Money, banking & insurance

Ethical capitalism

A crisis is a terrible thing to waste, but unfortunately that’s exactly what the world did back in 2008. The economy was crashing globally. There was talk of a new breed of capitalism: Capitalism 2.0. The end of investment banking was even mooted. But here we are now and nothing much has changed. There’s now more debt, more networked risk and more behaviour that’s downright unethical.

But we could still change things. We need to shift from business (or busyness) to betterness. We need to change from producing things that make a profit for someone to making things that make things better for everyone. We don’t just need to redefine value, we need to redefine values. We need to think long and hard about what constitutes right and wrong, fair and unfair, just and unjust. In short, we need to think about a much bigger picture.

Back in the day (Adam Smith’s day), capitalism centred on machines and money. Then, in the 20th century, came mass production, which itself soon became a commodity. Then we had human capital — the idea that the knowledge and skills of people matter most — because it is through this knowledge and skills that new innovations are created. But 21st century capital is no longer fit for purpose. Being able to utilise capital, or machines, or people, to sell stuff and make a profit is no good if you damage the planet, abuse people, or steal from future generations. We need authentic prosperity. We need growth that’s good for everyone, without any hidden costs, invisible subsidies or socialised losses. We still need profit, but we need profit that’s meaningful, profit that matters. Equally, we no longer need profit, or companies, that are socially negative.

Facebook is a textbook example. Facebook has zero ethical capital. Never did. Never will. The sooner their investors and customers wise up to this, the sooner we can connect the world in a meaningful manner.

Ref: Harvard Business Review (US) 06.10, ‘Ethical capital is capitalisms new cornerstone by U. Haque.

More things to worry about

What could possibly go wrong next? Top of the list might be US inflation. The Federal Reserve is aiming to steady inflation by slowly pushing up interest rates, but higher interest rates will eventually feed through to corporations and individuals seeking to borrow money, or service existing debt. With corporations, this is a modest concern, but for ordinary people, especially homeowners, a significant rise in inflation could be deeply problematic and could trigger mass default. Taking of default, Michael Lewis, the author of Liar’s Poker, reckons that Trump defaulting on US sovereign debt is a possibility, given his habit of walking away from his own corporate debt. Such a move could, understandably, trigger panic.

Global trade wars are another thing to worry about (Trump again). The tit-for-tat slapping-on of tariffs between the US and China could easily escalate and hit company share prices. Speaking of China, a major Chinese slowdown in the world’s second-largest economy and most populous country is generally thought of as a remote possibility, presumably because it hasn't happened in ages (recency bias). But all good things do tend to come to an end eventually.

Brexit? Whatever. It’s a big deal in the UK and Europe, but Europe, and especially the UK, aren’t a big deal globally. A technology bust? Quite possible. People are getting fed up with the behaviour of Big Tech and are growing especially tired of the focus on revenue and users regardless of whether there’s any profit being made. A re-run of the 2000-2001 tech crash perhaps?

Finally: cycles. The current bull market has been running for close to a decade. Since 1930, the average bull phase of markets (defined as a period without a drop of more than 20 per cent) has been eight years. Yikes. Buckle up.

Ref: The Times (UK) 13.10.18, ‘A wobble, a stumble or something more serious?’ by P. Hosking.

Negative mortgage rates and other financial fantasies

Do you remember — you probably don’t — that back in 2007 some banks were lending money to people with no job, no income and no assets? (“NINJA loans”, they were called.) Madness. And we wonder why the economy crashed in 2008. Do we learn from our mistakes? Of course not. Here’s a little taste of some current financial madness.

Negative interest rates. You pay a bank to look after your money (the money you have presumably already paid tax on, possibly more than once). Bonkers, but when it comes to monetary stimulus and making borrowing easier this is nothing. Bank in 2016, two Banks in Belgium (ING and BNP Paribas) starting paying people to take out loans. The interest rate on home loans through these banks had dropped below zero, meaning they paid you to take their money.

