The pandemic and its sister great lockdowns have accelerated several trends, the digitalization of everything but another macro trend is the widening income and wealth inequalities between rich and poor, in advanced economies.
The wealth and income inequalities gap has been widening for the last four decades with the megatrend accelerating since the great recession of 2008
Exhibit One shows the US wage share in GDP declining over the last forty years.
But rising inequalities are a potential risk to the stability of democracies leading to polarization of politics, identity, and fracture social cohesion as friction between social classes and generation wealth grows.
So, it comes as no surprise that tackling rising inequalities was on the recent G7 summit.
“another macro trend is the widening income and wealth inequalities between rich and poor”
WIN INVESTING
Flying in on private jets, staying in luxury accommodation with lavish meals served the G7 leaders gather in the seaside resort of Carbis Bay, UK to discuss tackling inequalities amongst other things.
An academic paper published by the London School of Economics in 2019 suggests that these inequalities could partly be due to a transition into the knowledge economy.
“The expansion of employment in knowledge-intensive services in advanced democracies between 1970 to 2006 has put pressure on inequality in all the advanced democracies” wrote The London School of Economics.
“It is clear that inequality has grown more rapidly in the English-speaking countries than in the continental and northern European economies” added the report.
“The UK and the US also saw large employment expansions in knowledge-intensive services” noted the report.
But smartphone saturation is high in advanced economies. So perhaps the internet, a great fountain of information, is being under utilized as a knowledge tool for economic gains. Does the education system need re-modernizing in view of the knowledge economy?
“The expansion of employment in knowledge-intensive services in advanced democracies between 1970 to 2006 has put pressure on inequality in all the advanced democracies”
THE LONDON SCHOOL OF ECONOMICS
What is clearer, however, is that in light of these inequalities fiscal and monetary policy is likely to remain accommodative to support an inclusive sustainable growth environment.
At a macro level policymakers are tackling the inequalities by explicitly aiming for a high-pressure economy
So fiscal policy has shifted from austerity to activism.
Drawing on the knowledge of the past cycle, policymakers think that such an economy will create broad-based and inclusive economic growth, thereby reducing the impact of the recession on lower-income households and address the long-standing problem of income inequality.
So, the fiscal response to this recession is already the largest since the Second World War. Moreover, policy-makers are working on additional fiscal packages.
The Federal Reserve has reiterated its dual mandate goal, which is to maximum employment and stable prices.
“Increasing the minimum wages is another way policymakers are attempting to tackle the inequalities” – Win Investing
In other words, reversing the inequalities macro trend means greater public spending and more monetizing of the debt
So, we don’t believe the Fed will unwind its $120 billion in monthly asset purchases to stimulate the economy in 2021, known as quantitative easing QE. In fact, we could see even more QE going forward.
The crux of the piece is that a policy to reverse inequalities means more public spending, more QE which could also equal higher stock prices going forward
Stock prices are driven by the central bank’s liquidity injections, the size of its asset purchases, and less by price discovery.
Moreover, high stock prices equal more tax revenues through capital gain tax. Put simply, central banks have no incentives to deflate their bubble.
Our view is that the stock melt up is likely to continue going forward and that any pullback would represent a buying opportunity.
Increasing the minimum wages is another way policymakers are attempting to tackle the inequalities
We could also see more increasing scrutiny of the tech, trade, and titan’s trio, which were the key factors that have held down the wage share of GDP.
These companies tend to be oligopolies, a few controlling the entire market share and therefore, reduce labor’s bargaining powers.
Moreover, they typically have a low labor share of value-added, which contributes to the general decline in the wage share of GDP.
“lawmakers proposed a raft of bipartisan legislation aimed at reining in the country’s biggest tech companies” – Win Investing
On a macro level inequality could lead policymakers to pass laws that curtail the market share size of these big tech giants, or even force them to split
House Bills Seek to Break Up Amazon and Other Big Tech Companies
In June, lawmakers proposed a raft of bipartisan legislation aimed at reining in the country’s biggest tech companies, including a bill that seeks to make Amazon and other large corporations effectively split in two or shed their private-label products.
One of the proposed measures, titled the Ending Platform Monopolies Act, seeks to require structural separation of Amazon and other big technology companies to break up their businesses. It would make it unlawful for a covered online platform to own a business that “utilizes the covered platform for the sale or provision of products or services” or that sells services as a condition for access to the platform.
So, let’s assume that policymakers, in this new era of state capitalism can reverse this mega-trend of inequalities either throw a raft of micro or macro policies.
The trickle-down effect of wealth could be a boost for discretionary spending and cyclical stocks. But it could increase the velocity of money and result in higher inflation.
In summary, policies which tackle inequalities also impact investment portfolios
The central bank’s QE infinity could raise stock prices but equally any policy to reduce big tech monopolies could also have an adverse impact on investors of these big technology stocks. Policy maker’s focus on tackling inequalities could also mean higher inflation.
