Today’s FT Markets Live quotes a paper by Albert Edwards, the famously bearish strategist at Societé Générale, in which Edwards starts by reminding readers of his prescience in predicting the rise of the “99%” movement:
It is just under two years since I wrote an article entitled “Theft! Were the US and UK central banks complicit in robbing the middle classes?” Since then a grassroots movement has risen up against the economic injustices of extreme inequality (most especially in the US, with the Occupy Wall Street movement, but also in the UK) .
However, Edwards feels the need to reiterate one of the points from his previous paper:
I am reissuing my original article because one of the key themes still seems to be eluding the 99%, namely the role of Central Banks in this story. They have eluded the wrath of the 99% despite the very same personnel remaining in their jobs most notably Ben Bernanke and Mervyn King. Why are there no protesters outside of the Fed Reserve and the Bank of England?
Edwards is not optimistic about the future. He predicts now that “extreme levels of social stress” arising from austerity will either force central banks to “print and print and print”, or lead (in the eurozone) to “total social disintegration and default”.
But to return to the central bankers, Edwards is scathing about their role, in particular in promoting the credit-fuelled housing bubbles that helped mask stagnating incomes and inequality. Nor is he inclined to write this off as mere error or incompetence on their part:
Some recent reading has got me thinking as to whether the US and 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 of ordinary people’s earnings in the US and 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?
Edwards argues that “ordinary working people would not have tolerated these extreme redistributive policies had not the UK and US central banks played their supporting role” (see also Edwards’ observations on this earlier in the year). Now that “the bubbles have burst, along with central banks’ credibility”, working people’s tolerance for inequality is likely to nosedive:
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 labor 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.”
In Japan, low levels of inequality and inherent social cohesion prevented a social breakdown in this post-bubble debacle. With social inequality currently so very high in the US and the UK, it doesn’t take much to conclude that extreme inequality could strain the fabric of society far closer to breaking point.
Those words used by Edwards in passing – “in the absence of a sustained housing boom” – perhaps go some way to explaining why the government is so keen to revive the housing market. If their house prices are going up, voters may be more willing to overlook economic stagnation.