Monday, 25 May 2015

We are not the 99%

‘We are the 99%”, the Occupy movement famously proclaimed. Society is now run for the benefit of the top 1%, Occupy said. The rest of us, the 99%, are frozen out, paying for the mistakes of a small elite, in whose clutches wealth was obscenely concentrated.

I’ve written before about how, paradoxically, this depiction of society is both an underestimate (the ones really making out like bandits are the 0.1%), but also brushes over fundamentally conservative impulses among a large segment of the 99%.

But in light of the Conservative party’s victory in the UK general election, I think the second part of that argument needs firming up. We are witnessing, it seems, not just a coincidence of interest between the 1% and, roughly, the top half of society. But an active alliance to the exclusion and detriment of the rest of society. “We” are definitely not the 99%. Some animals are more equal than others.

This is not just based on a common or garden assumption that the fortunes of the rest of us depend on the 1% or 0.1% prospering. That argument is always there.  Just last week, we learnt that in 2011 nearly a fifth of UK pension fund money was “intricately linked” to the profits of BP and Shell.

No, what I’m talking about is a division between asset rich and asset poor. And a de facto alliance between the finance industry and around half of society in the UK. One based around near zero interest rates.

Despite the assumption that this is the new normal, interest rates, the level of interest charged by government central banks to commercial banks, are astoundingly low. They have been stuck at 0.5% in the UK since 2009. By way of comparison, the Bank of England base rate (interest rate) was 5.75% in July 2007, 6% in January 1999, 7% in August 1997, nearly 14% at the end of 1990, 12% in 1986 and 11.25% at the start of 1975.

And the official interest rate has profound impact on the wider economy, since the interest charged by commercial banks will reflect the so-called ‘base rate’. Back in 2007, the now deceased former Bank of England governor, Eddie George confessed to a Parliamentary committee that he had paved the way for the financial crisis, by slashing interest rates from 6% in 2001 to 3.5% two years later. This had the effect, he said, of pushing house price inflation above 25% and stimulating consumer spending in a way not seen since the late ‘80s boom. Note, that when the late ‘80s boom turned into recession, the response was to raise interest rates mercilessly. Now, post-crash, they been cut even further. Is that not a prima facie example of a reckless economic strategy?

What are the effects of ultra-low interest rates? One is to make is much easier for banks and the government to handle their huge debts. With the base rate so low, bank debts, 210% of UK GDP in 2011, are much lower than they otherwise would be. So, taken together with Quantitative Easing, government intervention which reduces the effective interest rate, insolvent financial institutions are made solvent. So the banks, especially overleveraged ones, love low interest rates.

The other main effect is to make it much cheaper to hold or take out a mortgage. Mortgages either track the base rate or follow it closely. The number of people with a mortgage, compared to renting, has certainly dropped, to around 65% of the adult population in the UK, but it is still a clear majority. Government subsidies in the ‘market’ through the £80bn Funding for Lending scheme and Help to Buy, has also had the effect of reducing the cost of mortgages.  The result for many people has been a massive compensation for the fact that wages have endured their greatest contraction since the 19th century. “Many landlords who bought property before the financial crisis are on interest rates tracking the Bank of England base rate and have seen their costs plummet since it dropped to 0.5%,” observed an article on how Buy to Let landlords have earned 1,400% returns since the mid-90s. “They are coining it in – they’ve benefited from unprecedented property price rises and their rates are rock bottom,” said one mortgage broker. So mortgage-holders love low interest rates, too.

But others, those without assets, are definitely not coining it in. Private renters have endured rent rises of, on average, 15% since 2010, and they are accelerating. Evictions stand at a six year high. Benefit claimants, invariably without assets, have endured a torrent of hostility ranging from sanctions, the denial of help to sick and disabled people, the Bedroom Tax, and the benefit cap. There are roughly 1,000 food banks in Britain now, and just one provider, the Trussell Trust, distributed enough food last year to feed 1.1 million people. These people are paying for the sins of others.

Ultra-low interest rates, together with the deliberate restriction of the supply of newly built houses, also work to bolster perpetually rising house prices. This is clearly an advantage if you already have a mortgage or own a house outright. But not if you don’t. It’s no accident that support for the Conservatives in the recent election increased with age. In the way the British economy has been skewed in the last few decades, older and middle aged people, by and large, have housing assets. Younger people don’t.

But what is most interesting is that, to many economists, ultra-low interest rates, or to give its technical name, financial repression, means economic stagnation. This is because it discourages new investment. Investment largely takes place through borrowing and investors know, in the context of near zero interest rates, they won’t get much of a return (if interest rates are below inflation, a negative return), so they don’t bother. The game isn’t worth the candle. The dominant, supply-side philosophy, which says that if you reduce taxes on business, investment will increase simply doesn’t work. Still, a rise in government interest rates, though perennially predicted as being just around the corner, never actually happens.

All this chimes remarkably with Thomas Piketty’s assertion that, in an era of low growth, returns from capital (income from the ownership of assets, such as houses) will outpace returns from labour (income from work). It’s also why, I would suggest, society is so culturally conservative in comparison to the 1960s or ‘70s, but that’s a matter for another article.

The question is, can this alliance around low interest rates, last? Japan, the country of two ‘lost decades’, has kept interest rates below 1% since the mid-nineties (sometimes they have even been negative) and resorted to recurrent bouts of quantitative easing. The wealth and home owners have benefitted, savers and wage earners haven’t. But Japanese politics has remained staunchly conservative, with the only departure being that so-called ‘Abenomics’ isn’t implementing austerity.  
What would explode this compact between finance and a significant segment of the UK population? Undoubtedly, a large and unintended rise in interest rates. Default or write down of debt in the Eurozone may provide the spark, with debt being sold, the value going down and interest rates rises the inevitable result. The financial crisis, part two, in other words. But in its absence, the mantra, ‘we are the 99%’ simply doesn’t get to the heart of the matter.

1 comment:

  1. Interest rate rise could trigger recession, Bank of England chief economist says:

    Probably that's why an interest rate rise, though always predicted, never comes to pass. But the downsides of permanent ultra low interest rates need to be spelled out