The populist anger expressed in the Brexit vote and the underlying support in the US for the dark vision of Donald Trump can be sheeted home to the central banks around the world.
Following the global financial crisis in 2008, central banks in the US, Europe and Japan slashed interest rates close to zero. Some even adopted negative interest rates. The Reserve Bank of Australia is now following suit.
They also implemented bond buying programs, basically propping up prices in the sharemarket.
The ultra-easy monetary policy was designed to boost asset prices.
The thinking according to the technocrats at the banks would be that this would trigger a “wealth effect” – consumers would spend more as they watched the value of their share portfolios, or their houses, increase in value.
The opposite has happened.
Boosting the price of shares boosted the wealth of the rich, the one per cent who owned shares, but it did not flow through to the rest of the economy, This comes at a time when business schools are teaching managers that the aim of corporations is to make money for shareholders, not to expand the business and create jobs.
Now traditionally, companies built up the value of their plant and equipment, real estate and other investments over and above the company’s debts. Theoretically, the increased share price reflects the prospects of bigger profits and dividends. But these days, companies use profits and go into debt for stock buy backs, increasing the share price and making the minority of people, the one per cent, rich.
The major factors behind the increased stock prices over the last eight years have been the low interest rates set by the central banks, acting on instructions from their governments
So where have the borrowings boosted by low interest rates being going to? The Federal Reserve’s quarterly Flow of Funds statistics reveals that 80 per cent of new bank loans are for real estate. That’s pretty much the case around the world.
So think about it – most of the loans are for property already in place and for shares long since issued. The result: it inflates asset prices ranging from real estate to entire companies. It inflates housing prices, leaving people unable to buy or unable to pay off their mortgage. At the same time, companies are using low interest rates to buy other companies.
This means there is less money there for the real economy to expand. It means wages are flat or being cut, jobs are being axed and industries can’t expand.
And that’s the backdrop for the rise of Donald Trump and the populist anger over Brexit.
All this is captured by London-based hedge fund manager Crispin Odey, the founder of Odey Asset Management.
He has slammed central bankers for giving capitalism a bad name and says they are responsible for the rise of populist forces.
In an investor update , Odey says the large-scale purchases of bonds, aka quantitative easing coincides with rates still at or near zero and in some parts of the world they’re negative yielding.
“Six years later and it is becoming obvious that ‘Houston has a problem.’ Productivity is not only around zero in most developed countries but falling into negative territory. Market forces are no longer driving investment decisions on the allocation of resources – driven out by governments using central bankers as their conduit for extending credit,” Odey said.
“Central banks do their master’s bidding and governments tell them ‘stop recession at any price.’ They can control asset prices by printing money but can they control the economy? ‘No.’ So what we have now is a world in which the Have-nots are rising in number and, thanks to the workings of central banks, see the Haves still seemingly enjoying themselves on the back of rising asset prices.”
And that, he says, is why we’re seeing politics moving to extremes.
“The politicians and the central bankers are serving each other but not the common purpose,’’ Odey says. “In such an environment you must expect ‘Brexit’ to win, Trump to succeed.”