It’s one thing for banks to borrow money from governments or for governments to print money and call it QE. Buying up your own debt is only slightly more surreal (it’s all imaginary and a house of cards anyway). But when banks lend money to people to buy a house and end up paying you to live in the house, that’s just plain crazy. Houses are real. They cost money to build. People actually need houses. If you pay people to buy a house, that means the house is worth less than nothing, doesn’t it? You borrow a million pounds, buy a house, live in it for a year and get paid 10,000 pounds to do so.

Something is going slowly mad. The only question is: what?

Ref: The Week (UK) 22.4.16, Want to live in a mansion for free? By B. Bonner.

Quantitatively worse off

Conventional wisdom has it that, in the US and Europe, and other places too, we are witnessing a rightwards political shift. This may be so, but might things soon take a different direction?

One of the unforeseen consequences of the US federal reserve attempting to avoid a 1930s-style deflationary situation a decade ago could be a breed a new generation of socialists. It’s much the same story in the UK, with quantitative easing (QE) driving up the price of assets owned by people that were already quite wealthy. Putting aside the bailing out of bankrupt banks, QE has had the effect of making Baby Boomers richer while easing Millennials out of the property market. This leaves future generations with a tenuous stake in the societies they are expected to build. For example, in the US average hourly earnings increased by 22 per cent since 2010, but the cost of housing in San Francisco has risen by 96 per cent over the same period.

QE was intended to avoid mass default, which it did, but one consequence is that it’s made the assets of older generations more valuable. A growing economy is supposed to make everyone wealthier, but in the case of QE it’s penalised younger generations while making older generations richer (because older people tend to own assets, while younger people tend not to).

So, what’s next? One route might be higher taxes for the wealthy. Another might be the taxation of assets as well as, or instead of, income. Either way, it feels like something has to shift eventually.

Ref: Financial Times (UK) 2-3.03.19, ‘Cash for trash was the father of millennial socialism’ by D. McWilliams.

There’s someone in your pocket

The economist Kenneth Rogoff doesn’t like cash and he’s not alone. Rogoff, who wrote The Curse of Cash, has spoken about how paper money enables crime and tax evasion. We would all be better off, he argues, if cash disappeared and life became fully digital. Companies agree, especially retailers. Stores that accept cash can be easily robbed and there’s a cost involved when it comes to installing cash registers and carrying change, which is why an increasing number of retailers and airlines in the UK and US now refuse to accept paper money — a trend that seems set to continue.

The argument against such a move usually involves lower-income households and pensioners that do not have credit or debit cards and possibly not a bank account either. In the US, for example, around 10 million households do not have bank accounts. In the UK, the number is 1.3 million, and 2.2 million people rely on cash for most daily spending. Whereas this is unusual in ‘developed’ nations, in regions such as Africa and Asia it’s not. In fact, while cash is fast disappearing in the West, cash is still king in many other parts of the world. Individuals without access to the internet would fall into a similar category.

The other argument against the disappearance of cash — and it’s a strong one — is that while cash payments are anonymous, digital payments are not. If you pay using electronic means (which includes credit cards) there’s a data trail that can allow anyone from direct marketing companies to governments to analyse your spending habits and, in extreme circumstances, potentially stop you spending or tax you in certain ways to nudge you towards certain behaviours. Cash is also a hedge against banks that go bust and governments that attempt to restrict access to money — something that the EU has considered in the past.

However, for every significant trend there appears a counter-trend and the digitalisation of money is no exception. In the US, legislation is being considered to force companies to accept cash. If the economy tanks again, as surely it must, people will trust in cash once more and we may see more private physical currencies emerge too. The shift away from cash is also clearly orchestrated by business interests and this may create a reaction.

Ref: New York Times (US) 20.02.19, ‘This legislation could force stores to accept your cash’, by Karen Zraick. See also Daily Telegraph (UK) 9.04.19, ‘Cashless society could quickly become a reality, warns Bank of England’, by T. Wallace.