Central banks and the rapid rise of the multi-billionaire
Central banks’ desperate attempts to avoid deflation have had some unintended consequences, says Merryn Somerset Webb – including a rapid rise in the number of billionaires.
It has been a good week for billionaires: the UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world's 1,542 billionaires rose by almost a fifth last year to $6trn; more than double the UK's gross domestic product.
It has not been a particularly good week for governments, however. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty.
This kind of report does not do much for central bankers, either. The rise of the billionaires is as much about financial globalisation as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past ten years.
The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects. This observation is hardly controversial the rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures. Most markets have ended up overvalued (this will really matter one day), while pension-fund deficits and a constant sense of crisis have discouraged capital investment and have possibly held down wages in the UK.
Set a target, get a distortion this is standard stuff. But the fact that extreme monetary policy has been going on for so long means that central bankers do not just have macro problems to feel bad about. They are also effectively responsible for the increasingly dodgy micro-policies governments have felt forced to put in place in an attempt to alleviate the nasty side effects of very low interest rates, over which they have no control.
In the UK, for example, we have the ludicrous Help to Buy scheme designed to help people borrow too much to buy overpriced houses (caused by low interest rates); we have our pension freedom policy, a direct result of pensioner fury over low annuity rates (caused by low interest rates); and we might soon have unpleasant age-related taxes designed to reduce intergenerational inequality (caused by low interest rates). None of this is helpful.
A bit of good news is that this monetary experimentation has been about inflation targeting (everyone, for no obvious reason, is after 2%). And if you set a target and pursue it at the cost of everything else you usually get to it. So inflation is back. In the US, where expectations of inflation are low, September numbers showed average hourly earnings jumping 2.9%, the biggest rise in a decade.
Peter Warburton, chief economist at Economic Perspectives, points to a new inflation index from the Federal Reserve Bank of New York, the underlying inflation gauge, which suggests the trend consumer price index in the US is running in the 2.3%-2.8% range. Consumer price index inflation (CPI) in the UK is 3%. The old measure of inflation, the retail price index (RPI), is closer to 4%. Eurozone inflation is low 1.5% but there are signs of it being on the move.
In China, inflation could be significantly higher than you think. It looks all but non-existent, but according to Diana Choyleva, chief economist at Enodo Economics, we need to stop worrying about Chinese deflation: "It is the exporting of Chinese inflation that markets will have to contend with in coming quarters." The official Chinese GDP deflator shows inflation "quickening"; wage growth has been strong for years; and the main drag on CPI is food prices, which are likely to be over-represented in index calculations.
Finally, in Japan there are signs that inflation could be a lot higher than official figures: CPI numbers do not fully capture rising apartment prices or rents and appear to underplay price rises in consumer goods (everything from road tolls to Starbucks coffee is on the up).
You can dismiss each of these numbers for one reason or another. Perhaps the US wage number is a one-off, caused by the carnage of recent hurricanes. Perhaps the New York Fed's new index is badly constructed. Perhaps the UK number will tail off once the effect of the fall in sterling works through. The Japanese numbers are anecdotal. Until the government updates inflation calculation methodology, who knows what the number is? The same with the Chinese.
But you cannot look at all the numbers in the round and still insist the immediate threat to the global economy is deflation. This is why the European Central Bank decision this week to leave rates where they are and extend the quantitative easing programme is disappointing. It may be that the ECB did not see advance copies of the billionaires report. But Mark Carney and colleagues at the Bank of England will have it.
The Monetary Policy Committee could dig out a list of excuses not to raise rates despite the last GDP growth numbers being rather better than expected. Raising rates will do harm at some point (asset prices will fall and the indebted will suffer). But not reversing is beginning to look like it could do more harm. Unless, of course, you are a billionaire.
This article was first published in the Financial Times.