Let’s begin with a quote in Latin. That will put us in the right mood – reaching for the eternal verities: “Fere libenter homines id quod volunt credunt”.
That was written by Julius Caesar in his De Bello Gallico, his account of the conquest of Gaul.
We didn’t know what it meant either, until last night. In case your Latin is a little rusty, we will give you a little WD-40. It means “men willingly believe what they want to believe.”
At least, they believe it as long as they can. As long as stocks rise, for example, they can believe that the economy is recovering nicely, and that they will get richer and richer just by owning pieces of someone else’s business.
They call it ‘investing’. But that is mere flattery.
Someone else already did the investing when they built the factories and developed the business. ‘Investing’ implies you are doing something that will provide more or better products and services, something that improves productivity and makes us better off.
But when you buy shares in an existing business, you are simply buying out someone else’s position.
Will the price of your shares go up? Or down? Who knows. One business grows. Another shrinks. You cannot know, in advance, which will be which. And taken all together, the shares in a nation’s businesses are unlikely to grow more than the economy itself.
In the US, for example, over the last six years, real growth has averaged 0.9% per year. But stocks have gone up more than 130% in the US. How is that possible?
Well, first earnings rose. Businesses ditched expensive labour. Stopped new projects. Trimmed down and boosted profit margins. They also benefited from low-cost financing, rolling over their debts at lower interest rates and reducing their interest expenses.
Then, the liquidity produced by quantitative easing (QE) and ZIRP needed a place to go. It could not get to the consumer, because households were still cutting back on debt and wages were actually going down. So, it stayed in the financial sector, pushing up asset prices.
Result: stock prices far exceeding GDP growth.
Meanwhile, you were probably concerned about our garden party, weren’t you? Well, despite the drippy forecasts, the rain held off. What a lucky break! The guests could spread out on the lawn. Otherwise, they would have had to squeeze into the house.
Among the guests was an attractive French woman in her 70s, an economist:
“I am so annoyed by Monsieur Piketty. He has become famous. The rest of the world must think we French economists are all a bunch of idiots. Imagine… Keynesianism… the class struggle… the envy of the rich… as if these were new ideas that hadn’t been thoroughly discredited.
“And I don’t know why they take Piketty seriously in the US. I thought American economists were smarter than that…”
We rose to defend our countrymen:
“Oh… no,” we contradicted her, “American economists are as dumb as the rest of them. They all seem to believe that capitalism needs to be carefully controlled. By them, of course.
“And then, they control and pervert the system… it blows up… and they blame it on capitalism. And I think there is a very big example of that coming.”
“Yes… I know what you mean… they distort asset prices with their QE programmes. Then, people invest their money foolishly – because they are reacting to the distorted asset prices. Just look at the US stock market. It is near an all-time high… even though the economy is barely growing. The prices are based on two things that can’t possibly continue – cost cutting and zero interest rate policies. Stocks’ prices could be easily cut in half.
“But this time, it is not just a few foolish investors who lose money. It will be millions of investors and business people… and households… and governments that depend on tax revenues.
“We could be looking at a very big problem.”
“Yes, and it will be blamed on capitalism…”
“Fere libenter homines id quod volunt credunt”, she concluded.
“Yes, madam, the canapes are very nice”, we replied.