks.
When we’re giving people a cash-handout to stop them defaulting on their mortgage or other debts, then what we’re really doing is giving the banks a handout.
The people are just an intermediary between the government and the financial sector.
So even if we’re not giving money to banks directly – although given things like the Term Funding Facility here in Australia, we are actually doing that too – but even if we don’t give money to the banks directly, it still ends up in their pockets.
So why would banks care if we end up in a crisis? They’ve got money coming at them from all directions.
It’s baked into the system.
And the solution? The very least we should do, according to Kashkari, is “to force them to fund themselves with more equity.”
That is, make them put some money aside for a rainy day, since very rainy days seem to come around every ten years or so.
But given the free-kicks the politicians are handing out these days, I wouldn’t be holding my breath.