Harrods and Poundland both reported record results this week.
That nicely sums up the state of the global economy. It also explains what all this ‘Occupy Wall Street’ stuff is about.
The mega-rich have more money than ever before. Everyone else has less. And the general feeling is that governments and central banks are happy to subsidise and protect the wealthy, while everyone else tightens their belts.
Does this matter to you as an investor? Yes. Here’s why…
Why people put up with income inequality
The mere fact that some people have more money than others is enough to annoy certain political factions. That’s just the way it is. And this makes it easy to accuse people who get upset with the status quo of ‘the politics of envy’.
However, lots of people who wouldn’t normally be upset by income inequality are far more irritated now. Let me explain why.
Most of the time, the average Westerner – certainly in Britain and the US – doesn’t mind too much about other people getting rich. There are two main reasons for this.
First, they think they live in a society where you get paid what you’re worth. Second, because they think they might have an opportunity to get to a similar position if they decide that’s what they want and they work hard enough.
You can support a pretty inequitable society on the basis of these two beliefs: fairness, and equality of opportunity, as my colleague Merryn Somerset Webb writes about regularly on her blog.
The trouble is, faith in these ideas is breaking down. That’s because lots of people who are still mega-rich today, shouldn’t be. They have only been able to hang on to their wealth and their jobs because governments and central banks have conspired to make others pay for it.
Interest rates have been slashed, propping up asset prices, and giving those who can still borrow money access to historically low debt costs. Meanwhile, inflation has been ignored, hurting anyone who thought they were being sensible by saving money during the boom years.
Look at Britain. The Bank of England seems hell-bent on demolishing the pound, while inflation is well above twice its target level. So people with savings are seeing them vanish at an ever-increasing rate. And it’s being done largely to prop up the banking sector.
Of course, you could argue that if the banks hadn’t been bailed out in the way they were, then society would have collapsed (I don’t agree, but you can make a case). You can also argue that inflation and ‘financial repression’ are the best routes out of this particular crisis, as Merryn does on her blog.
However, this won’t make people feel any less aggrieved. For a start, it’s counterfactual. It’s very hard to make the case that this is the best of all possible worlds, because it’s impossible to know what would have happened if other decisions had been made.
Also, people just don’t like feeling like they’ve been done over. Various behavioural economics studies have shown that individuals value fairness over personal gain. In effect, they’ll cut off their own noses to spite their faces, regardless of what the ‘rational, profit-maximising’ route is.
So why does this matter for you as an investor?
In short, for two reasons: interest rates and tax.
First, interest rates. How high can inflation go before the Bank of England is forced to tackle it? In other words, what consumer price index figure would cause the average saver in the street to start panicking?
I reckon the number is around 7%. That’s just going on gut feel, of course. I’d be curious to know what your ‘inflation panic’ rate is – let us know in the comments below.
But at 7%, it would become very obvious to anyone with any significant cash savings that they were rapidly becoming poorer. They could tackle that by going out and buying middle-class inflation hedges such as antique furniture or silver or other collectibles (as Merryn noted in a recent issue of MoneyWeek magazine).
But they might also tackle it by getting out there and protesting. And while Mervyn King might tell protestors to suck it up, politicians are far less stubborn in the face of an aggrieved electorate.
I’m not saying interest rates will rise in the near future. In fact, it could be years before they do so. But it would be a mistake to base all of your investment decisions on that hope. And when they do start to rise, there’s a good chance they’ll rise a lot faster than we’ve become used to since the Bank gained independence.
So if you’ve got a big home loan, and you’re able to, I’d certainly consider fixing it at the low rates available just now. It might not matter this time next year, but you could be grateful in say, four years’ time.
What about the second point, tax? Well, this is one we were discussing the experts at our property Roundtable the other day. The notion of the ‘mansion tax’ just won’t go away. The more annoyed voters are by this idea of unfairness, the easier it becomes to push through. I’m certainly not in favour of it (we get taxed too much already), but if the government did push through some sort of property tax, then it certainly wouldn’t be pretty for British property prices.
We’ll have more on both the potential impact of a ‘mansion’ tax and the property market in general in the next issue of MoneyWeek magazine, out next Friday. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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